Managing Cost Savings in Manufacturing During Economic Uncertainty
The COVID-19 pandemic has impacted demand, revenue, production and business financial obligations. In the search for ways to create and maintain cash positions, some CFOs in manufacturing have realized that merely canceling your CAPEX or shutting down areas of operations can have long-term implications, too.
Managing costs remains an integral part of resiliency and growth, but thriving during economic uncertainty calls for a more creative approach to cost savings in manufacturing. Adopting a strategic mindset toward cost optimization can preserve revenue, optimize business operations, encourage innovation and deliver more value.
When revenue slows down, the temptation to make drastic cuts rises. Downsizing might be a logical first response, but if done too hastily, you may alienate highly skilled talent and leave them to be hired by competitors. Switching vendors and suppliers can also improve margins initially, but results may come at the cost of quality and brand reputation.
Cost optimization aims to improve cash flows by managing expenditures in a big-picture framework. Decisions are made based on a matrix of criteria relevant to your business needs and goals, taking into consideration factors such as risk, efficiency, productivity, business value and cost shifts. The evaluation begins by identifying a potential cost reduction and then considers trade-offs in the context of time and business goals. Some of these considerations may include:
- How much will this cut improve cash flows in both the short and long term?
- How long will it take for the business to reap benefits in cash flow?
- What kind of impact will the cut have on production and other operations in the long term? Can we address or reverse any undesired effects?
- What risks will the company endure due to the cuts?
To plan for the future, look at the costs, benefits, risks and viability of each potential cut. An organized approach to cost reduction can involve mapping cuts on a grid or spreadsheet to showcase the trade-offs and rewards. This exercise can highlight the information you need to rethink decisions or win stakeholder buy-in.
One way to drive value while achieving new cost savings in manufacturing is to seek economies of scale. This can involve modifying assets, internal talent pools and supply chains to produce more goods for less. Another way is to use what the business already has to meet new market demands. A company that's already using an industrial ingredient or material may pivot by employing the same staff and equipment to make another product. During the early days of the pandemic, for example, some companies using neutral grain spirits shifted portions of their capacity toward manufacturing hand sanitizer.
Some companies also turn to automation to streamline workflows. At the same time, others have found success in increasing financial transparency or eliminating data silos. In taking these measures, inefficiencies become easier to spot and resolve. Other ways to cut costs can involve increasing or modifying customer engagement channels, such as using chatbots and online forms. This can make it easier for customers to communicate their needs and for the business to respond faster to changes in demand.
The COVID-19 pandemic remains an unprecedented economic challenge. Many companies had business continuity plans in place but didn't anticipate mass local and regional shutdowns of businesses, schools and travel. The hurdles that your business must overcome will be unique for each phase of the recovery cycle.
Therefore, an effective approach to new cost savings in manufacturing will also need to adjust dynamically. How can a business stay ready to take on unforeseeable adversity? One way is through a continued commitment to two incremental goals: digital transformation and business model adaptation.
Technology can help companies pursue various essential recovery tactics, such as responding quickly to shifts in consumer demand or allowing remote work for nonessential employees. Pivoting for long-term survival and growth in a world that could forever be changed may require new strategies. For instance, you may need to find new ways to engage your target customer or even rethink your market base altogether.
Cost optimization isn't simply about slashing expenses to free up cash. It's about connecting spend to business value and achieving better outcomes. Working with your banking partner can help you discover ways to invest in the cost management strategies that work best for your business goals.
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This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.