3 steps auto suppliers can take to control costs
INSIGHT ARTICLE |
Automotive suppliers are facing increasing manufacturing costs on a per unit basis due to a number of factors, including material price increases, tariffs, a tight market for skilled labor and high overhead costs. Understanding and managing these costs will be critical to maintaining profitability on both a program and enterprise basis. There are three steps auto suppliers can take to better manage manufacturing costs:
1. Capture true costs
Visibility into the drivers of manufacturing costs on a program and product level will be key to ensuring suppliers are able to understand and minimize their impact on company profitability. While the largest recent increase in costs has been due to tariffs, controlling labor and overhead costs are just as important. However, traditional standard costing systems do not adequately give an accurate picture of true costs, especially when it comes to overhead. Consequently, it is imperative that management have in-depth knowledge of the processes that drive cost inefficiencies.
To provide a more accurate picture of true cost absorption by product, driver-based costing methodologies need to be considered. Activity-based costing, for example, where indirect costs are considered, is one option to consider. However, any cost methodology which leverages true and detailed drivers to allocate costs will work. Ultimately, driver-based costing will generate more accurate profitability and enable management to dive into problem areas that drive inefficiency.
2. Leverage technology
Most enterprise resource planning (ERP) systems are not designed to handle sophisticated driver-based costing; consequently, separate cost management solutions should be considered. Technology capabilities have evolved dramatically in the last several years, with specific cost and profitability solutions as well as custom analytical solutions that can be developed on modeling technology. For any solution considered, the technology needs to have robust allocation and calculation capabilities in order to enable proper alignment of costs to product or programs.
3. Automate variance analysis
Monitoring actual performance manufacturing costs in comparison to predetermined targets is critical to ensuring ongoing control. Automated variance analysis comparing actual drivers with budget drivers will make the process of performance management much easier and consistent. Working from one version of the truth is vital to ensuring management understands problem areas and their underlying causes.
Controlling manufacturing costs will be fundamental to overall profitability. To accomplish this, auto suppliers should focus on the above three areas.
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