What Drives Cost in Your Business

Plant managers of world class organizations know exactly what drives their costs in their operations.  While they do not count every penny, they do know the key drivers of expenses.  For most organizations those key drivers fall into two very obvious categories; labor and material.

Labor Costs

Labor costs are incurred when you pay employees to perform the work content necessary to provide products or services.  The costs show up in the form of overtime, poor utilization, and absenteeism.

Great plant leaders track overtime even during times of strong demand to ensure it does not get beyond 15% when it may make more sense to hire another employee rather than wear out your existing work force.

Likewise, they track the utilization of the workforce in the form or product or service performed per hour worked.  They may even have a system of earned hours that allows them to calculated total productivity.  Having a full crew that does not produce the expected outcome is a cost to the bottom line. It is typically seen as a labor variance on the income statement.

And finally, plant leaders track absenteeism.  They realize that a work force that does not reliably show up or turns over often is a cost to the business.  It places extra burden on those who do show up and makes for a variable work environment that causes waste.

Material Costs

Material costs are incurred when you purchases the raw materials needed to produce your products. The costs show up in the form of yield losses, scrap or quality defects, and obsolete items.

Great plant leaders track yield losses on most processes necessary to produce their products.  They watch closely the amount of material that enters the process divided into the amount of good material that comes out of the process.  100 grams into the forming press and a 80 gram good bottle that comes out is 20 grams lost, or a 20% yield loss.

Likewise they track scrap produced during most processes.  Every time 100 grams is entered in a process and a bottle that has to be reground or tossed out is a scrap loss.  Knowing this value in the shortest interval is critical to make sure it is remedied quickly.

And finally, plant leaders track obsolete items.  Anytime finished goods or raw material is no longer able to be used it is considered obsolete.  This is often the result of over production and very very expensive.  Again, quick detection is a key to stopping quickly.

Help your organization know their key costs and how to track them.  The shorter the detection of losses the sooner the problems can be addressed.







Jeff Boris

Jeff Boris

Jeff completed a 31 year career at Alcoa in engineering, Maintenance, Production, and 5 years as Location Manager. He currently consults across manufacturing facilities leveraging his plant management experience for excellence in EHS, Operations Management, and Cost analysis. He and his wife have 4 adult children. He currently lives in Newburgh, Indiana.
Jeff Boris

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