Manufacturing News
TECH FLASH

Stable growth and demand patterns reveal room for cost optimization

Stabilizing patterns allow manufacturers to focus on productivity improvement for margin growth.

March 26, 2013
/ Print / Reprints /
ShareMore
/ Text Size+

Stable growth and demand patterns reveal room for cost optimization

Are your company’s cost performance goals in line with those of the rest of the industry? A new cost optimization study by the Hackett Group maps typical cost optimization goals and identifies top strategies to achieve them. Hackett’s targets include all components of the cost of goods sold (COGS), including labor, manufacturing overhead and material, and take into account both prior and expected future results.

Hackett says companies should plan for continued growth in 2013, and stabilized global growth and demand patterns will allow manufacturers to focus on productivity improvement for margin growth. Revenue increased by an average of 1.6 percent in 2011 and 3.9 percent in 2012, and is predicted to increase by an additional 4.3 percent in 2013. Companies are taking advantage of this stability by sourcing more strategically, using assets more effectively and managing operations for greater efficiency.

In the US, growth has been stronger in manufacturing than other industries, due in part to favorable energy costs in the US relative to other markets. However, capacity utilization in the US remains well below recent highs. Hackett’s data shows only 31.5 percent of firms operated at or above 85 percent capacity in December 2012, compared to the 43.3 percent recorded in September 2011. That gap suggests many companies could support immediate growth with existing capacity before needing to make major investments in new capacity.

Margin growth in 2012 was far less reliant on outsourcing than it was in 2011, when 30 percent of COGS improvements were realized through outsourced manufacturing. The study expects the trend away from outsourcing to continue, as major companies have already outsourced many of the activities that can be effectively managed by third parties. On-shore and near-shore have become more attractive as stable demand reduces the need for the flexibility companies sought by outsourcing.

Companies will also seek to reduce total materials cost in 2013, continuing a trend that saw a nearly 1 percent reduction in 2012. However, 77 percent of the forecasted drop in material costs is due only to price savings from lower commodity costs or better sourcing. The remaining 22 percent of the decline in material costs came due to techniques like managing product specifications and designs to reduce material requirements, optimizing product mix to manage costs and using value engineering to extract additional savings.

In addition to reducing total material costs, companies were able to reduce internal manufacturing costs by 1.8 percent in 2012. According to Hackett, survey respondents plan an additional 1.7 percent cut in 2013, with productivity improvements continuing to represent the largest share of manufacturing cost improvements. Internal operations efficiency has benefited from aggressive plant management to remove underperforming plants, integrated business planning for more efficient resource allocation, targeted manufacturing investment of equipment and systems and the continued use of lean manufacturing techniques.

Declining energy costs and stabilized demand contributed to cost reduction in logistics and warehousing costs, leading companies to optimize distribution networks and spend to lock in logistics savings in the future. Sourcing improvements and low fuel costs also contributed to 2012’s logistics savings, and Hackett expects that trend to continue.

Did you enjoy this article? Click here to subscribe to Food Engineering Magazine.

Recent Articles by Shane O'Halloran

You must login or register in order to post a comment.

Multimedia

Videos

Image Galleries

Fabulous Food Plant: Paramount Citrus

Learn more about this fabulous food plant in Food Engineering's article, found here.

Podcasts

Burns & McDonnell project manager RJ Hope and senior project engineer Justin Hamilton discuss the distinctions between Food Safety and Food Defense as well as the implications for food manufacturers of the Food Safety Modernization Act.
More Podcasts

What was your favorite part of FA&M 2014?

View Results Poll Archive

THE MAGAZINE

Food Engineering Magazine

Food engineering magazine 2014 april cover

2014 April

Catch a preview of the Powder and Bulk Show in this April 2014 edition of Food Engineering. Also, be sure to check out a coffee stick making a real stir and a major advancement in the the pet food industry.
Table Of Contents Subscribe

THE FOOD ENGINEERING STORE

Food-Authentication-Flyer-(.gif
Food Authentication Using Bioorganic Molecules

This text provides critical tools and data needed to augment routine food analysis and enhance food safety by aiding in the detection of counterfeit, and potentially deleterious, foods.

More Products

Clear Seas Research

Clear Seas ResearchWith access to over one million professionals and more than 60 industry-specific publications,Clear Seas Research offers relevant insights from those who know your industry best. Let us customize a market research solution that exceeds your marketing goals.

Food Master

Food Master Cover 2014Food Master 2014 is now available!

 

Where the buying process begins in the food and beverage manufacturing market. 

Visit www.foodmaster.com to learn more.

STAY CONNECTED

FE recent tweets

facebook_40.pngtwitter_40px.pngyoutube_40px.pnglinkedin_40px.png