Cost Optimization in Production: Using Economies of Scale and Reducing Costs
Many companies know their cost structure is too high, but do they know why?
There are almost always multiple causes. They may be related to internal production, for example, the value stream across multiple production stages, increased vertical integration, or regulatory and market-related shifts between different sites and regions. One thing is certain; the current global market situation means that companies must become more efficient. A dedicated, solution-oriented approach based on an entrepreneurial mindset is essential for achieving greater efficiency.
This is exactly where Ingenics Consulting steps in.
For over 30 years, we have been planning and implementing production stages in manufacturing companies. Therefore, we understand exactly how cost structures are set up and what their key drivers are. We also work with you on equal terms to identify what can be changed.
Cost Optimization Through Maximum Cost Transparency
We never consider cost positions individually, but always in connection with the processes that cause them and the organizational structure in which they occur. This consistent transparency reveals which costs create genuine value and which ultimately tie up resources. This allows us to develop measures that enable sustainable cost reduction without compromising the quality and delivery capability of your production.
What does cause-based cost optimization mean?
Cause-based cost optimization reduces costs by identifying and eliminating actual drivers at the cost type level. Value stream design is used to identify and streamline activities that do not add value (unnecessary transportation and idle times, etc.). We combine this with an established CIP to prevent a rebound effect.
Why General Austerity Programs Shift Costs Instead of Reducing Them
General austerity programs usually follow the same pattern. A fixed percentage is cut across all areas, but without eliminating the actual cause, e.g., the relevant cost driver. Expenses are often simply shifted to other areas, e.g., in the form of additional rework or subsequent corrections. The resulting rebound effect causes a renewed increase in costs and results in additional austerity measures that recur at increasingly shorter intervals.
As long as costs are considered independently from processes, budget cuts can hit precisely those areas that are vital for the performance and stability of your company.
The good news is that addressing costs at their source avoids this conflict of objectives. Our cost optimization strategy considers costs and processes as a unit so that savings remain sustainable in the long term.
Cost Optimization at Ingenics Consulting:
Targeted Cost Impact Across All Levels
We do not see cost optimization as just an austerity program, but as a decision-driven management practice. It is an integral part of operational excellence. The main focus is placed on the sustainable optimization of cost structures along the entire value chain, from product and manufacturing costs to overheads and direct and indirect production costs, as well as safeguarding these costs in the long term.
The three steps of the implementation phase are:
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Step 1 – Break down costs according to cost type:
We analyze product and manufacturing costs across all stages of the value creation process and break them down according to cost type (materials, personnel, energy, maintenance). This reveals which cost types are driving costs and where no equivalent value is created.
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Step 2 – Cost benchmarking in market comparison:
We use outside-in benchmarks to compare your cost position with the best-in-class values in your industry. Instead of only measuring yourself against your own previous performances, this external perspective reveals how competitive you are and where you have further potential to improve.
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Step 3 – Measures for sustainable cost safeguarding:
We will clearly demonstrate the consequences of each decision. Quality and delivery capability are safeguarded because we examine every measure by its process and consciously maintain what is necessary to continue stable operations. Furthermore, we relate it to the organizational structure and the CIP to ensure that cost savings do not weaken the areas that are essential for the success of your company.
The Most Effective Levers of Cost Optimization
Cost generation is usually not limited to individual areas. That is why optimization measures must be implemented in parallel across different points, such as early product development, the manufacturing value stream, and the indirect cost structure.
Depending on the initial situation, the following approaches can be adopted individually or in combination.
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Design-To-Cost and Redesign-To-Cost: Cost Control at the Root Cause
Up to 80% of product costs are already determined in the development phase. Therefore, the design-to-cost method is the most effective lever for cost reduction and supports the optimization of manufacturing costs. Technical specifications are consistently monitored against target costs (target costing) so that production costs exceeding the equivalent value are not incorporated into the product in the first place.
Redesign-to-cost is applied to existing product lines, enabling economies of scale and cost savings through material substitution or functional integration. -
Value Stream Design: Eliminating Waste in Manufacturing
Activities that do not add value may be hidden within the value stream of mass production and cause additional costs. Value stream design (value stream mapping) makes these activities visible. Activities that do not add value are reduced as a result (e.g., by shortening routes, minimizing intermediate storage, etc.). An established CIP makes this saving permanently effective. It ensures that the value stream is continuously monitored and that newly emerging waste is identified and eliminated early on.
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Excessive Overheads and Indirect Costs: Streamlining Structures
The overheads, i.e., the general costs for administration, control, and support functions, are growing faster than value creation in many companies. We trace these indirect costs back to their drivers and examine structures using a zero-based budgeting approach: Instead of carrying over budgets from the previous year, each item starts from zero and must be substantiated again. As a result, historically grown costs are realigned with actual needs.
