To reduce manufacturing costs, these seven pits must be avoided!

Cost reduction is the eternal theme of enterprise management, but this issue is now very important and urgent, especially for China’s manufacturing industry in the era of low profit. The more nervous, the less blind. What can’t enterprises do in the process of reducing costs?

According to relevant reports, if the manufacturing cost in the United States is set to 1, the manufacturing cost in China will reach 0.96, which is quite close to that in the United States. The manufacturing cost in some industries, such as the light textile industry, is even higher than that in the United States. In the actual operation, it is likely to hurt the enterprise by mistake to blindly understand that seeking benefits from management means cutting costs and reducing costs.

According to relevant reports, if the manufacturing cost in the United States is set to 1, the manufacturing cost in China will reach 0.96, which is quite close to that in the United States. The manufacturing cost in some industries, such as the light textile industry, is even higher than that in the United States. In the actual operation, it is likely to hurt the enterprise by mistake to blindly understand that seeking benefits from management means cutting costs and reducing costs.

The principle for enterprises to measure cost advantage is to reduce the cost of enterprises relative to competitors on the premise of ensuring the same product value as competitors, that is, to minimize the cost that does not increase the difference of products or services. The behavior of blindly reducing costs without considering the value of products or services will never create the cost advantage of an enterprise. Sometimes, the gain may even outweigh the loss, which is counterproductive.

In the management of cost reduction, enterprises often have such phenomena as paying attention to one thing and losing another, settling accounts after a while, relying too much on finance, not adhering to quality, ignoring the interests of suppliers, and pursuing superficial fashion, which will weaken the effect of cost reduction and even lead cost reduction into a misunderstanding. In China’s manufacturing industry, as the overall economic environment has entered the new normal of medium and high-speed growth, the increase of production factors such as labor, raw materials and energy is greater than the improvement of enterprise production efficiency, making enterprise operation more and more difficult. Therefore, it is undoubtedly a controllable way for enterprises to save themselves by constantly exploring ways to reduce costs. However, in the process of actual cost reduction, enterprises sometimes have the phenomenon of seeking quick success and instant benefits, which must arouse our vigilance. The misunderstandings of enterprise cost reduction mainly include the following aspects:

Myth 1: blind price reduction of purchasing cost with the buyer’s strong position in the market leads to the decline of raw material quality

In order to reduce the cost of raw materials, they often bring together many suppliers and ask them to reduce the price. If the suppliers do not agree with the requirements of the enterprise, they will immediately terminate the cooperative relationship. In fact, this is a mistake that enterprises can easily fall into in reducing costs. Faced with this situation, many suppliers had to accept it reluctantly. However, they put forward such unreasonable demands to their upstream suppliers in the next step. Finally, the whole industry chain was flooded with price reductions.

In the whole value chain of an enterprise, there are dependencies between various links. The cost management of the next link must be based on the cost management of the previous link. The minimization of the cost of the previous link does not mean that the cost of the next link will also be minimized, nor does it mean that the cost of the whole value chain will also be minimized.

In the whole value chain of an enterprise, there are dependencies between various links. The cost management of the next link must be based on the cost management of the previous link. The minimization of the cost of the previous link does not mean that the cost of the next link will also be minimized, nor does it mean that the cost of the whole value chain will also be minimized.

Some enterprises unilaterally pursue the lowest cost in the procurement process, and then purchase raw materials with low price and inferior quality. If the cost optimization is indeed achieved in the procurement phase alone, but the cost of the production phase is increased, the expenses of the sales department are increased, and the customer satisfaction is reduced because of the raw materials with poor quality. If these problems are summarized, it will be found that the cost of the entire value chain is increasing. What’s more, due to the decline of the purchase price, the raw materials are shoddy, leading to quality accidents, resulting in the damage of the company’s brand, and the loss outweighs the gain, that is, the so-called “no wrong selling, only wrong buying”

Misconception 2: one sided view of cost advantage as simply reducing production costs

Most managers will naturally understand the cost as the production cost, and limit the cost reduction to the process of production activities. In fact, in the traditional manufacturing industry, the production cost is only a part of the total cost, accounting for about 50-70%, and a considerable part of the cost is generated in the fields of technology research and development, marketing, consumer services, and so on. However, they are often paid little attention in cost analysis.

Therefore, while paying attention to reducing production costs, we should look for ways to reduce costs from the perspective of the entire supply chain. Otherwise, if the production cost is too limited, the effect will not be obvious enough, and sometimes things will turn against each other.

