One of the most successful ways that manufacturers can improve their profitability and their business viability is by reducing the cost of production. Production costs are the all-in expenses it takes for a manufacturer to make goods and bring them to market. Because there are so many cost inputs at even the smallest of manufacturers, figuring out how to minimize spending can seem daunting. But through effective technology investments that deliver visibility and coordinated management centered on industry-proven best practices, such as lean manufacturing, manufacturers can lower their production costs. The following guide explores some of the most common ways to accomplish this goal.
What Are Production Costs?
Production costs, also known as the cost of production, refer to the total expenses incurred by a company to manufacture and bring a product or service to market. These costs are essential for management to understand as they directly impact the pricing, profitability and competitive positioning of the company’s offerings. Production costs can be broadly categorized into direct costs and indirect costs. Direct costs are those that can unquestionably be attributed to the production process, including raw materials and the labor involved in manufacturing. Indirect costs, or overhead costs, aren’t clearly tied to the production process but are necessary for operations, such as rent, utilities and administrative staff.
Understanding production costs is crucial for businesses as they strategize to minimize expenses and maximize efficiency. These costs are a key factor in determining the break-even point — the price point at which a product must be sold to cover its production costs. By analyzing and optimizing production costs, manufacturers can make informed decisions about pricing, investment in production technology and process improvements. This can lead to more competitive pricing for consumers and better margins for the company, ultimately affecting the business’s bottom line.
Key Takeaways
- The cost of production in manufacturing includes all of the direct manufacturing costs, manufacturing overhead and indirect expenses necessary to bring goods to market.
- Lean manufacturing principles that reduce waste across both materials and processes play a huge part in reducing production costs.
- Manufacturers can also drive down production costs through optimized design of products and packaging geared toward reducing raw materials and labor needed for assembly, including standardizing on parts wherever possible.
- Investing in automation and technology can help speed up production and offer visibility into processes, allowing manufacturers to continue to improve efficiency and reduce waste.
24 Ways to Reduce the Cost of Production
Because the cost of production includes such a variety of different cost inputs, there are many ways manufacturers can start bringing it down. However, since cost of production is a big-picture metric, companies must coordinate the simultaneous execution of myriad strategies over time in order to truly make a dent in production costs. This coordination serves as the basis of manufacturing cost management, which considers all of the levers described below to lower the cost of production and boost profitability.
-
Negotiate With Suppliers
Effective supplier negotiation and strong supplier relationship management practices can yield tremendous savings on production costs, and manufacturers will build a more resilient supply chain in the process. Manufacturers can bring down costs by negotiating preferred contracts that guarantee certain volumes over time to lock in lower prices. They can also craft supplier contracts that guarantee exclusivity to certain suppliers in exchange for price breaks, or they can ink deals with a broader range of regional suppliers that could reduce distribution costs. Ultimately, there’s a lot of room for creativity and deal-making on this front to save money and reduce risks that could ultimately impinge on the bottom line.
-
Implement Lean Manufacturing
Lean manufacturing practices can help businesses slash production costs by limiting overproduction and reducing idle time. Lean manufacturing also helps manufacturers cut the cost of raw materials by minimizing defects or purchasing mistakes. Industry studies show that, on average, a manufacturer can reduce costs by anywhere from 5% to 20% in the first year alone after implementing lean manufacturing practices. And those savings aren’t to the detriment of finished products — in fact, lean manufacturing generally improves quality management metrics, such as defect reduction, by anywhere from 25% to 90%.
-
Optimize Energy Use
Energy prices are outstripping broader inflation rates, and manufacturers would do well to get ahead of these costs by optimizing their energy use, which will help bring down production costs. This optimization starts with regular energy audits to identify inefficiencies in factory machinery and facilities equipment and prioritize investments. Some obvious ways to move the needle on energy use is through technology, such as LED lighting, high-efficiency motors and green heating, ventilation and air conditioning (HVAC) systems. Similarly, automated facilities and plant management systems that lean on Industrial Internet of Things telemetry and advanced analytics to minimize energy waste during idle times can help manufacturers reduce consumption and drive down energy costs.
-
Minimize Waste
Cutting waste can reduce production costs across a number of fronts. One of the most obvious is the reduction of disposal costs. By minimizing their waste streams, manufacturers spend less on logistics, transportation and storage of garbage, scrap and hazardous byproducts. On top of that, reducing waste cuts down on the cost of raw materials that go into making a product in the first place. Waste isn’t just a materials play, either. Implementing lean manufacturing principles, including just-in-time production, optimized equipment and service schedules and streamlined processes, eliminates overproduction, excess inventory and unnecessary movement, leading to significant cost savings. Additionally, recycling manufacturing waste avoids landfill tipping fees and can even generate revenue through selling recyclable materials, such as cardboard, further reducing operational expenses.
