Now that you’ve got the basics of manufacturing productivity, it’s time to learn how to improve it.
Naturally the people in a business play a critical role in its overall performance, so improving their productivity is a key goal for managers. There are two ways in which it’s helpful to think about this.
The first – and perhaps most obvious – is to think about how your staff can be more productive in the tasks they’re given. In the old days this was just about making people work faster. However this approach has now largely been replaced by the modern art and science of employee productivity, which looks at how the most effective employees are motivated to excel.
Meanwhile a second, less obvious, way to think about people and productivity is to step back and ask which tasks your people can add the most value to. Again there is an old way and a new way of looking at this. The old model seeks to reduce wage spend by replacing workers with machines. While a smarter response is to automate non-value-adding tasks like data-entry, or counting stock, so that your staff are freed up for more value-adding work. This is a key way to boost manufacturing productivity.
In simple terms, employee productivity is a metric that businesses use to compare output against the amount of time it takes. Essentially, it is a measure of how efficiently employees work: for each hour spent working, how much do they produce?
Naturally a highly efficient and productive workforce generates more profit. However there are other reasons businesses should pay attention to employee productivity. For example:
Measuring employee productivity can be one way to help a business understand their return on investment. For example, a company significantly invests in upgrading its machinery and installing new software to optimise efficiency. If this investment was worth it, the business would see an increase in employee productivity.
Take the time to see what low employee productivity is telling you. Low productivity suggests disengagement, interruptions to workflows, process inefficiencies, poor management and more. Think of employee productivity as a diagnostic test within your business.
The business of lifting staff productivity is a whole industry in itself, with entire companies dedicated to worker incentives, psychology, and optimising people and culture practice. So without getting too lost in the details, here are five important tips on how to keep employee productivity high.
The right tools help employees perform their tasks efficiently and on time. There’s nothing more counterproductive (and painful) than being hindered by slow equipment or outdated gear. That goes for both physical machinery and the computer hardware and software you use to track and plan your physical processes.
Ensure the work environment is geared towards productivity. Address the basics and make sure you have:
A strong people and culture team does wonders for employee productivity. Their role starts with hiring people with the right attributes and attitudes, and extends to training and development, and keeping staff morale high. A firm with unhappy employees will always struggle with productivity.
Labour productivity, also known as workforce productivity, should not be confused with employee productivity. Labour productivity measures the hourly output of a country’s economy, whereas employee productivity measures an individual worker’s output. Labour productivity is defined as real economic output per labour hour:
Labour productivity = Real GDP / Total labour hours
If output is increasing while labour hours remain the same, it indicates that the labour force has become more productive. Labour productivity growth is directly attributable to changes in physical capital, new technology, and human capital.
For any business, waste strains profitability. Waste can come in the form of time, resources and labour; it shows up through poor process planning, inventory imbalance, or poor warehouse layout. Essentially, waste is any expense or effort that does not transform raw material into a finished product. By optimising processes and eliminating waste, businesses can add value to each phase of production.
To fully understand manufacturing waste, you first need to understand lean methodology, which focuses on identifying and removing waste in a manufacturing process.
The concept of lean was documented in the early 1900s, but it wasn’t until Toyota founder Sakichi Toyoda, his son Kiichiro Toyoda and chief engineer Taiichi Ohno created the Toyota Production System (TPS) in the 1930s that lean manufacturing really took off. You’ll also find that people refer to lean manufacturing by other names: lean production, Just-In-Time manufacturing, lean enterprise and more.
The main objectives of lean manufacturing are minimising waste and costs, maximising productivity and quality and ensuring continuous improvement.
The main goal of TPS is to eliminate muda — that’s waste in Japanese. The lean manufacturing model has eight types of waste:
Despite selling different products, many product-based businesses will find that their wastes are similar and will benefit from a lean perspective. Lean manufacturing techniques focus on cost reduction and increasing turnover by systematically and continuously removing activities that don’t add value.
Now that we know what types of waste to look out for, here are five practical strategies you can implement to reduce manufacturing waste:
Stop manually recording inventory levels and manufacturing information. This often results in inaccurate and outdated data and leads to misinformed decision-making. A good inventory management system keeps product quality levels high, reduces inventory shrinkage and inventory waste.
Look at implementing a just-in-time manufacturing process to keep production and inventory lean.
Find out more:
How can you redesign product packaging to use the minimum amount of materials? Try using reusable or recyclable packaging materials or even buying in bulk to reduce the amount of waste coming in.
