S2:E6 – Controlling Manufacturing Costs
Season 2

 
 
00:00 /
 
1X

In this episode, we apply real-world techniques to the monitoring and controlling of manufacturing costs. Join CRI Partners Tom Carmichael and Scott Bailey as they unravel everything from the budgeting processes to the most effective purchasing techniques performed by the manufacturing industry’s goliaths.


Intro:

From Carr, Riggs and Ingram, this is “It Figures: The CRI Podcast”, an accounting advisory and industry focused podcast for business and organization leaders, entrepreneurs, and anyone who is looking to go beyond the status quo.

Tom Carmichael:

Welcome everyone and thanks for joining today’s episode of “It Figures” I’m Tom Carmichael and I’m CRI’s manufacturing industry line leader. I’m a partner in the firm. My experience in the manufacturing field, I’ve got over 25 years serving manufacturing clients, started out working with a lot of textile clients and have a lot of experience also with some food processors. And I’m joined today by Scott Bailey, who’s one of our leading manufacturing partners. And Scott won’t you to tell us a little bit about yourself and your background?

Scott Bailey:

Thanks Tom. I’m a partner out of the Raleigh North Carolina office, and I’ve had almost 20 years of experience with a mix of manufacturing and distribution, both from a public accounting perspective, as well as from an internal audit perspective. I’ve seen it from a lot of different angles and in a lot of different industries as well. I’ve worked with some contract manufacturers, I’ve worked with pharmaceutical manufacturing and generics, as well as some of the more traditional supply chain manufacturing as well. I had a lot of opportunities to take a look at this industry from a lot of different perspectives. And it’s one that both Tom and I enjoy working with quite a bit. This is definitely an area where we’ve spent a lot of time and put a lot of focus.

Tom Carmichael:

Absolutely. And thanks, Scott. And we’ve got a great topic today. We’re going to discuss controlling manufacturing costs and share some techniques and some strategies that we’ve seen, some of our better managed and more profitable clients employ over the years. But before we jump into really talking about the different types of costs and some of those techniques, I want to touch on one of Peter Drucker’s core principles.

And that was, “If you can’t measure it, you can’t improve it.” And you know what you’re measuring, whether it be cost or different type of soft topics that may not necessarily involve dollars, it may be processes actually that, you’re measuring and monitoring to. Scott, won’t you tell us a little bit about the reporting systems that maybe you’ve seen in place and what some of our clients have developed as they look to truly measure those costs so those key performance indicators that sort of keep them on track and how they’re managing costs and in their business with it.

Scott Bailey:

Sure Tom. And really one thing I would say is that the systems in place for that are less important than the data, making sure that you have good data and that not only do you have it, but you’re looking at it on a regular basis that you’re actually using that data to drive your decision-making. That is absolutely critical and for some of our best manufacturers and distribution companies, they’ve always got an eye on that data. And this covers the gamut of their businesses, this covers costs from raw material to labor, to their indirect costs and overhead. It covers the whole thing and all the way down through their processes from, that’s obviously on the production side, but also on the inventory management and the sales side, as we know, several of our businesses fluctuate depending on the time of year or depending on buying patterns of customers.

And on the cost side, cost can vary based on when certain raw materials tend to be more available than others. In particular, if you look at industries that are dependent upon natural resource, raw materials, a lot of the production for that can vary based on the time of year and the distance from supplier to your business. The key thing is to have that data, and if you’re looking at that data that should drive your decision making process across any of the topics that we discussed today. Tom, I hope I got to the question you were asking is that I think what’s more important is that you’re letting the data drive the decision making. It’s a little bit like the quarterback of a football team, letting the game come to the player, rather than trying to force the player, trying to force the play on the game. Does that make sense?

Tom Carmichael:

It certainly does. And again, just back to what you said, it’s not so much how you’re doing it, but what you’re doing in terms of tracking those costs. We have some clients who have a fully integrated production system that’s tracking those costs and it’s overlaid and integrated with the general ledger. And then we have some who are tracking those costs maybe necessarily separate from the general ledger. But again, as long as they’re doing a great job of that, and they have a process that works for them, they can get to where they need to be to identify the information they need to measure what it is they want to measure.

Scott Bailey:

Absolutely, absolutely.

Tom Carmichael:

We talked a little bit about the measuring, these key performance indicators or costs. Let’s jump into maybe some of the different types of costs and what we see some of our clients, some of the issues that they deal with that maybe … Let’s jump in and talk a little bit about labor costs and some of the issues that we see out there, why don’t you share some of your recent experiences with this?