-
Manage Inventory Effectively
Effective inventory management can help organizations reduce production costs through savings across the entire product life cycle. For example, adequately managing raw materials and ensuring that stock is at the right place at the right time keeps bottlenecks from slowing production cycles down. Meanwhile, strong forecasting and well-planned distribution of finished inventory ensure availability without overburdening the manufacturer with excess stock that ties up cash, and they also decrease the risk of waste through stale inventory that becomes obsolete. Finally, whether for raw materials, works in process or finished products, inventory management helps organizations trim storage costs by optimizing the amount of inventory on hand.
-
Utilize Space Efficiently
Real-estate costs are baked into production costs, so getting the most out of rented or owned space is a real concern for manufacturers seeking to manage costs. The goal should be to design facilities that optimize storage and squeeze utility out of every inch of property that the manufacturer pays for each month. Arguably even more crucial is understanding that the layout of warehouses and factory plants often have a direct correlation to operational productivity and effectiveness. Manufacturers that design layouts that support streamlined workflows and minimize bottlenecks are able to improve margins over the long haul.
-
Enhance Workforce Efficiency
Establishing processes and tools for workforce management can help manufacturers get more from their workers across factory floors, warehouses and distribution facilities. For instance, tweaking operational workflows and shift scheduling to reflect accurate demand forecasting can help bolster workforce efficiency, as can effective training for employees to ensure that they’re operating at peak performance. Many manufacturers today turn to automated back-office solutions that feature labor optimization powered by artificial intelligence (AI) to juggle factors such as skills in demand, budgeted hours, customer demand and concerns about regulatory compliance regarding labor. This leads to optimal schedules that balance labor demand with budgetary and market realities.
-
Automate Processes
Since the advent of the assembly line, manufacturers have been on the front lines of automation to achieve efficiency and cost savings. Manufacturing automation has now entered an era of hyperautomation, where a complex web of digital technologies, including advanced analytics, robotics and AI, are woven together across IT, operational technology and engineering technology to maximize the profitability of workflows and to bridge silos across functional areas. In this world of hyperautomation, back-office analytics examining customer trends result in advanced forecasting that automatically triggers changes in inventory management and production scheduling based on real-time data. This helps manufacturers keep costs down in quiet periods without losing their ability to appropriately supply customers with the goods they need, when they need them. Industry watchers say that using composability for automation is the way to go here. Composability is the use of modular components that are part of a well-integrated system of hyperautomation. Analysts say that manufacturers that move to composability in the next few years stand to save 50% on the total cost of ownership of their automated systems.
-
Conduct Audits Regularly
Audits aren’t purely a regulatory compliance or quality assurance tool. Conducting regular checks, such as energy audits, manufacturing process audits, waste audits and supply chain audits, can help manufacturers find opportunities to improve operations that help slim down production costs. For example, manufacturing process audits can reveal bottlenecks or workflow issues that could be addressed by resequencing operations or standardizing procedures to bolster productivity. Similarly, regular inventory management audits could help a company eliminate excess inventory and reduce carrying costs. When done right, the results of regular audits can serve as cost management roadmaps.
-
Improve Processes Continuously
In manufacturing, sometimes the smallest improvements can spur the biggest savings over time. This is why continuous improvement stands as a key component of the most popular manufacturing management frameworks — be it lean manufacturing, total quality management or just-in-time inventory management. Smart manufacturers take input from audits, factory telemetry, consumer surveys and employee feedback to search constantly for small ways to optimize processes and tweak designs. The culture of continuous improvement favors incremental changes and easily reversible experiments that don’t introduce too much risk to the organization, making it possible to minimize waste without threatening productivity or product quality.
-
Design Products Efficiently
Designing products with ease of fabrication and assembly top of mind can lead to significant production cost savings. To accomplish this, manufacturers should choose materials that balance performance with cost and consider parts reduction and standardization wherever possible. Designing products efficiently can help manufacturers slash their material expenses, cut down on assembly time and save on labor costs. It can also help lower capital expenses by reducing the need for specialized factory tooling in certain instances. Additionally, simplifying the parts list can help lower the risk of defects over time; fewer moving parts mean fewer places something can break. One of the most common ways to improve efficiency through design is by adhering to design for manufacturability principles, a set of industry engineering practices for designing with manufacturing cost in mind. Manufacturers are also increasingly using generative AI to develop simulation models and optimize design. In fact, some estimates indicate that by 2027 33% of new product and asset designs will use generative AI, compared to less than 5% in 2023.