Myth 3: regard cost reduction as the lowest cost in all links of the supply chain

The supply chain is centered around the core enterprise, through the control of information flow, logistics and capital flow, starting from the purchase of raw materials, making intermediate products and final products, and finally sending the products to consumers by the sales network. Some managers believe that enterprises should pursue the minimization of expenditure costs in all links. Supply chain is a system composed of a series of interdependent value-added activities of enterprises. The costs of each link affect each other, and sometimes even rise and fall. Therefore, the opportunity of cost reduction should be brought through the mutual coordination and optimization of various supply chain links, and the total cost optimization should be pursued.

Misconception 4: cost reduction is understood as the drastic reduction of institutions, streamlining of manpower, and reduction of welfare, and is taken as a sign of reform courage

The management of Chinese enterprises is generally extensive and the efficiency of resource utilization is low. Therefore, strengthening cost management is of great importance to the profitability of enterprises. However, the essence of cost reduction is to improve the input-output ratio measured in money, rather than blindly increasing the input-output coefficient or compressing the cost. However, it is regrettable that the cost management of many enterprises has gone into the wrong area, especially in the aspect of human cost management. They want horses to run faster and eat less grass. Is it possible? The result can only be the reverse elimination, the bad currency expels the good currency, and becomes the talent training base of the same industry.

What is an appropriate cost? People with a little economic knowledge should know: the higher the return of a certain fee, the lower the cost. If the fee can not bring a return, it is a waste. The employment cost is not judged by the level of wages paid by the enterprise, but by the value of employees’ contributions to the enterprise.

Mistake 5: neglecting the important influence of product development and technology development on product cost design

Product design often takes into account the market competition situation, consumer demand, factory production capacity, raw material cost and other aspects. Once the finished product is finalized, 60% of its cost will be locked. In specific operation, the cost can only be reduced by improving efficiency and input-output ratio, and the effect is quite limited.

Therefore, the enterprise should take the R & D cost as the first link of the supply chain cost reduction, comprehensively consider the design cost from the aspects of easy access to raw materials, maturity of production technology, stability of production efficiency, convenience of product distribution, etc., and give full consideration to make the enterprise cost leading strategy win at the starting line.

Myth 6: lack of perspective and planning for dynamic and comprehensive cost analysis

In addition to cost behavior analysis at a certain point in time, enterprises must also consider the changes of absolute and relative costs of value activities over time. Some improvement measures have an obvious effect on cost reduction at a certain time point, but with the passage of time, the effect shows a rapid decline. For example, some enterprises make the equipment run faster than the design speed in order to increase the production efficiency, resulting in equipment deterioration in advance and even scrapping.

Through dynamic cost analysis, enterprises can predict the possible changes of cost driving factors of value activities, and quickly take corresponding actions to put themselves in a cost advantage position. Ensuring the durability of cost advantage and preventing competitors from imitating depends on the joint action of various factors to reduce costs. The product scale, the systematization of advantages and the cost of know-how are more durable than other cost drivers. The competitive advantage gained through the interaction of multiple value chain links can make it difficult for competitors to imitate and make enterprises maintain a lasting cost advantage. Therefore, the effect of cost reduction cannot be judged only at a certain time node.

Myth 7: contradiction and cross influence of cost reduction factors

When enterprises reduce costs, they often reduce the costs of different links in contradictory ways due to the lack of overall planning and prior planning. They try to increase market share and benefit from economies of scale, but they produce products of various specifications, which in turn increases management costs and reduces scale effects. They set up factories close to consumers to save transportation costs, but the production costs increased due to the dispersion of production. At the same time, because the differences in product costs often affect their competitiveness in different markets, enterprises may set too high prices for some products or customers and give price subsidies to other products or customers. Unintentional price cross subsidies often give competitive manufacturers an opportunity to take advantage of.

China is a big manufacturing country, and the topic of “made in China” has naturally lasted for a long time. At present, the high-end manufacturing industry has been favored by the national policy, relying on its own industrial foundation, which can be said to have full stamina and rapid growth. However, the medium and low-end manufacturing industry lacks technology, brand and market position, and it is difficult to survive in the competition. Moreover, the medium and low-end manufacturing industry is the main body of China’s manufacturing industry. On the premise that there is no major breakthrough in technological innovation and industrial upgrading, how can they base on their own advantages, avoid weaknesses, break through the competition through efficient resource integration, and win competitive profits through benign cost reduction, So as to create opportunities for the next step of development, it is a common concern and solution.

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