The 7 Principles of Manufacturing
Excellence & Cost Management
Cost management optimizes performance to reduce manufacturing costs
while ensuring the highest possible quality, reliability, and productivity. It is not
about cutting costs but improving manufacturing efficiency and effectiveness.
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Business leaders are accountable for cost management and must ensure that
manufacturing strategies are effectively implemented and that resources and
processes are in place to enable and ensure manufacturing excellence.
Table of Contents
Provide Clear, Consistent Performance Objectives- Manufacturing
Excellence
The second element, aligned expectations, is equally important-
Manufacturing Excellence
Provide Knowledge, Tools To Succeed- Manufacturing Excellence
Understand True Costs- Manufacturing Excellence
Excellence: The Only Acceptable Performance Target-
Manufacturing Excellence
Reduce Organizational Complexity- Manufacturing Excellence
Commit to Broad-Based, Knowledge-Driven Involvement-
Manufacturing Excellence
The 7 Principles of Manufacturing Excellence & Cost
Management- Conclusion
Cost management is as strategic as it is operational, and business leaders
must be prepared to take a holistic approach to reduce manufacturing costs.
By taking a proactive and comprehensive approach to cost management,
business leaders can ensure that their manufacturing organizations are
productive, efficient, and reliable.
If passionately embraced and implemented, the following seven principles
provide both a robust business model and the essence of a cost management
ethos. Together they provide a road map to business success.
1. Provide Clear, Consistent Performance
Objectives- Manufacturing Excellence
The manufacturing excellence team has defined the manufacturing strategy
and critical objectives. The manufacturing process improvement roadmap is
developed and communicated to the organization.
The manufacturing excellence team utilizes a facilitated process to engage
the manufacturing organization in developing project charters that align with
the manufacturing strategy and critical objectives. Projects are selected for
implementation based on aligned business objectives, manufacturing strategy,
and manufacturing process improvements.
The first step in any undertaking is to ensure clear and aligned expectations.
This is especially true in cost management, where many managers’ only cost
experience is in cost-cutting, such as staff reductions, product and facilities
rationalization, and cutting capital budgets.
While these actions are sometimes necessary, effective cost management lies
in an everyday process discipline that continually addresses the root cause of
excess staff, unprofitable and over-expanded product lines, and the
justification and implementation of marginally effective control systems.
Effective cost management deals with the underlying systems which create
the need for such structural cost elements. Ensuring that everyone
understands the expectations from the start of a project allows the project to
run smoother with fewer issues down the road.
This also gives everyone a clear understanding of their role in providing better
results. In essence, if everyone knows what is expected of them from the
beginning, it will save time, money, and frustration overall. Regarding
manufacturing excellence, clearly understanding expectations is key to
success.
Various production strategies are used in any manufacturing organization to
achieve manufacturing excellence. The aim is to identify and eliminate waste
throughout the manufacturing process, from the raw materials stage to the
delivery of the finished product.
This is done to improve quality and competitive edge and increase profit
margins. There are four main areas where manufacturing excellence can be
achieved: production scheduling, maintenance effectiveness, product
offerings, and technical knowledge.
Each area can be either a cost-effectiveness tool or a root cause of low-value
cost. Understanding this distinction is the first step in effective cost
management. All four areas must be given due attention and consideration to
achieve manufacturing excellence.
2. The second element, aligned expectations, is
equally important- Manufacturing Excellence
The second element, aligned expectations, is equally important. Even with
clear revenue expectations, an aggressive, well-meaning sales and marketing
organization can offset its hard-won top-line successes by adding products,
packaging options, and channels to market that add far more cost than the
projected benefit of increased sales.
Similarly, there are potential cost trade-offs between traditional procurement
cost-saving processes and manufacturing’s need for process stability and
variation reduction.
All stakeholders must understand the company’s overall manufacturing
excellence objectives to avoid these pitfalls. Only then can everyone make
informed decisions that will help to achieve those objectives.
Manufacturers in the pharmaceutical, alternative medicine, dietary
supplements, and food processing businesses know that product integrity and
consistency are crucial to success. To manage costs effectively, aligning
performance expectations and objectives across all manufacturing operations
is critical.
This way, manufacturing excellence in one area does not offset by increasing
costs in another. By working together to establish manufacturing guidelines
and protocols, these businesses can ensure that their products meet the
highest quality and safety standards.
In turn, this will help to build customer confidence and loyalty, contributing to
long-term success.
3. Provide Knowledge, Tools To Succeed-
Manufacturing Excellence
In manufacturing, as in any other field, an organization’s performance is only
as good as its employee’s ability to execute the company’s vision and goals.
This places great importance on an organization’s leadership, ensuring its
workforce has the right knowledge and tools to succeed. The leadership
team’s beliefs about employee motivation will guide approaching this
challenge.