-
Standardize Parts
The standardization of parts can be a game-changer for manufacturing cost management. Standardization cuts down on the number of components manufacturers need, making procurement more straightforward and simplifying both purchasing and inventory management. Less variety in purchases makes it easier to negotiate better bulk discounts and generally promotes more economies of scale in production. When production lines deal with fewer parts, assembly becomes easier and more efficient and defect rates go down. Additionally, maintenance and repair are more cost-effective, as parts are more accessible and easier to track down across the organization, limiting wait time for parts.
-
Streamline Marketing Efforts
According to recent figures, manufacturing firms spend an average of 13% of their overall budgets on marketing expenses. As organizations seek to reduce overhead expenses, which include production costs, they would do well to put a microscope on marketing costs. Marketing is a tricky line item because, when done right, it’s part of the revenue generation engine and a necessary component of successfully driving growth. The goal here is to take a closer look at marketing analytics and the data that tracks the return on investment (ROI) of marketing initiatives. Using a data-driven approach to marketing, manufacturers can start to jettison less productive marketing expenses and target investments on the marketing activities that drive the highest value to the business.
-
Negotiate Utility Rates
Manufacturers can reduce their production costs by doing a better job actively managing their utilities supply chain. One of the most obvious ways to do this is by negotiating better rates with energy or fuel providers — for example, by locking in rates for specified periods of time over the course of a long-term contract. Another opportunity to lower costs is to negotiate lower pricing for buying off-demand energy during quieter times on the grid, when a manufacturer can run its line outside standard business hours.
-
Rationalize the Product Line
Rationalizing a product line helps manufacturers cut back on the number of products they make so they can focus on the goods they’re best at delivering. Manufacturers engaging in rationalization typically aim to eliminate high-cost, low-margin products that may not be generating a lot of value for customers. Similarly, they’re on the hunt for redundant products. These actions can help manufacturers ease complexity problems and cut costs by reducing setup times, improving economies of scale and slashing overhead expenses around storage and distribution. A well-rationalized product line is one that gets the most out of a manufacturer’s existing resources and maximizes profitability in the process.
-
Cut Overhead Costs
Manufacturing overhead costs include all of the indirect expenses that go into producing products, including utilities, facility maintenance, depreciation and administrative expenses. Companies that are ruthless about finding ways to cut overhead are the ones that maximize their margins. Whether it’s through sweeping measures, such as lean manufacturing initiatives, or taking small steps, such as improving maintenance practices to increase the lifespan of machinery, every dollar saved on overhead makes a dent in overall production costs. One of the most dramatic ways that manufacturers can drive down overhead is by streamlining manual back-office functions through technology investments that automate tedious busy work and enhance data analytics at the same time.
-
Restructure Products
Redesigning or reconfiguring the way a product is built can help simplify expensive manufacturing processes and potentially lower materials costs. For example, manufacturers that continually reevaluate materials and product features — particularly for products with high manufacturing and raw material costs — can often reap consistent gains on margins over time. In order to do this well and maintain customer satisfaction, manufacturers need to balance innovation in materials science and cost-savings measures with quality targets, keeping a close eye on customer satisfaction data as they make tweaks. While cost savings are the ideal, manufacturers have to be mindful that they don’t diminish their products’ value propositions.
-
Lower Labor Costs
High labor costs can quickly eat into a manufacturer’s profits. Recent studies show that while manufacturing labor costs have stopped skyrocketing the way they did a couple of years ago, they still increased 4.2% over the last year. Manufacturers can take a number of measures to drive down the cost of labor. For example, automation and continuous process improvement make it possible to get more done with fewer employees. Meantime, flexible work arrangements, including part-time schedules or job sharing, can help companies adjust staffing levels and minimize idle time during periods of lower activity. Cross-training and upskilling employees can limit dependency on expensive specialized employees, while performance incentives and reward systems can motivate employees to boost their productivity.
-
Streamline Production Processes
Streamlining production processes can bring down production costs by enhancing overall operational efficiency and decreasing cycle times and defects. This can be achieved through standardized workflows and efficient facility layout designs that reduce bottlenecks and improve materials flow. Similarly, investments in automation and robotics can speed up production and get the most out of labor resources. Lean manufacturing principles tend to be one of the most favored ways to effect these changes, as they help manufacturers identify and eliminate waste across production processes, such as unnecessary movement, waiting times and overproduction. Some manufacturers also focus on effective scheduling, leaning on Kanban-based systems to visualize workflow management and optimize inventory levels.
-
Train Staff Effectively
According to the National Association of Manufacturers, 71% of manufacturers report that building and maintaining a competent workforce is their primary concern, emphasizing the need to train staff effectively. Training is crucial to cutting the cost of production, as it prevents productivity-busting brain drain when turnover occurs and can also reduce the rate of turnover by improving the employee experience. Appropriate training also shrinks expenses related to defect rates and safety incidents. Many manufacturers are exploring creative, tech-fueled ways to improve their training capabilities. For example, some use generative AI to pore over incident reports and cross-reference occupational health and safety guidelines to create tailored training on relevant topics that need focus. Others turn to augmented reality and virtual reality training, as well as metaverse environments, to provide better hands-on training to front-line factory workers.
