Finding the Hidden Drivers of High Manufacturing Costs

BOSTON, MA--(Marketwire - January 22, 2009) - The current economic downturn has companies scrambling to cut costs and generate cash, especially in the face of tight capital markets and the imploding financial sector. A new report by The Boston Consulting Group (BCG) shows how companies can find major cost savings beyond the usual budget cuts and salary freezes by rethinking and redesigning their global manufacturing operations for optimal performance. This approach can unlock a huge amount of hidden value yet is often overlooked as a cost-cutting measure, says the BCG report titled "The Power of Cost Transparency: Finding Hidden Value in Manufacturing Networks."

Too often, companies rely on benchmarking to drive their redesign decisions, but comparing the performance of different plants against industry- or companywide standards and identifying best practices are useless exercises unless the reasons for cost differences are fully understood. "Even subtle differences in business makeup or strategy can lead to erroneous benchmarks that result in suboptimal decisions," notes Michael Zinser, a partner in BCG's Chicago office.

Most production networks have so many cost factors to consider -- related to location, product mix, plant capabilities, and supply chain design -- that assumptions about cost savings are often wrong. A detailed analysis of hidden cost "drivers" can cut through the complexity and deliver straight answers for making redesign decisions. "When costs and cost drivers are truly transparent, the insights gained can be surprising and, if acted on, can improve a company's overall competitive position," explains coauthor Andreas Maurer, a senior partner in BCG's Düsseldorf office. By optimizing their manufacturing networks, companies can often realize cost savings of 10 to 15 percent.

Production networks often don't keep up with evolving global markets, or they're fragmented and inefficient due to a laissez-faire attitude following a merger. "Because the task of rethinking the manufacturing footprint is complex and politically difficult, it often falls to the bottom of a company's to-do list," notes coauthor Daniel Spindelndreier, a partner in the firm's Düsseldorf office.

According to the report, cost drivers fall into three categories: scale (the effect of volume on cost per unit made), efficiency (the effect of productivity, utilization, and complexity), and factor costs such as labor, energy costs, and logistics. A cost-driver analysis involves four steps:

-- Collect meaningful, detailed data on products and production

-- Analyze the cost drivers and their impact

-- Model different network scenarios

-- Choose an optimal network design and design an implementation plan

As the analysis proceeds, people from various plants typically begin talking to each other in depth for the first time, discussing the different ways they do things. In the process of these exchanges, the teams often discover improvement levers that have nothing to do with the original cost analyses. "This knowledge sharing is an important byproduct of a cost-driver initiative," says Alexander Türpitz, coauthor and a principal in BCG's Stuttgart office.

To receive a copy of the report or arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or gregoire.eric@bcg.com.

About The Boston Consulting Group

The Boston Consulting Group (BCG) is a global management consulting firm and the world's leading advisor on business strategy. We partner with clients in all sectors and regions to identify their highest-value opportunities, address their most critical challenges, and transform their businesses. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 66 offices in 38 countries. For more information, please visit www.bcg.com.