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business | Cost management


increasingly perilous world. KEY POINT: If you don’t understand where your costs are coming from it is futile to try to manage them.

Target cost management effort The cost model that many processors have been using was largely developed in the fi rst half of the 20th


when direct labour was a high proportion of the costs. Increased investment in machinery and services has reduced direct labour costs and simultaneously increased overhead costs but the cost model remains the same. Figure 1 presents the broad cost distribution and the

Direct labour is no longer a big cost contribu- tor but it remains the prime focus for many plastics processors

effort spent on cost management within a typical plastics processing operation. It shows that most of the effort is spent in managing direct labour when this is actually one of the smallest components of the total cost. Are we determined to get it wrong? In fact, this problem is getting worse as time goes by.

Direct labour costs continue to shrink and overhead costs continue to rise. The cost basis for most manufac- turing industry has changed yet direct labour continues to be the focus for cost management. The model we have all grown used to is no longer valid. In the past, even when we did look at ‘overheads’ we

concentrated on the staff (or labour) element of overheads and ‘delayered’ (another word for ‘made redundant’) the middle management. This meant there was nobody left to do any of the work that could really save the company money. Meanwhile, production staff were frantically trying to meet the ever increasing production targets, to complete new initiatives started by the upper management (the latest set of manage- ment fad initiatives) while the real cost contributors were left unchallenged and out of control. This misdirected effort continues to cost money and

waste resources throughout the industry. Our efforts are badly or incorrectly focused because we continue to operate with a model that is now out of date and sends us in the wrong direction when we try to manage costs. We spend most of our time and effort on the

smallest component of the cost and largely ignore the other costs. Reducing overheads by only 10% translates into a product cost reduction of about 3.5% - the same as a labour cost reduction of 35%. Logic should tell us that if we want to make reductions then we should start with the big numbers because that is where we will make the big savings. Yet this is not where we start and we wonder why our cost reduction efforts are not as effective as we would like them to be. KEY POINT: Managing costs can make you a low-cost producer, simply cutting labour costs will not.

Control material costs Plastics processing rarely adds much to the product in terms of additional items and is basically a ‘conversion industry’. This means that direct materials are inevita- bly one of the largest cost elements of the fi nished product, yet it is one of the least attacked. Depending on the product, the raw materials cost

element will vary from 45% (technical products) to 80% (mass produced products). In many processing companies there are few formal attempts to manage the materials cost. Attempts generally involve simply reporting ‘variances to standard’ without any real

14 INJECTION WORLD | January/February 2013

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