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OEE Losses: Uncovering Hidden Costs
Low overall equipment efficiency (OEE) often hides indirect production costs
in the form of additional setup costs, overtime, or increased maintenance expenses. However, an unrefined production process is usually the root cause. For example, changing quantities and sequences at short notice requires set-up changes and additional work, which increases costs.The most effective lever for OEE optimization is therefore an optimized production planning and control process (S&OP) that smooths out production. This increases plant availability and reduces unit costs. At the same time, overhead costs are spread across a larger number of products due to the higher output, thereby reducing the overhead share per product. See performance management for information on how to use OEE as a control variable.
Strategic Cost Impact: Make-Or-Buy, Total Cost of Ownership and Working Capital Optimization
The most significant cost impacts do not arise from the individual manufacturing steps, but are defined at the higher decision-making level when determining your value creation structure. It defines which value creation remains within the company, and which is covered by external procurement, making cost optimization part of the operations strategy.
A reliable make-or-buy strategy evaluates all product costs according to the total cost of ownership (TCO), from material procurement and manufacturing to disposal – and reveals hidden cost drivers concealed by the basic purchase price. Accompanied by a cost comparison (cost benchmarking) that compares your cost position with the competition, it forms a crucial basis for choosing between in-house production and outsourcing.
In volatile markets, converting fixed costs to variable costs can also come into play. High fixed cost intensity quickly places pressure on margins when demand fluctuates. Converting fixed costs into variable costs (e.g., through outsourcing peripheral processes or flexible working time models) makes the cost structure more resilient to rising energy prices, material and personnel costs. Targeted SG&A optimization further reduces the gross margin by putting sales and administrative overhead costs under the microscope. In parallel, working capital optimization releases tied-up capital and strengthens the company's ability to invest from within.
How does working capital optimization create room for investment?
Working capital optimization releases tied-up capital by selectively reducing inventories and lead times, which improves liquidity immediately without external financing. Moreover, companies can achieve the financial freedom required to finance essential transformations in digitization or sustainability in spite of cost pressure.
Our Promise: Cost Optimization That Delivers Better Long-Term Results
In order to optimize your cost structures, we establish a comprehensive cost responsibility system where each cost item is assigned to a responsible role.
At the same time, we address the actual cost drivers and embed all the necessary measures into the structure of your processes. Initial savings will take effect in the short term and permanently improve the performance of your production.
The following improvements are the result of an accurate understanding of the root cause of costs and the close connection between finance and operations. Financial targets and operational reality are brought together so that every cost decision is economically viable and feasible in practice.
Ingenics Consulting: Your Partner for Efficient Cost Reduction and Optimization
Whether you want to gain transparency of your cost structure or are already preparing an actual make-or-buy decision. Ingenics Consulting will support you in every situation.
Benefit from our knowledgeable end-to-end perspective and many years of experience from over numerous projects successfully implemented in the area of cost optimization. Our practical approach, based on established benchmarks, offers your company a cost optimization strategy that not only provides short-term relief, but also structurally safeguards your competitiveness.
You can always rely on your quality, delivery capability, and innovative strength to remain protected. As a vendor-neutral partner, we will recommend what truly benefits your company.
More Topics to add to your Cost Optimization
Operations Strategy
How to develop a viable vision for your operations based on your corporate strategy.
Operational Excellence
How strategic goals are transformed into sustainable, high-performance production processes.
Performance Management
Key metrics that make cost impacts visible and manageable, from OEE to lead time.
Make-or-Buy Strategy
Before relocating any plant, determine which value-added activities will remain at your own plant and which will be outsourced.
Inventory Optimization
How to free up tied-up capital through optimized inventory and strengthen your working capital.
FAQ - Frequent Questions About Cost Optimization in Production
Why is traditional cost reduction often inadequate in the manufacturing industry?
It often only includes general budget cuts without addressing the actual causes of rising costs. We focus on a cause-based cost impact. Instead of cutting overheads across the board, we use tools such as a value stream analysis to eliminate activities that do not add value. This prevents a rebound effect and ensures a sustained improvement in results without negatively affecting the delivery capability or quality.
What is the relation between OEE optimization and a reduction of overhead costs?
Cost optimization is most effective when it is regarded as a shared matter between Finance, Operations, and Management. Although cost targets are often defined in the finance division, their actual drivers are found in products, processes, and established structures. Savings can only
What is the relation between OEE optimization and a reduction of overhead costs?
A low overall equipment efficiency (OEE) is usually caused by an unstable production process – and this is exactly where indirect production costs are hidden (e.g., due to overtime or maintenance). The most effective lever is therefore a production smoothed by the S&OP process, which exposes unclear cost structures and increases plant availability. Overhead costs are spread across a larger number of products due to the higher output, thereby reducing their share per product.