Suppose they believe that most employees arrive at work with the willingness
and desire to do their best. In that case, they will focus on ensuring that each
individual has the knowledge and capability to perform well.
On the other hand, if they believe that employees need to be constantly
prodded and incentivized to do their best, then their focus will be on designing
programs that motivate employees to perform at a high level. In either case,
the manufacturing excellence of the organization will depend on its ability to
ensure that its employees have the knowledge and tools they need to be
successful.
To optimize the trade-offs between volume, margin, and manufacturing cost,
the sales force must have a strong understanding of manufacturing, standard
cost, and how their product and customer-related decisions can impact the
organization as a whole.
The same is true for those on the decision-making planning and production
side. They must be able to see how each of their actions could affect the
customer, cost, inventory, and product lead times before taking any action. By
manufacturing excellence, organizations can be assured that they are making
the best decisions for all parties involved.
Cost control is a critical element of manufacturing excellence. To effectively
control costs, managers need to understand the cost drivers of their business,
the difference between efficiency and structural cost, and the systems that
drive the company’s day-to-day activities. They also need to have detailed
knowledge of the production and sales process.
By understanding these factors, managers can make informed decisions
about where to cut costs and how to improve efficiencies. As a result,
manufacturing companies can achieve a competitive edge in today’s
marketplace.
Executives need a deep understanding of their organization’s cost drivers to
manage costs effectively. With this knowledge, they can identify
manufacturing excellence opportunities and implement strategies to reduce
waste and improve efficiency.
On the other hand, cost-cutting measures are often less effective in the long
term and can lead to negative consequences such as lower employee morale
and reduced quality. Therefore, executives must thoroughly understand their
organization’s cost drivers to manage costs effectively.
4. Understand True Costs- Manufacturing Excellence
For businesses to manufacture excellence, they must have an accurate
standard cost. Standard cost is fundamental in most business decision-
making, from budget preparation, pricing, and variance reporting to strategy
formulation and performance-based incentive plans.
Standard cost data drives most new product pricing, advertising, marketing,
and investment decisions. The importance of accurate standard cost data
cannot be overstated. In other words, if a company does not have reliable
standard costs, then the company is at risk of making suboptimal decisions
that can lead to decreased profitability.
In a manufacturing company, product costing is an essential management tool
for making strategic decisions regarding pricing, product mix, and capacity
utilization. However, traditional costing systems often produce inaccurate
results, overstating the cost of high-volume products and the cost of low-
volume products.
This can lead to sub-optimal decision-making and puts the company at a
competitive disadvantage. The solution is to implement accurate product
costing methods considering all fixed and variable manufacturing costs. By
doing so, companies can achieve manufacturing excellence and maximize
their profits.
In today’s business environment, data is everything. Companies rely on data
to make crucial decisions, from pricing and product costing to new product
justification and introduction. However, it can be challenging to accept that the
data we have used for years may be the root cause of many business
problems.
This is especially true in manufacturing, where excellence is critical to
success. Manufacturing process, we must first understand the root cause of
the problem. We can only make the necessary changes to improve our
manufacturing process and achieve excellence.”}>
In today’s manufacturing landscape, producing products profitably is
becoming increasingly difficult. In study after study, the average applied
overhead analysis targeted at the lower 50 percent (in volume) of all products
offered to account for less than 5 percent of sales volume and productive
labor, are therefore assigned less than 5 percent of all overheads, yet account
for 20 percent to 30 percent of all non-material cost. In other words, over 50
percent of products are sold at a loss.
Until this cost distortion is acknowledged and corrected, major management
decision systems, including long-term strategy formulation, remain extremely
difficult to validate. Accepting such a reality has been impossible for many of
our finest executives.
Only by facing up to this challenge and implementing manufacturing
excellence programs can we hope to overcome it. Otherwise, the current
situation is unsustainable and will eventually lead to the downfall of even the
most successful companies.
5. Excellence: The Only Acceptable Performance
Target- Manufacturing Excellence
Organizations today are under pressure to provide products and services that
meet the highest quality standards. This means achieving excellence in
reliability, safety, and cost in manufacturing. High quality and performance are
among the essential keys to achieving manufacturing excellence.
This means aiming for a minimum 1.33 Cpk quality level, zero injury safety
record, zero late delivery, and year-over-year product cost reduction. By
setting the bar at excellence, organizations can ensure they provide their
customers with the highest quality products and services.
In today’s manufacturing environment, excellence is the norm rather than the
exception. As a result, technical knowledge, well-understood, aligned
performance systems, and absolute data integrity add to a performance
culture and a cost management behavior ethos.
The benefits of this approach are many and varied, but perhaps the most
important is that it enables manufacturing companies to remain competitive in
an increasingly global marketplace.
