Why Production Costs Are Rising and How You Can Control Them

Following 18 months of inflation and persistent challenges in the manufacturing sector, producers are grappling with soaring costs for raw materials and supply chain disruptions. While inflation may be showing signs of slowing, manufacturers are turning their attention inward, seeking to regain control over rising expenses.

Let’s examine the reasons for the surge in manufacturing costs and the ways manufacturers can overcome them.

Factors driving up manufacturing costs

A combination of factors threatens to shrink American manufacturers’ margins. In response, producers are raising prices to offset the higher cost of making goods. Here is what’s driving the spike in prices:

• Inflation: The current inflationary surge has reached a 40-year high, affecting the prices of goods and services, including raw materials, energy, and labor. In an environment where everything costs more, manufacturers are grappling with a major uptick in their cost of goods sold (COGS).
• Supply chain disruptions: From lingering pandemic shifts to the ongoing war in Ukraine, global disruptions have wreaked havoc on supply chains, making it harder and costlier for manufacturers to secure materials and components.
• Labor shortages: Many manufacturers are grappling with labor shortages. These shortages are situational, driven by factors like an aging workforce, pandemic-related issues, and the Great Resignation. To attract and retain workers, producers are compelled to offer higher wages, which contributes to increased production costs.
• Rising wages: In an attempt to address labor shortages, manufacturers are raising wages, adding another layer to their cost structure. Moreover, the costs of hiring, training, and retaining workers have also risen, contributing to more human capital costs.

Strategies to combat rising costs

How can manufacturers combat rising production costs? While cost-reduction strategies vary from business to business, producers should explore the following options as they look to protect their margins:

• Unlock operational efficiencies. Streamline processes, reduce waste, and invest in advanced technologies to boost operational efficiency, thereby trimming costs.
• Negotiate with suppliers. Engage in negotiations with suppliers to secure better prices on raw materials and components. Explore alternative suppliers for cost competitiveness.
• Reduce inventory. Evaluate inventory levels to strike a balance between meeting demand and minimizing carrying costs. Reducing excess inventory can lead to significant savings.
• Automate tasks. Embrace automation to reduce labor costs. Utilize robots for assembly tasks and implement artificial intelligence (AI) software solutions for data entry and other routine processes.
• Adopt lean manufacturing principles. Employ lean manufacturing to eliminate waste and inefficiencies from production processes. An effective lean implementation is proven to result in cost reduction and improved efficiency.
• Invest in research and development. Allocate resources to research and development to foster innovative, cost-effective processes and enhance long-term competitiveness.
• Partner with other organizations. Collaborate and develop synergies with trusted partners to share resources and expertise. Strategic partnerships can help reduce costs and boost efficiency.

Cost control is increasingly important

There’s no one-size-fits-all solution for cost reduction. A successful strategy will align with the specific industry, business model, and unique challenges faced by each producer. By taking an agile, proactive approach, manufacturers can regain control over their costs and stay competitive.

While costs rarely fall in the manufacturing environment, producers who prioritize cost-control efforts today will set themselves up for efficient production in the future without the constant threat of a shrinking margin.