Controlling costs is fundamental for every manufacturer looking to enhance profitability and ensure sustainability within their industry. But where and how to address this challenge can change over time based on various economic and logistical factors.  

With cost management remaining a top priority for manufacturers, consider these cost-cutting initiatives to focus on within your business today.  

1. Supply chain. Supply chain costs and delays soared during the pandemic because of global disruptions and backups. Since then, some sense of normalcy has returned, though that doesn’t mean managing supply chain costs has become easy. 

Many manufacturing companies find that most of their spending is done with just a few vendors. By identifying these vendors and consolidating spending with them, you may be able to put yourself in a stronger position to negotiate volume discounts. Consolidating your supplier base also tends to streamline the administrative work associated with purchasing. 

It also pays to really know your suppliers. One way to gather an abundance of relevant information is to conduct a supplier audit. This is a formal process for collecting key data regarding each supplier’s performance to manage quality control and ensure you’re getting an acceptable return on investment. 

2. Labor/nonlabor overhead. Controlling labor costs is tricky in today’s environment. Manufacturers are facing skilled labor shortages, meaning they would love to spend more on labor if they could find people to fill those positions. Nevertheless, with payroll being such a dominant expense category for most companies, it’s critical to monitor these costs and prevent overspending. 

A logical first step in managing labor costs within your manufacturing business is to know how much you’re spending. And the answer isn’t as simple as looking at the total gross wages you pay out every month or year. You need to know the actual and total amount of these costs. Fortunately, there’s a metric for that. Labor burden rate reflects the additional costs that companies incur beyond gross wages. These generally include expenses such as payroll taxes, workers’ compensation insurance and fringe benefits. Knowing your labor burden rate can enable you to truly “right-size” your workforce. 

Beyond that, outsourcing remains an option for mitigating labor costs — especially given the vast pool of independent contractors now available. Although you’ll obviously incur costs when outsourcing, the time and labor cost that it saves you could end up a net gain. Carefully chosen and implemented technology upgrades can provide similar results. 

3. Marketing/sales. Much like labor, strong marketing and sales are critical to most businesses operating today. So, skimping on their related costs typically isn’t going to pay off. But, of course, you also need to ensure a strong return on investment. 

Again, choosing and monitoring the right metrics can prove useful here. The optimal ones tend to vary by industry and company type, but some of the most widely used for marketing purposes include lead conversion rate, click-through rate for online ads and cost per lead. Popular sales metrics include total revenue, year-over-year growth and average customer lifetime value. 

Whether it’s sales metrics, labor burden rate or supply chain management, getting objective, professional advice, especially from CPAs who specialize in manufacturing, can help you and your leadership team obtain an accurate picture of what’s going on with your costs and target feasible solutions.  

To explore more cost-cutting solutions for your business, get in touch with our manufacturing CPAs. We know the way.