Reduce manufacturing cost with supply chain data

Shrinking profit margin makes cost reduction a priority

While the aviation industry has made significant strides in recovering from the drastic decline in air travel caused by the pandemic, the industry is bracing for further challenges. The landscape is undergoing structural changes that include escalating expenses, a decrease in corporate travel, and investments in sustainable technologies, all of which are expected to contribute to a decline in profitability over the next decade.

Several prominent trends are exerting mounting pressure on the profitability of all sectors within commercial aviation. At a macroeconomic level, rising inflation rates and labor shortages are driving up costs and undermining overall performance. Additionally, the widespread adoption of video conferencing software on a global scale has significantly reduced business travel while increasing the proportion of leisure travelers who prioritize affordability. Another significant force is the growing prevalence of aftermarket service contracts among airlines, which are based on risk-sharing and per-flight-hour charges. This trend has the potential to weaken the performance of original equipment manufacturers (OEMs). Furthermore, long-term investments aimed at reducing carbon emissions and enhancing the sustainability of air travel are expected to considerably raise costs.

In light of these factors, the aviation manufacturers are compelled to address the issue of rising manufacturing costs. This article will identify the components of manufacturing costs, examine the root causes of rising expenses, and outline strategies for reducing manufacturing costs through enhanced operational efficiency and cross-functional collaboration.

Identify the manufacturing cost

Knowing that macroeconomics put a lot of pressure on the profitability, companies always need to find opportunities of improvement on internal operations. To achieve this, it is crucial to understand the components of manufacturing costs and identify areas for potential reduction.

There are three main types of manufacturing costs: direct materials, direct labor, and manufacturing overhead.

Direct Materials

Direct materials are the raw materials that are directly used in the production process. These include any materials that can be traced back to the finished product, such as wood, steel, and plastic. The cost of direct materials includes the purchase price, shipping and handling costs, and any other expenses associated with acquiring the materials.

Direct Labor

Direct labor refers to the wages and benefits paid to the workers who directly contribute to the production of goods. This includes wages, salaries, and benefits paid to production workers, supervisors, and quality control personnel. The cost of direct labor is determined by multiplying the number of hours worked by the hourly rate.

Manufacturing Overhead

Manufacturing overhead includes all other costs associated with the production process that cannot be directly traced to a finished product. These costs include rent, utilities, maintenance, depreciation of equipment, and other indirect costs. The cost of manufacturing overhead is typically allocated to each unit produced based on a predetermined rate.

How supply chain data transparency reduces manufacturing costs

The effective utilization of supply chain data and improved team collaboration offers abundant opportunities for reducing manufacturing costs. Many manufacturing companies currently suffer financial losses due to disruptions, such as overtime deliveries, costly last-minute solutions, and excessive work-in-progress (WIP) inventory. However, by leveraging supply chain data and streamlining cross-team collaboration, these disruptions can be proactively avoided, leading to reduced manufacturing cost.

In industries with complex supply chains, such as aerospace manufacturing, there is a vast amount of data to manage. By storing all operational data in one central platform, teams can easily access accurate information without switching between various systems and apps. This saves time and improves efficiency, allowing teams to focus on proactive measures rather than corrective measures to prevent supply issues such as parts shortages. For example, a production controller can instantly know which parts are critical to source, which suppliers to contact, and which customer orders to potentially delay, which enables them to take the necessary actions in a timely manner.

Moreover, tapping into historical and contextual data about suppliers, equipment, machines, bills of materials, and customers allows companies to create accurate forecasts for future shortages and risks. This invaluable knowledge empowers businesses to address future challenges swiftly and effectively.

By bolstering visibility and forecasting capabilities regarding supply and demand, deliveries, WIP inventories, and production plans, companies can proactively prevent disruptions and allocate more time to mitigate potential issues. This proactive approach not only reduces manufacturing costs but also ensures a more resilient and efficient manufacturing process.

To be more specific, with more visibility into supply chain data and efficiency of decision making and collaboration, companies can reduce manufacturing cost in the following aspects:

Reduce overtime costs

Enhance forecasting capabilities to better anticipate supply and demand, enabling more accurate production planning. This reduces the need for overtime work and ensures a smoother production flow.

Reduce contractual penalties

Minimize contractual penalties for late deliveries by optimizing production schedules, improving logistics coordination, and implementing efficient supply chain management practices.

Optimize inventories

Reduce costs associated with financing and work-in-progress (WIP) inventory by implementing inventory optimization strategies. This involves monitoring inventory levels, identifying and eliminating excess inventory, and streamlining the production process to minimize idle resources.

Reduce expedited services costs

Enhance supply chain operations to reduce the reliance on costly expedited services. This can be achieved by improving inventory management, establishing reliable supplier relationships, and implementing just-in-time practices.

Improve team productivity

By optimizing manufacturing efficiency, we can effectively decrease material and manufacturing overhead costs. However, it is equally crucial to focus on reducing labor expenses. Implementing strategies such as downsizing the workforce can contribute to lowering labor costs, but it is also essential to streamline cross-team collaboration to enhance overall productivity. This approach enables the team to deliver more value while minimizing expenses. Furthermore, a highly productive team should prioritize maximizing customer satisfaction, which in turn leads to reduced service costs.

Streamlined cross-team collaboration also brings more agility to the manufacturing process, allowing teams to work together seamlessly and respond quickly to changing environments. By breaking down silos and fostering open communication, different departments can share context, resources, and expertise, leading to improved decision-making and faster problem-solving. This increased agility enables companies to adapt their production strategies swiftly, optimize workflows, and make timely adjustments to meet customer demands efficiently.

Wei Zhao
Gülşah Keleş
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