The fixed costs myth

“The problem is that 30% of our cost base are fixed  costs”.   Everyone nods wisely as though nothing could be done as indeed the word fixed implies. “If only we could sell 30% more then our overall costs would go down by 10% but in the current economic climate that’s going to be difficult”…but just how fixed are these fixed costs?

Indirect Labour

Imagine a factory with 200 employees.  The indirect staff  are the following:

1 Factory Manager, 1 Engineering Manager, 2 Product Engineers, 3 Production Foreman(one per shift) ,2 Goods Inwards handlers (morning and afternoon shift),3 Plant Materials Handlers,2 Goods inwards inspectors, 1 Quality Manager, 3 Quality inspectors(one for each shift) ,1 Purchasing Manager.

It seems to be near impossible to reduce this number, after all, the company is working on 3 shifts and to leave a shift without a quality inspector is unthinkable…Unthinkable, until we imagine how a factory with 50 employees is structured.    With 50 employees all of the rigid functionalities have disappeared.  The production foreman is also a quality inspector.  The manufacturing manager also does the purchasing.  The engineering manager is also the quality manager, there are no materials handlers because the operators get their own materials.  Once we apply this logic it becomes apparent that “indirect” labour is much less fixed than we would like to imagine.

IT costs

Often viewed as a “fixed cost” IT costs are in practise quite variable, since both software and hardware licenses will depend upon the number of work stations and be directly proportional to the number of employees using the systems.

Building Costs

Building costs are probably fixed in the short term.  But have you considered the possibility of moving to a smaller facility or sub-renting out part of our existing facility?  This is not without its own costs and there may be security issues with sub-letting but as a first stage you can always try renegotiating the rent with the property owner.

Depreciation

Depreciation is a deferred cost of past investments (such as machinery and tooling) which are spread out over the life of an asset and as such are  probably one of the few truly “fixed” costs in the sense that as the consequence of past investment decisions it cannot be changed.  However, if in the future our investment is moderated then this cost will also decline.   That doesn’t mean that lack of investment is a good prescription to improve manufacturing productivity, on the contrary, wise investment in cost saving and product development is necessary to improve any factories performance however the manufacturing manager should appreciate the impact this investment will have on the future “fixed” cost base.

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