Wrong Manufacturing Cost Methodology

by Charles Dagher

Monitoring manufacturing costs by controlling production line output is not enough to ensure plant profitability. Many other unnecessary overhead costs must also be controlled, including: additional space required for overproduction and inventories excessive handling, evacuation and/or manipulation underutilized labor and machinery over-reliance on manual record-keeping lack of flexibility overly complex planning and synchronization of manufacturing activities too many process stages creating too much work-in-process (WIP) and retention time and unbalanced flow, to give the principle categories.

For a factory, selling price is currently established by the following formula: Selling Price = (Actual Total Manufacturing Costs + Desired Profit) In today’s buyer’s market, it is the buyers who are imposing the Selling Prices, leaving the factories with less profits but not less costs. Unless they make active efforts to cut costs, factories will struggle to find other ways to improve their bottom line or grow. Selling Price is more or less established by market forces, in this case, the buyer. Desired Profit is derived from the factory’s internal accounts. The only variable element in the equation is Cost. Factories must start with accurate estimates for Selling Price and Desired Profit and then design, define and plan costs in order to meet those two estimates. The formula now reads as follows: Manufacturing Costs = (Expected Selling Price – Desired Profit) Without a comprehensive and aligned effort throughout the plant, it is currently simply too difficult for factory personnel to identify areas and opportunities for improvement. Today, most apparel factories are focusing on traditional key areas such as line output, bundle throughput time, lead time and end line quality to measure performance.