-
Identify Cost Reduction Areas
Effective cost management starts with greater visibility into all the cost inputs that contribute to a manufacturer’s production costs. The more a company can implement effective data collection across factory telemetry and business systems alike, the easier it is to identify cost reduction areas. This data, paired with strong accounting and analytics capabilities, makes it easier for manufacturing cost management teams to make informed decisions about everything from maintenance scheduling to production timing to inventory control. Visibility through real-time monitoring and data analysis is especially important as manufacturers engage in continuous improvement initiatives. Manufacturers need this data to validate that the changes are achieving appropriate cost savings and that they’re doing so without degrading quality or performance.
-
Reduce Packaging Costs
Similar to efficient design of products, the efficient design of product packaging can reap manufacturers significant savings over time. Not only can improved packaging reduce the cost of materials, but it can also save manufacturers on transportation costs if it results in lighter, more efficient loads. Similarly, better packaging can save on warehouse costs if it leads to less volume stored on the shelves. Manufacturers can also shave costs by standardizing packaging across different product lines to make it easier to manage inventory, striking deals for bulk materials purchases across the company and simplifying packaging operations, all of which can yield lower production costs.
-
Focus on Quality Over Quantity
Getting out of the high-volume, low-margin product game can help manufacturers reduce production costs and build a healthier business in the process. By focusing on producing fewer, higher-quality products, manufacturers can decrease the amount of expensive rework and scrap generated by high defect rates. Additionally, once these products get into the hands of customers, manufacturers are much less likely to incur costs around repairs, replacements and returns. Typically, a drive toward quality initiatives also reaps process efficiency benefits over time that translate into lower production costs.
-
Invest in Technology
Manufacturing decision-makers are investing significantly in technology across their organizations to drive revenue and reduce costs. Some of the highest profile areas of investment today are related to AI, with 97% of manufacturing CEOs reporting that they have deployed AI or soon will, and 60% stating they’ve already seen ROI from their AI initiatives. Manufacturers are also doubling down on industry cloud platforms. Analysts believe that by 2027, more than 60% of large manufacturers will use industry cloud platforms to accelerate their business and product innovation initiatives, up from 37% in 2023. This includes heavy investments in back-office business technology, such as cloud-based enterprise resource planning (ERP) systems, which can be instrumental in helping manufacturers identify savings opportunities and validate that improvements are appropriately bringing costs down.
Reduce the Costs of Production With NetSuite
Whether a manufacturer is planning to implement incremental cost-saving measures in specific scenarios or a robust lean manufacturing initiative across the business, it needs strong visibility and control over its business operations. Purpose-built for manufacturers, NetSuite for Manufacturing provides management capabilities from the shop floor to the top floor. NetSuite offers flexible control over procurement, inventory management, warehouse management and supply chain management, giving manufacturers a variety of levers to reduce the cost of production. Most important, the solution delivers deep analytics that are tied to organizational finances so manufacturers can identify new opportunities for savings and track continuous improvement measures aimed at driving down production costs.
The most profitable manufacturers understand that cost efficiency from the factory floor to the back office is the key to a healthy business. Reducing the cost of production takes a concerted effort to eliminate waste wherever possible and maximize the time and expertise of workers as they execute critical business processes. Coordinating these cost-saving measures can be complex to plan and track over time. Manufacturers need a solid foundation of technology and automation investments and a culture of continuous improvement to pull it off effectively.
#1 Cloud ERP
for Manufacturing
Production Cost Reduction FAQs
Why is it important to reduce the cost of production?
Reducing the cost of production will increase the profitability for a manufacturer as it produces goods and brings them to market. Lower production costs deliver better profit margins.
What are the disadvantages of reducing the cost of production?
Manufacturers must be mindful of the impact that cost-saving efforts have on product quality and customer experience. Reducing the cost of production could potentially cause unintended consequences on these fronts.
Why is cost of production important?
The cost of production is a key performance indicator for manufacturers, as it tells them how much they’re spending to bring products to market. It’s directly tied to overall profitability.
How can the cost of production be reduced?
Manufacturers most commonly reduce the cost of production by employing lean manufacturing measures that increase labor productivity, minimize waste and improve the quality of goods produced.
What three actions should be taken to reduce production costs?
Three actions manufacturers can take to reduce production costs are to decrease raw material costs through better negotiation and efficient product design; increase labor productivity through improved training and automation; and enhance workflow efficiency through data-backed continuous improvement efforts.
