How to Eliminate the Hidden Costs in Your Factory and Increase Its Performance?

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July 18, 2022

What Are the Hidden Costs? How to Identify Them?

What Are Hidden Costs?

The socio-economic theory of organizations has highlighted the concept of hidden costs, which stems from the structuralist (structure-behavior-results relationship) and behaviorist (behaviour-results) movements. This theory considers the company as a set of work structures interacting with the behavior of the personnel.

A hidden cost can be defined as one that does not exist in the company's information system. Thus, it will not be found in the accounting entries or management charts. Hidden cost management is a natural performance resource in the factory.

Case Study – Becoming Aware of Your Hidden Costs

Most of the malfunctions, and therefore the associated costs, can be eliminated, at least partially, which makes it possible to avoid the consequences: excessive workload, payroll, consumption, etc.

To continue, we will look at several cases where identifying and eliminating hidden costs could lead to significant savings and thus increase the profitability of a plant.

In the first case, when designing or transforming an existing plant, 10 million euros are invested in building or increasing the capacity of a plant or in introducing a new product. If the sizing is not done correctly, it is widespread to end up with a 10% overinvestment. In our case, this means an overinvestment of 1 million euros.

For this second case, let's look at a factory that assembles parts in the automotive sector. The factory has an hourly production of 30 parts for a VA PRF (manufacturing cost of the part, excluding purchases) of 100 euros per part. The plant operates 21 hours a day, 220 days a year. This assembly plant of thirty islands works with a 10% cost overrun because the right improvement decisions were not taken (due to a wrong diagnosis). Thus, without realizing it, the factory loses 1.4 million euros annually.

In this third case, let's look at a plastic parts factory. It runs 21 hours a day, 220 days a year. The average hourly cost of the machines is 40 euros. The factory has 30 machines that operate at a 10% cost premium due to poor management and improvement decisions. Thus, these bad choices over one year create an additional cost of 0.6 million euros per year.

How to Better Eliminate Hidden Costs?

Are you planning to increase your production in the short or medium term? Planning to introduce a new product in the short or medium term? Do you want to produce at a lower cost?

Dillygence is at your disposal to guide you and help you optimize your plant and reduce your costs.

How do we do it? Firstly, we will create a digital or analytical twin to inject data from your production tool. Then by exploring a wide range of options with our ultra-fast algorithms, we can identify the most cost-effective actions to take to achieve your goal.

Later, we can also give you SaaS access to your analytical twin. This will allow you to rely on it for future decision-making.