Continuous improvement doesn’t stop on the shop floor. Contract manufacturers must look beyond their equipment investments to identify hidden costs, embrace new technologies, and foster a culture of perpetual advancement.
Variable overhead costs are some of the easiest to overlook, but machine shop management can rein in that financial outflow. Here’s what you need to know:
Variable Overhead Costs Offer Hidden Savings Opportunities
Humans are creatures of habit. Shop owners and man
agers are more likely to notice obvious efficiency issues like slow machining time or high material costs while overlooking the less noticeable expenses that are eroding their company’s potential.
A precision manufacturer’s variable overhead costs aren’t always apparent in financial statements. Variable costs are often lumped in with fixed costs, meaning machine shop management never evaluates those expenses for savings opportunities.
Overhead costs: fixed vs. variable
Fixed overhead costs remain stable regardless of how much work your shop is (or isn’t) doing. These costs include facility rent or mortgage payments, employee salaries, and insurance premiums. Even when business is slow, fixed overhead costs stay the same.
Variable overhead costs change according to your shop’s production volume. These include costs such as raw materials, third-party vendor services, and office and shop supplies. When business is slow, variable costs drop; when sales are soaring, variable costs increase.
Routine Financial Audits Help Keep Your Costs Controlled
Don’t wait for a crisis to find the flaws in your overhead spending. Establish regular audits for evaluating costs, culling unnecessary expenses, and identifying investments that will improve your shop’s cost efficiency for the long haul.
Focus your internal audits on these key questions:
Are you paying for outdated, unhelpful solutions?
Last year, the NTMA team switched to a new association management system (AMS). Why? We realized that our outdated methods were costing us more money and time than a newer, more advanced solution.
Are you overlooking advantageous upgrades?
NTMA member Justin Quinn told us how he decreased Focused On Machining’s quoting time from one hour to only 15 minutes! A simple upgrade to his shop’s Paperless Parts quoting software now allows any FOM team member to create 300% more manufacturing quotes per hour. While the software itself is a fixed overhead expense, Justin was able to identify a variable overhead cost within the company’s quoting process; that variable was time.
Are your costs out of control?
Costs are always increasing, and folks have been hit especially hard since the pandemic. Stay on the lookout for ultra-inflated costs that no longer make sense for your shop. Cut out the expenses that aren’t giving you an adequate return, and leverage your problem-solving capacity to implement a new, lower-cost solution.
You Need a Cost-Cutting Strategy
Be bold in your cost-cutting, but don’t slash line items carelessly; you want to measure twice and cut once! To succeed, machine shop management should ensure that the shop’s financial strategy aligns with its long-term objectives.
For example, you can enjoy immediate savings by canceling your NTMA membership, but how will that decision affect your business over the next month, year, and beyond? How much time and money were you saving with your NTMA membership benefits?
As one NTMA member told us, “Our NTMA membership costs us $1,200 a year, but it saves us $8,000 annually on Grainger purchases!”
A cost-cutting strategy will help you avoid expensive mistakes. Along with performing regular financial audits, ensure that every cost-cutting measure is reviewed by machine shop management. Internal checks and balances will help you prevent unilateral decisions that aren’t truly ideal for the organization.
Don’t let old habits hold you back
Sometimes, the only way to reduce overhead is to change suppliers or processes. You can try negotiating with your preferred providers first, but if their prices aren’t adjustable, it may be time to consider alternative solutions.
Staying open to new opportunities creates space for meaningful savings. In just a few short weeks, NTMA will introduce a new opportunity for tremendous member savings on tooling. What does “tremendous” mean to us? Consider a $10 million contract manufacturer that spends about 4% ($400,000) on tooling annually. With NTMA’s new tooling package, that shop could cut its tooling expenses by $40,000 – $60,000 each year!
Stay tuned for more details!
Take NTMA’s Benchmarking Survey: April 1 – May 31
Through the end of May, NTMA members are invited to participate in our latest Operating Costs Survey.
Take the 2024 Operating Costs Survey NOW
NTMA’s benchmarking surveys are confidentially conducted by our partners at MacKay Research Group. This survey’s resulting Operating Costs Report is a profitability study that provides a holistic view of precision tooling and machining businesses. You’ll be equipped to benchmark your own shop’s financial performance against industry trends among small- to mid-sized manufacturers just like you.
Make Manufacturing Improvement a Reality
With NTMA on your team, you’re well on your way to getting your overhead expenses under control. And when you spend strategically, you set your shop up for sustained success that spans generations.
Leverage your NTMA membership benefits to their fullest, and you’ll always be ahead of the curve.
Not a member yet? Join NTMA today!
