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Managing Material and Labor Costs

Conjuring up a fiscal plan of attack for 2007.

Welcome to 2007, which I hope will be a prosperous year for you and your business. As we enter a new year, we invariably look on this time as an opportunity to start fresh with new goals and renewed dedication to better our companies.

Your plan of attack might begin with the sales and marketing budgets-not a bad place to start. Equal attention, however, should be given to the costs of your business and how you can improve in some of those areas. In this column, let’s address two key areas of emphasis to improve 2007’s bottom line: direct material and direct labor costs.

Material costs
Since you’re in the manufacturing business, the percentage of your direct material costs to your sales may have a very wide range from product to product. Most of us produce a number of different products in the graphics world, each of them carrying their own cost burden to the bottom line. But one thing is certain: Inventory will almost always be one of your highest costs.

Think about how you manage your materials. When material costs go up on the profit-and-loss statements, we inevitably blame the problem on our suppliers and ignore the way goods are managed on the purchasing and inventory side of our business. Admittedly, because we live in a custom-order world where demand is sometimes quite difficult to predict, managing your inventory is a challenge. But it can be done.

I’m sure you have read over the years about the theories of supply-chain management and how companies such as Dell have revolutionized the way inventory is managed. You may shrug your shoulders thinking that’s great for them, but it doesn’t really apply to your business.

Not true. While the principles of supply-chain management may be applied differently in a custom-order environment, they can be applied. And although space restraints here won’t allow an in-depth discussion on the theories of supply-chain management, I can touch on a few of the basics.

Begin by tracking the history of your purchases and inventory. Even the most basic purchasing and inventory software provides this type of data. The problem, however, is that many of us don’t use it.

Once you analyze your purchasing trends, begin establishing minimum and maximum quantities to keep on hand. Based on those numbers, you can then determine the order points (or triggers) and order quantities to promote the most efficient use of inventory space and avoid costly overnight deliveries of out-of-stock inventory. Analyze your inventory turnover on a regular basis to determine whether or not you have excess inventory in some areas. Without question, this is a tricky part of the business, but you can save a significant amount of money if you dedicate the proper time and effort to effective systems.

Supplier relationships also play an important part in managing your direct materials. Don’t assume that the price you are currently paying is the best price you can get from your suppliers. If you’re purchasing significant quantities of materials from a supplier, you may have more leverage than you believe. Talk to that company about its pricing and find out what "column" of their pricing structure you are currently buying in. One strategy is to suggest that your company is a growing one and that you’d like to establish a long-term relationship with them-but you would need to negotiate a better buying level in order to do so.

The graphics-supply business for materials is a very competitive industry. Shop various sources to see what pricing is available on the primary products you use. Just be aware that the lowest price isn’t always your best buy. Availability, shipping costs, lead times, etc., are all issues you need to have nailed down by the time you select a supplier.

You can also develop partnerships with your vendors. For instance, my company has successfully set up purchasing structures with some of its suppliers in which they stock certain inventory items that we use most often at a convenient facility earmarked just for us-a type of consignment relationship. Because we purchase enough quantities, they are happy to do it; they know we will eventually be buying it from them, and we know the material will be available when we need it. It’s a win-win situation.

The costs of labor
Managing your labor costs can also be rather challenging, but if approached properly, can save your company significant money. One of the first keys to managing your labor costs is to actually manage your labor. Too often we assume that our processes are already the most efficient they can be, simply because "that’s the way we’ve always done it."

Instead, spend some time to analyze the way you produce your work. Challenge your managers to find better, more productive ways to utilize your people on the production floor. Communicate with all your employees and solicit their suggestions on how your processes may improve.

Recently, our production manager and I held what we call "quality circles." The two of us met with all of our employees in groups no larger that five or six people at a time. Instead of telling them about the various ways we wanted quality to improve, we listened to their recommendations, took notes, and will now begin to discuss which of the ideas we can implement to improve our production processes.

The best part is that when we do put their ideas into action, we will have immediate buy in-after all, it was their idea.

Be creative in the way you approach your labor demands. If you never use any temporary employees, you may have too many employees (unless the demands of your customers are always steady). If you never pay overtime, you may have too many employees. Demand in our industry typically fluctuates enough that management of labor will always be an issue, but don’t try to manage the peaks and valleys of your business by constantly hiring and laying off people.

Instead, try to manage those highs and lows. For example, this year our print manager set up a schedule almost two months in advance of busy season, scheduling different print operators to work different weekends. This way, we did not have to go to them with any last-minute requests to work the weekend. In addition, as we approach various times during the year when we’re less busy, we review our vacation "accounts" and talk to employees who may have significant time built up in their account, encouraging them to use the slower times for their vacation. For the most part, our employees are very cooperative when they realize we are trying to cut costs.

Examine for prosperity
You should continuously be examining your material and labor costs. Identify areas you’re succeeding in, as well as those areas in which your business can improve. Development in both of these areas can prove to be a great boost to your bottom line, making for a much more prosperous 2007.

Marty McGhie (marty@ferraricolor.com) is VP finance/operations of Ferrari Color, a digital-imaging center with Salt Lake City, San Francisco, and Sacramento locations.

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