By managing costs effectively and continually striving for improvement,
manufacturing companies can continue to produce high-quality products at a
price that consumers are willing to pay. In this way, a performance culture is
essential for manufacturing companies that wish to remain successful in
today’s business environment.
6. Reduce Organizational Complexity- Manufacturing
Excellence
The manufacturing sector is a prime example of an industry in which
organizations can only afford to focus on the highest contributing activities. To
be successful, manufacturing organizations must be able to produce goods
quickly and efficiently, with a high degree of quality control.
This requires a continuous investment in new technologies and processes and
a commitment to continual improvement. As a result, manufacturing
excellence has become an essential requirement for many organizations.
However, this commitment to excellence comes at a cost.
Manufacturing organizations must invest significant research, development,
training, and education resources to maintain a competitive advantage. As a
result, manufacturing has become increasingly complex and capital-intensive.
This complexity has increased pressure on manufacturing organizations to
achieve ever-higher performance levels. In many cases, the only way to meet
these demands is to sacrifice quality for quantity.
As a result, manufacturing has become increasingly impersonal and
mechanized. The result is that many of today’s manufacturing processes are
burdensome and costly rather than being sources of value.
Organizations that constantly and boldly apply the test of relevance and value
to every daily activity are the most effective at cost management. They
question everything to weed out manufacturing inefficiencies.
A substantial cost management system can simplify complex processes and
make them easier to understand. This creates manufacturing excellence
within the organization – products, customers, etc., that meet these standards
must go. to achieve true manufacturing success.
Oftentimes, it is better to shut down a sophisticated maintenance
management system that isn’t working and go back to the basics than to add
the ongoing cost of fixing and maintaining a low-value system.
By constantly asking themselves whether or not an activity is truly providing
value, organizations can put themselves on the path to manufacturing
excellence.
To ensure manufacturing excellence, looking at the standard cost of product
variety is essential. If 50 percent of product variety accounts for less than 5
percent of total sales yet creates 20 percent to 30 percent of non-material
variable cost. Product by product, they too must pass the test of contribution
value.
By looking at the standard cost, we can see which products are not
contributing to the overall goal of manufacturing excellence and make
necessary changes. This will help improve the quality of our products and
increase customer satisfaction.
7. Commit to Broad-Based, Knowledge-Driven
Involvement- Manufacturing Excellence
To manufacture excellence, it is essential to focus on knowledge and
involvement. Uninvolved people will not easily give their commitment, and
authentic leadership is earned through knowledge and respect.
As we review the seven principles of effective cost management, it becomes
clear that excellence depends on what business strategist W. Edwards
Deming called profound knowledge. The central factor of employee
involvement or empowerment has always been the perceived quality of the
decisions and the problems solved.
To achieve manufacturing excellence, businesses must focus on knowledge
and involvement.
The manufacturing process is constantly evolving, and to maintain a
competitive edge, businesses must continually strive for manufacturing
excellence. Standard cost, complexity reduction, and maintaining a valued
and credible performance system are all essential components of
manufacturing excellence. And, as any business leader knows, these
components are all driven by the common denominator of knowledge-driven
involvement.
Only employees with the knowledge and opportunity to be successful
decision-makers can pave the way for future business success. By
empowering employees and giving them the tools they need to be successful,
businesses can ensure that they have a solid foundation to build continued
manufacturing excellence.
The 7 Principles of Manufacturing Excellence & Cost
Management- Conclusion
The most important principle of effective cost management is leadership’s
understanding and acceptance of the reality that the majority of all
organizational cost is structural.
That is, costs are built into an organization by management systems and
management decisions. Decisions about the number of products, the
customers they serve, and how the business is run all drive cost.
What We Do versus How Well We Do It determines most of an organization’s
cost. To manage costs effectively, manufacturing excellence must be
achieved. This can be done by focusing on Lean manufacturing principles and
Six Sigma quality methods. Organizations can reduce costs by eliminating
waste and improving quality while still delivering high-quality products and
services to their customers.
For manufacturing excellence to be achieved, management must be willing to
accept change and challenge their own past decisions. They must also
embrace the power and potential of their employees.
It is essential to realize that past leadership decision-making has created and
supported most organizational costs. Therefore, it is essential to adopt a
process-driven approach to cost management. This is the only way to ensure
manufacturing excellence and, in many cases, the only path to organizational
survival.
Manufacturing Excellence- Recommended Reading
1. Five Steps to Manufacturing Executional Excellence
2. Manufacturing Excellence by Uncomplicating Your
Organization
3. The 7 Principles of Manufacturing Excellence & Cost
Management
4. Manufacturing Excellence Complexity: A New Perspective
5. Manufacturing Excellence & Complexity- 15 Troublesome
Symptoms
Updated: 5/24/2023