Don’t wait until a machine breaks down in order to fix it. Schedule in regular maintenance for your machinery, especially for high-use machines. As a bonus step, create a backup plan in case your machines fail and make sure the relevant employees understand the plans.
Reconfigure your floor plan and warehouse layout to improve order fulfilment. Efficient warehouses store frequently picked items closest to the shipping areas to minimise picking time, improve productivity and minimise travel time between picking locations.
Some key areas you need to consider when organising your floor plan are:
Product supply and demand changes continuously, so you should review floorplans regularly to adapt to seasonal changes.
Make it easier for your team to navigate the warehouse and for pickers to choose the right stock and reduce fulfilment mistakes. Have clear and concise rack labels, bin labels and warehouse signage.
Operational efficiency is about delivering good quality products to the right customers in the most cost-effective and timely manner. There are four factors that contribute to operational efficiency:
There are a few financial ratios that business owners use to assess their operational efficiency. The simplest way to calculate operational efficiency is:
Operational efficiency = Operating expenses / Revenue
A lower result indicates greater efficiency. This ratio can be used to assess the business as a whole or for individual areas of operations if you can identify and restrict revenue and costs to that department.
You need to measure operational efficiency over time to determine how your efforts are paying off, and to identify patterns and inefficiencies.
There are a few things that can hinder your ability to measure operational efficiency:
Here are seven strategies you can use to help improve operational efficiency.
It’s a good idea to examine your workflows. Take a scientific approach to it: make a hypothesis before experimenting, alter certain parameters, measure the results, then compare the results with your assumptions and previous workflows. This gives you a better picture of what changes you should make.
You want to always have the right raw materials in the right quantities on hand so you don’t hinder production. Make sure you can accurately forecast demand so you know when to place an order and in what quantities.
Once you’ve identified what’s holding up your manufacturing operations, it becomes easier to devise strategies to remove bottlenecks and improve throughput.
Invest in your employees, as they play a role in production efficiency and maintaining product quality.
Simplify the manufacturing process with automation so you can save time, make the best use of resources, ensure consistent product quality and more. Before investing in an automated system, make sure that it will meet your business needs and has flexible integration capabilities.
Manufacturing operations often involve heavy machines and equipment. If someone gets injured on the production floor, the whole process must stop immediately. Along with the initial trauma and injury you may also need to delay production and miss customer deadlines. Workplace accidents can also increase insurance costs, damage production equipment and more. Prioritise workplace safety so your staff can work to the best of their ability without worrying about their health and safety.
Equipment failure can throw production off course, causing delays and serious issues down the line. Aside from causing frustration, machinery downtime is expensive — the average cost of unplanned equipment downtime is $260,000 per hour and lasts about four hours on average! Take a proactive approach and schedule regular maintenance for high-use equipment so you can sustain efficiency.
If you manage your supply chain well, you can benefit from better negotiating power and get the best rates and products in the shortest possible time. In turn, this reduces inventory costs and improves your production efficiency.
Depending on a business’ size, type and the products they manufacture, supply chains can be complex and hard to manage. Make sure you know how supply chain management affects manufacturers:
How well you manage your supply chain affects the timeliness of raw materials arriving at your production site. Poorly managed supply chains can bring production to a halt — late raw materials set back production schedules, leaving employees idle and the company unable to fulfil time-sensitive orders.
Good supply chain management lowers transport costs. Manufacturers with cost-efficient supply chains have lower overheads and direct sales costs.
Manufacturers want a balance between fully-owned distribution systems and contractor services. In-house distribution systems are costly but manufacturers have full control over the process. Relying on contracts can be more affordable but manufacturers risk giving up control.
Keeping competitive in the global marketplace means maximising supply chain efficiency. Manufacturers who opt for continuous quality improvement programs like Six Sigma will have different supply chain dynamics — they will need to collaborate more with customers and suppliers than normal. Manufacturers with a Just-In-Time system, or who serve customers using JIT, need to digitally integrate with their upstream and downstream contacts, which will minimise interactions.
Supply chain efficiency is a measure of how a company’s processes make the best use of their resources, whether those resources are financial, human, technological or physical. Make sure to not confuse it for supply chain effectiveness.
An effective supply chain has knock-on effects on all areas of the business. Here are five proven strategies to improve supply chain efficiency:
Commit to scheduling regular meetings to give your team a chance to address upcoming logistics concerns ahead of time. Face-to-face meetings are another great way to avoid miscommunication and clarify misunderstandings.
