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Managing Material and Labor Costs

(January 2007) posted on Wed Jan 03, 2007

Conjuring up a fiscal plan of attack for 2007.

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By Marty McGhie

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.