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Cost management key to future of manufacturers according to Advanced Manufacturing/KPMG survey |
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By Tom Vandeloo, Partner, Advisory Services, KPMG Canada
Has there ever been a tougher time to be a manufacturer in Canada? Businesses are finding their margins squeezed by parity with the US dollar and soaring energy and raw material costs. A slumping US economy has cut into exports. The outlook is daunting.
This perfect storm of cost pressures has prompted many organizations to begin looking inwards — and it’s about time. Yet, KPMG’s publication, Rethinking Cost Structures, confirms that the majority of businesses continue to miss out on major opportunities to boost profits. And, incredibly, almost one-third (30 per cent) of the manufacturing companies polled in a joint Advanced Manufacturing-KPMG manufacturing executive survey said that they implement no productivity improvement strategies at all in their plants. This historical lack of focus on cost containment is understandable; as revenue and profits rise in good times, controlling costs becomes less of a priority, but, in the current climate, it is difficult to comprehend. If ever there was a time when cost management should be thought of as a strategic issue, that time is now.
With the attention of many manufacturers now focused squarely on cost, the search is on for proven strategies to make quick — yet sustainable — changes to cost structures. Maintaining the balance between reducing expenditures and offering the quality and service that their customers continue to expect, while minimizing business risks, is crucial.
Lean Manufacturing is by far the key plant improvement approach identified by the 174 companies questioned in the joint survey. Nearly one-third of manufacturers (32 per cent), cited Lean Manufacturing as the main driver of improved plant efficiency. By comparison, only 18 per cent offered Total Quality Management and seven per cent reported their reliance on Agile Manufacturing processes.
Whether or not they have a definitive plan in place, the joint survey makes it clear that companies are counting upon cost savings and productivity improvements going forward. Polled about their company’s most important strategy for growth, 45 per cent cited process/efficiency improvements. New product development ran a close second to process improvements at 42 per cent. Both of these options compare with 25 per cent of respondents intending to attack new markets, and eight per cent seeking opportunities for mergers and acquisitions as drivers of growth.
Making the most of what you have: Overall Equipment Effectiveness (OEE)
This approach to understanding the true productivity of assets is a key and well-proven component part of Lean Manufacturing. Viewed through the lens of OEE, organizations that appear at first glance to be busy, humming and efficient are frequently not. Ask yourself three simple questions:
• Does your plant run at least 90 per cent of the time?
• Does your plant continually produce products at rates that are within a few percentage points of your measured standard or cycle times?
• Is the total reject rate of the products that you produce measured in hundreds of parts per million or less?
• If your answer to these questions is a definitive yes, then your OEE is probably class leading (at over 85 per cent) — read no further. If your answers are less clear-cut, then it is likely that opportunities to improve performance and reduce your costs are going unnoticed.
In the hands of practitioners, OEE can provide managers with insightful and material opportunities for improvement.
Tax and procurement: It’s time to start talking
Tax-efficient supply chain management (TESCM) is being used by forward-thinking companies to help drive down costs. A number of manufacturers have embraced the risks presented by the interplay of taxation and supply chains. They see their management of these risks as part of their competitive advantage. Ignoring this interaction may be inflating risks, or leaving significant opportunities to enhance profits on the table.
TESCM opportunities are derived from a range of events; from the negative — an authority investigation or lack of profit, to the positive — the identification of material untapped benefits. Whether you are changing your tax or organization structure, or looking at ways of enhancing tax within your existing structures, there are frequently many opportunities to pursue.
Cost optimization as a superior business strategy
Many manufacturing companies are attempting to reduce their costs. Incredibly, many are not. While managers should always remain focused upon their key goals, accepting that cost has become a strategic issue is critical. The tools to manage costs and enhance profitability are well understood and available. In the hands of experienced practitioners, they can be extremely effective.
It is up to owners, directors and managers to make sure that their cost reduction programmes deliver the benefits — KPMG’s research confirms that almost one-half of the savings identified by cost reduction programs are usually not achieved. So, be sure to reward the managers for reducing costs, and invest the time (and capital expenditure) to make the key strategic changes to the organization to help realize all of the benefits.
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