Mastering Cost Control in Manufacturing: Best Practices to Achieve Cost Targets

Manufacturing is inherently cost-intensive, standing in contrast to the revenue-driven nature of sales. While sales can focus on maximizing revenue through strategic pricing and market opportunities, manufacturing must concentrate on minimizing and optimizing costs to protect margins. This challenge is further intensified by competitive market dynamics, which often leave little room to increase product prices.
To thrive in this environment, manufacturing companies must implement robust cost control practices. This responsibility often falls to the Cost Control or FP&A departments within the finance function.
Imagine this scenario: you’re a newly appointed Cost Control Manager at a manufacturing company. The organization is struggling with a lack of cost control, and your mission is to improve cost management and achieve a demanding cost target. The head office has set this target based on historical P&L data, factoring in an approximate forecast of variable costs, historical fixed costs (minus extraordinary expenses), and a reduction of 10% to be achieved over three years.
The challenge? Head office may not fully understand the nuances of your local situation, leaving you to figure out whether the target is feasible—and how to achieve it. Here’s how you can approach this systematically.
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1. Analyze Historical Data

Start by diving into historical cost data. This foundational step helps you identify trends and understand the overall cost structure. Use spreadsheets to streamline the process and focus on:
• Total costs, including variable and fixed expenses.
• Trends over time, paying attention to significant deviations and anomalies.
Analyzing historical data at a macro level provides a strong starting point for detailed insights.

2. Ensure the Cost Target is Data-Driven

• Begin by thoroughly analyzing the cost target provided by the head office. Understand the assumptions and methods they used to determine this figure.
  • Assess whether their calculations are grounded in historical data, realistic forecasts, and industry trends—or if the target reflects a top-down directive that lacks practical feasibility.
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  Negotiate and Collaborate
  • If you identify discrepancies or errors in the head office’s calculations, prepare a detailed analysis to present your findings. Use data to back up your arguments.
  • Engage in a professional dialogue to understand their perspective. Ask for explanations on their assumptions, and don’t hesitate to challenge unrealistic expectations.
  • Propose adjustments based on your local insights and data. For example, if inflation, labor costs, or production volumes were miscalculated, offer corrected estimates supported by evidence.
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  Build Credibility
  • Addressing cost targets directly with the head office might seem daunting, but this is an opportunity to demonstrate your expertise and commitment to the organization’s success.
  • By thoroughly understanding the numbers and advocating for reasonable goals, you showcase professionalism and a solutions-oriented mindset. This approach not only strengthens your credibility but also ensures that future targets are set with greater accuracy and collaboration.
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  Balance Assertiveness with Diplomacy
  • Approach negotiations confidently but respectfully. It's important to strike a balance between advocating for realistic targets and maintaining positive relationships with stakeholders.
  • Frame your discussions around shared goals: achieving sustainable profitability and ensuring the organization’s competitiveness.
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  Take Ownership of the Target
  Ultimately, you and your team will be responsible for achieving the cost target, not the head office. This makes it crucial to be comfortable with the target's feasibility. A realistic, data-driven target provides a solid foundation for building actionable plans and driving organizational alignment.
  
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  3. Prepare the Cost Matrix.

A detailed classification of costs is essential for gaining clarity and setting priorities. Create a Cost classification & Responsibility Matrix along the following dimensions:

• By responsibility : Which Department head has a reposnsibility for what costs.
  • By nature: Direct costs (e.g., raw materials) vs. indirect costs (e.g., administrative overhead).
  • By behavior: Fixed costs (e.g., building rent) vs. variable costs (e.g., Raw materials, ).
  • By function: Production, administration, or sales-related expenses.
  • By controllability: Costs controllable by departments vs. those influenced by external factors (e.g., parent company mandates).

The Example of the Cost Matrix :

Engage department managers to review this Matrix to avoid any misallocation and misclassification.

4. Controllability

• Analyse costs by controllability.
• To streamline cost management, separate costs into controllable and uncontrollable categories, while setting aside costs imposed by the Parent company.