Scott Bailey:

Well, obviously right now, this is a particularly sensitive issue, as it always is. Labor cost is always one of the most significant costs that every business that we’re involved with, not just manufacturing, distribution, but every business, this is one of their most significant costs across the board. And it’s also one of the more difficult to measure and to control. Certainly there are portions of it that are more measurable than others, and that is in terms of your direct labor application, what do you really need to keep production moving, but also important to this is, and while it’s a little less measurable, I think is equally important. Tom and I generally agree that if you can’t measure it, you can’t improve it.

The one area where I would say that is not a 100% true initially, but eventually becomes true, is when it comes to making sure that the team members you have, that the labor you have that not just are they productive, but that they’re also bought into your business philosophy that they’re bought into making sure that the business is operating as it’s intended, both from an efficiency standpoint, but also ensuring that where cost savings are achieved, that those areas have an eye on the long view, that we’re not making changes to costs with a short-term game, long-term difficulty.

And a lot of that’s in the mentality, making sure that the people who are responsible for creation of the product, for managing those who are creating the product that everybody’s facing the same direction, that everybody’s got the same approach to the business. And as much as possible that they are seeing the business through your perspective, and while that’s not initially cost savings, that has tremendous benefits on both costs and sales and other elements productivity throughout the entire operation.

That for me, Tom, that’s one of the most important things to focus on. And in addition to that, we keep going back to data, looking at the data and making sure that the labor burden you’ve got is generating output, that you are generating production and looking at based on what the data tells you, what are the right levels, getting that balancing correct. That’s absolutely essential. Tom, what thoughts do you have on this?

Tom Carmichael:

Yeah, I agree with that. Those are some really good points. And I think when you talk with really any employer, but specifically in the manufacturing industry, one of the biggest issues that they face is having access to a skilled labor force. And when you look at, in terms of your labor costs, I mean the training component and being sure that you are identifying those employees who are longer-term employees and that you’re investing in them. It’s not a cost, it’s an investment. And then when you get into the whole, the issue of whether you’re talking about types of cost, or even whether you have fixed or variable costs, there’s certainly going to be a component.

I think more so today and in today’s environment than maybe in years past that a training component, that really is a fixed cost. And that’s what it’s going to take because so many of the clients that I work with, they tell me that most of the training that occurs for them is internal. And if they can find the labor force that, and put them in place, they can train them. But again, I think that’s going to be an ongoing process and it’s going to be a fixed cost that is just a part of doing business.

Scott Bailey:

Absolutely. And I would even add to that because I think you touched on this a little bit, is that in an environment like we’re in where there is a real difficulty in access to skilled labor. Labor retention is going to be critical. Things that can be done again, getting back to the buy-in business philosophy, those elements are significantly important in making sure that you keep your best people in your organization.

Tom Carmichael:

Absolutely. We’ve talked a little bit about labor costs from a material cost perspective and maybe production costs in general, what we would refer there. Scott, what have you seen with the recent shutdowns with a lot of manufacturing facilities costs have been sort of all over the place, in terms of what we’re seeing people trying to manage those risks there and what they’re doing to control those costs. Maybe give us some insight on what you’ve been seeing.

Scott Bailey:

Well, it’s no surprise to anyone involved in this industry that we’ve seen a significant disruption in the supply chain, in many, many areas. One of the things that we would want to see most is that one of the things that our clients are doing is taking a look at their supply agreements, making sure that our clients have access to those critical components that are hard to get a hold of. One of the examples I think is with a generic pharmaceutical manufacturer that I used to work with. And one of their most important products had two suppliers in the entire world. And one of those suppliers exited the market. Basically at that point, they were down to one. And the one that exited the market was the one that they were buying from. And this client didn’t have a supply agreement in place that was effective for the product they needed and the significance of that product relative to their sales volume and the support of the company.

And they had, as you might imagine, a big mess on their hands, and that’s been 10 years ago, that’s before we ran into some of the supply chain issues we’re dealing with right now. Certainly the most significant thing is to make sure that we are identifying again in the data who our most important suppliers are, that we’re reaching out to those suppliers and making sure number one, that they’ve got the capacity to support our production. And then also to make sure that we have supply agreements in place to make sure that we can continue production. This is before we even think about controlling costs, but through that process, that’s where we establish those costs. That’s where we get into the details and make sure that not just we have the supply in place, but we’ve got that supply in place at a price that allows us to meet the market where it needs to be on the sales side.

Scott Bailey:

Most of our manufacturers operate in either somewhat of a cost plus or various forms of driving revenue based on the cost. But we want to make sure number one, we’ve got supply and we’ve got supply at an appropriate cost. What are you seeing in this area, Tom?

