Any job shop or contract manufacturer assumes certain overhead costs: infrastructure, utilities, storage, wages, etc. Taken in total, these expenses can eat up most of your income—especially if overhead isn’t actively monitored and appropriately reduced.
The impact of a one percent drawdown here and there appears to be nominal. However, assuming overhead keeps exact pace with revenue, a collective overhead reduction of just 10 percent could yield your job shop a 20 percent increase in net profit. Compare that to requiring a 20 percent increase in sales revenue to realize the same amount of profit from sales alone, and the importance of managing overhead costs in maintaining an efficient, profitable business is readily apparent.
Calculating and Budgeting Overhead
Many job shops focus on reducing manufacturing overhead—the cost of completing a job—and assume that if these numbers stay in check, job shop expenses and profitability will fall in line. While a widely held theory, it falls short of encompassing all true job shop overhead in key areas, including:
- Insurance policies that cover general/health benefits and worker’s compensation for all employees
- Logistics that move product from the job shop, like domestic/international freight charges for large orders, or other package conveyors like the U.S. Postal Service or UPS for smaller orders.
- Supplies are broad-reaching and include cleaning, packaging, office and job shop fundamentals and furnishings, day-to-day incidentals, etc.
- Services that you engage with for basic operations like banking, equipment leasing and maintenance, payroll processing, records management, labor, uniforms, utilities, waste management, etc.
- Communication systems that connect you internally and to the outside world, like phones, computers, and larger IT infrastructures.
The “big picture” look at overhead immediately changes your perspective. How do you choose which area can withstand reductions to keep overhead low?
Cutting Overhead Costs
There are no quick fixes when it comes to managing overhead. Remember, decisions made in any area affect the entire job shop. For example, if the workforce is reduced to cut costs, you’ll meet your temporary goals, but the long-term impact on underlying workloads could damage customer relationships and erode profitability.
How can you cut cautiously? Consider taking these steps to review and reduce overhead expenses as they relate to the categories defined above:
- Identify spending patterns: Where and how have you spent money over the past 12 months? Do the recurring patterns support your business goals?
- Complete a needs analysis: Over the past year, how has your job shop evolved? Where do you see growth occurring in the next 12 months? Are your current suppliers still a good fit for anticipated needs?
- Know your competitors: Identify key market players and niche suppliers in all five categories. What are their service standards? Pricing? Contract terms? How could your job shop cost-effectively leverage these relationships?
- Ask for input: You don’t know what you don’t know, so don’t be afraid to ask questions. Solicit feedback from staff about potential improvements. Ask trusted suppliers to guide you in their areas of expertise and to provide tips about how to make the most of your dollar spend.
- Send out Requests for Proposals (RFPs): There’s no need to limit your purchase potential. Occasionally send out an RFP to your existing supplier and a few others that are similarly situated to verify you’re receiving the best deal.
- Negotiate with vendors: Before signing on the dotted line for any service, be realistic about price objectives and question if price “wiggle room” exists for customers willing to enter or renew a contract.
- Commit to the process: Repeat your review and these steps annually. Analyzing your overhead is worth the time investment.
Reach out to Wipfli today to find out how you can use technology to save on overhead costs and run an efficient, effective, and profitable job shop.