More transparency in the supply chain improves efficiency for your business and has further benefits to your workforce and your clients. Here’s how you can do that:
Review your process to see where you can use automation to boost efficiency. Discuss with your team and upper management, taking into account your business needs, current goals and future ambitions.
Your workforce can be a major operational cost component so make sure your staff have the chance to upskill. If training is aligned with the business’ strategies, training and development will help employees be more in sync with the company’s overall business objectives, ensuring better productivity.
Improving supply chain efficiency is a continuous process. To make sure you’re on the right track, measure the changes, review the effects and tweak what’s not working.
One way to improve productivity is to reduce production costs. Production costs are the costs incurred in manufacturing a product or providing a service. These can include expenses such as raw materials, labour, suppliers and general overhead. Production costs can also include government taxes and royalties.
There are four important types of production costs: variable costs, direct costs, indirect costs and labour costs.
Variable costs increase or decrease depending on a company’s production volume. As production increases so do these costs; as it falls variable costs drop too. Packaging costs are a good example of a variable cost — the more products made, the more packaging is needed.
Direct costs are expenses that a company can easily connect to a specific product, department or project. This includes items such as software, equipment and raw materials.
Indirect costs are costs associated with multiple activities and can’t be assigned to specific cost objects. Examples of indirect costs include accounting expenses, rent and utilities.
Labour costs are the costs incurred by an employer in paying staff. These are usually measured in hours worked and divided into direct and indirect labour costs. Direct costs include wages for employees that produce a product, such as those on a factory line. Indirect costs are associated with support labour, such as machine maintenance staff.
Before trying to reduce production costs, we must first understand the elements that come into play when we calculate total production costs.
Total production cost, otherwise known as total manufacturing cost, is the aggregate cost incurred when a business produces goods in a given period.
Total manufacturing costs = Cost of direct materials + Cost of direct labour + Manufacturing overhead costs
This is the cost of raw materials or component parts that go directly into making products. For example, the cost of plastic is a direct material cost for a toy manufacturer; the cost of glass is a direct material cost for a window manufacturer.
This is the cost of all direct manufacturing labour incurred during the period, including wages, salaries and employee benefits.
These are the costs that are indirectly incurred during production that cannot be easily allocated to a product. Examples of manufacturing overhead costs include things such as rent, electricity used to operate machinery, insurance, depreciation on machinery and more.
Dennis runs a factory that makes cotton T-shirts. In a month, he manufactured 100 shirts and incurred the following expenses:
The direct material costs are the cost of cotton, transport expenses to bring cotton from the mill to the factory, labour cost to unload supplies, and the cost of needles and thread. Adding these up results in a direct material cost of $12,700.
The direct labour cost is the salary of tailors, $4,000.
The manufacturing overhead costs are the cost of packaging materials, the manager’s salary, office stationery expenses and warehouse rent. Adding these up gives us a manufacturing overhead cost of $7,650.
Total manufacturing costs = Cost of direct materials + Cost of direct labour + Manufacturing overhead costs = $12,700 + $4,000 + $7,650 = $24,350
We can take it one step further and calculate the total manufacturing cost per shirt:
Total manufacturing cost per shirt = $24,350/100 shirts = $243.50
To begin with you need to ensure you’re tracking your costs — you can’t change what you don’t measure. And with the rise of cloud technologies, you won’t even need an accountant to do this. Accounting software like Xero or QBO will track your costs throughout your entire business.
Analyse each stage of your production process: is each activity required? Does it add value? You should also consult the relevant employees to find out what steps in the process are not adding value, redundant, or interrupt their workflow. Drop non-value-adding activities to cut out unnecessary costs.
Optimal inventory control means you hold the right quantity of stock so you’re not stuck with excess inventory that costs money to store, insure and can go to waste; but neither are you caught short by stock-outs.
Engaged employees means lower staff turnover, which in turn leads to reduced labour costs. Engaged staff are also more effective and productive. This means you should:
Automated solutions can require an upfront cost but reduce your operational costs in the long run. Other solutions, such as subscription-based software, can break even immediately.
Start by automating your inventory management with the right software. It will make your inventory control processes more efficient. You’ll be able to better manage procurement, track stock on hand, manage suppliers and customers and more.
Already have a good relationship with your supplier? You’ll be better placed to negotiate for discounted prices. Consider:
We’ve only listed six ways to reduce production costs — there are many more. Take the time to see which technique or combination of techniques works best for your business.