Tom Carmichael:

Yeah, I think there’s no coincidence that the best managed clients that we work with are by far and away the best communicators. And they have the best relationships with really all of the stakeholders in their business, but particularly with their vendors, because they know that with the supply chain getting shortened with just-in-time manufacturing processes being put in place. That’s the key is for the communication to be there so that there are spikes or whatever it may be, in someone’s production process so that your vendors understand what your process is so that they can make the decisions that they need to do to be a quality provider as well. Another thing that we see, and I’ll just kind of throw this in there.

And really this even kind of goes back, circling back maybe to some of the labor costs is that, I say a lot of our clients, and I know within CRIs footprint, every state that we’re in has fantastic state universities that have this available, but through their extension services with their engineering schools, a lot of them bring in those extension agents, literally on the business side and more specific to what type of business, but let’s just say it’s a textile company. There are textile engineers that can come in and take a look at your processes, take a look at your shipping process. Maybe how you’re packaging materials are or whatever it may be. I just wanted to encourage anyone that’s listening that if you have some concerns, that’s certainly an Avenue that you could get some very high quality feedback on your processes within your company.

Scott Bailey:

Absolutely, absolutely true.

Tom Carmichael:

Scott, another thing that really, it just seems like every year, this piece of the cost puzzle just continues to grow and be more and more burdensome, but compliance costs. And whether it be at the state level, the federal level, I know all manufacturers are burdened with making sure that they are complying with whatever walls regulations it may be. But share with us a little bit about what maybe you see in those regards?

Scott Bailey:

Well, one of the oldest forms of costs that we’ve seen as it relates to compliance, Tom, is related to safety. And we would hope that most of our clients by now are at a very mature state when it comes to production safety, facility safety, safety in transportation, things like that. If not we certainly have some resources available to help folks so that they can get to where they need to be. Just because that’s a cost that doesn’t necessarily add value, but it can add a whole lot of problems if it’s not under control. Certainly that’s one of the oldest and most frequently encountered compliance costs.

But as you say, we’re starting to see a lot more compliance activity in the manufacturing area, but we’re also seeing the opportunities for some benefits. One of the benefits I see is the potential for GMP, Good Manufacturing Processes. Getting that certification can provide a competitive advantage. It gives you a little bit of something to sell to your customers that your competitors maybe have, or maybe don’t. And in following those processes, that helps you work out a lot of the kinks when it comes to compliance with either with product storage, product safety, things of that nature. That’s one of the things I’ve seen some of my clients exploring Tom. I’ve seen him exploring GMP, what are you seeing as well?

Tom Carmichael:

Yeah, we say that and obviously you mentioned in any type of safety type issues. We work a lot with food processors and obviously food safety and the tolerance of what is allowed. I mean, when you talk with some of the companies that operate in that space, it’s incredible, the cleanliness and the regulation that, whether it be the USDA or whatever it is that that is monitoring that. That holds them accountable for, and that they are far and away, above and beyond what’s required. But it is costly, and it is something that certainly needs to be looked at on an ongoing basis. But again, it’s a cost of doing business, but a lot of these times you have a food order and it doesn’t meet those specific tolerances, there’s no redo on that. We’ve got really one shot at it, and you have limited shelf availability or your shelf life. You’re just not going to have an opportunity to rework or whatever that may be.

Scott Bailey:

There is no plan B there is there?

Tom Carmichael:

Absolutely not.

Scott Bailey:

And one of the things related to that, that we’ve also seen the cost of clean rooms is really escalating. That’s something to watch for our clients and prospects that are in industries that require that level of product control.

Tom Carmichael:

Absolutely. Well, Scott, thanks again for sharing your expertise with us today. And I know there’s been a lot of valuable information that you’ve been able to share to our listeners. And just as a recap, if you can’t measure it, you can’t improve it. But that measurement goes beyond, just true dollars and cents and costs component, it’s your key performance indicators, whatever they may be in your business, whether it’s cultural and obviously some of them are related to costs. But there may be some other areas that aren’t necessarily measured strictly off dollars and cents. Thanks again to our audience and again, we welcome you to visit our website at cricpa.com for additional information. And thanks again.

Scott Bailey:

Thank you, Tom.

Outro:

If you want more CRI insights or interested in learning about our firm, please visit our website at cricpa.com. Thanks for listening to this episode of It Figures: The CRI Podcast. You can subscribe to it figures on iTunes, Spotify, or wherever you prefer to listen to your podcasts. If you liked what you heard today, please leave us a review.