The Biggest Costs Affecting Manufacturing Companies

Putting a company on the market requires a delicate balance: manufacturing businesses pursuing M&A must reduce unnecessary costs, while still ensuring the business is growing and profitable. Knowing the biggest cost drivers in manufacturing can help you assess your own expenditures. So as you move toward a sale, take a hard look at the biggest costs affecting manufacturing businesses.

Labor Costs

It’s an extremely tight labor market, with employees increasingly able to demand more than they ever did before. While this expense varies a lot from region to region, it remains one of the highest cost drivers. As you move toward M&A, it’s important to pay fairly for labor, but also to ensure that you’re actually getting real value from the expenditure. Trim the fat by getting rid of employees who require micromanagement.

Part Complexity

Complex parts with sophisticated designs drive costs, especially if they require complicated production steps and multiple processes. Every process increases cost by increasing manual labor, set-up, and supplies. To lower costs, keep designs as simple as possible while still maintaining their functionality.

Raw Materials

The materials used in each product strongly influence price. Each plastic resin and metal alloy has its own unique properties, and owners must determine how much to spend for higher quality products. Because raw materials are traded on the international market, the cost is predictable and owners and other decision-makers can easily find commodities tables to help them determine price, thereby minimizing expenses.

Tooling

Projects that require fixed tools to be machined to make cast parts can generate additional costs. The increase in price depends on the material require to make the tools, the number of components, and their reliance on special treatments. CDC machining takes longer per fixed part than casting, but with smaller volumes it is an option to reduce project costs.

Precision

Precision is not the same as accuracy. Accuracy is a measure of how closely the feature or product matches the desired value or goal. It is measured in inches, microns, or even feet depending on the product. Precision is a measure of accuracy over time. Higher levels of precision require more work and more expense, because of the increased need to control the manufacturing environment. Companies must balance the costs of increased precision against the potential costs of imperfect products.

Volume

The volume of tools made doesn’t change the price, but the cost per finished piece will shift. The more parts made from a tool, the more the price goes down, potentially amortizing the expense. Increasing volumes also empower manufacturers to strengthen the production process, reducing waste and maximizing efficiency. It’s also possible to negotiate bulk prices for larger volumes of raw materials.

Companies considering a merger or sale should work with a manufacturing M&A advisor who can help with assessing costs, value drivers, and potential areas of improvement. Controlling costs without compromising quality is a key strategy for achieving a higher valuation and enticing more buyers to place a bid.

Skills

Posted on

October 6, 2021