Uncontrollable Costs

If the Parent company sets cost targets for the Local plant, it should take responsibility for managing uncontrollable costs. Examples of such costs include:

• Royalty fees: Payments made by the Local company to the Parent for brand utilization.
• Mandatory suppliers:
•  Supplies specified in the Technological card established by the Parent company, which dictate that materials or components must be procured from designated suppliers.
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These costs should fall outside the scope of the Plant Cost Reduction efforts and be directly managed by the Parent Company. Efforts should be made to negotiate this arrangement with the Parent Company. However, if they do not agree and their target includes the uncontrollable portion of the costs, it would imply that a greater reduction must be allocated to the locally controllable costs. This is because the imposed costs are beyond your control. In my experience, Parent Companies typically take responsibility for their own costs to avoid placing an excessive burden on the plant. Targets should always be realistic; otherwise, there is a risk of demotivation and burnout, which could lead to outcomes contrary to the intended objectives.

Controllable Costs

In contrast, costs that are local but not directly controlled by the plant, such as local taxes or other mandatory payments, should still be considered controllable costs. Although the plant cannot influence these costs, their local nature makes them part of the plant’s cost structure and thus relevant for cost analysis.

Controllable costs refer to all costs that Local responsibility centers can manage and control. In the case of mandatory costs that cannot be directly managed, they should still be considered and absorbed within other cost reduction targets.

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5. Analyze Current Costs Per Unit and compare it to the Future Cost per Unit

A critical element of cost control is understanding the cost per unit (e.g., cost per vehicle). This metric offers a clear view of efficiency and progress:
Establish a Baseline: Only controllable costs are in the scope now. Identify the historical or achieved cost per unit. It may be costs per unit for the last month if the monthly production volume is stable, or average for the period. This will be so called Achieved or Current Cost per unit.

Analyse the historical Cost per Unit and the future 3 years cost per Unit based on the Forecast Production Volumes and inflation within the company absorption.  If the Volume is stable the cost per Unit will be stable , but if the volume goes up the fixed costs will go down in the cost per unit.

At this phase there is no need to forecast future costs with more accuracy, as any future events which will have additional impact on the costs should be classified as Project related and if so they will not be included in the Cost per Unit or should be absorbed by the additional reduction.

Compare the 3-year Cost per Unit with the Current one (which can be average for the period or that achieved in the Last month).

What is the Gap between them? If the Future Cost per Vehicle is 10% lower than the Current one, it means that you need to produce the future volumes and keep the costs at the current level (Variable cost at a Cost per Unit level and Fixed costs in absolute amount and absorb by Reduction activities any negative deviations , i.e. inflation of consumables, Salary increase etc). You will need to keep the Current Cost per Unit for these 3 years.

If the Future Cost per Unit  is higher than the Current Cost per Unit less 10%, the difference between them is the gap which should be reduced in 3 years.

This will be a reduction target.

Allocate the reduction target over a three-year period using a reasonable and strategic approach. In the first year, a larger portion of the target can be allocated, as departments will initially address known inefficiencies and eliminate unnecessary expenses. Subsequently, they can focus on sustainable cost reduction and improvement activities, such as automation, better waste management, process optimization, and similar initiatives.

6. Departmental Cost per Unit

Split the Overall Cost per Unit in to departmental one. This approach allows each department to take ownership of their respective cost elements and focus on targeted reduction efforts. Discuss it with every Responsible manager to reach their agreement.

7. Determine and Allocate Reduction Targets to Departments

   Distribute the overall cost reduction target across departments in a realistic and equitable manner. Engage department managers in discussions to emphasize the shared responsibility of achieving these goals. While finance provides guidance and tools, effective cost management is a collaborative effort.
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   8. Develop Department-Specific Cost Reduction Plans

Encourage each department to create actionable cost-reduction plans. These plans should include specific initiatives such as:

• Automating processes to eliminate inefficiencies.
  • Streamlining workflows.
• Waste reduction.
  • Renegotiating supplier contracts.

Each proposed activity should be supported by an economic evaluation to ensure feasibility and impact. These evaluations will guide the budgeting process.

Ensure that the proposed cost reduction plans are sustainable, do not compromise quality or safety, and do not lead to increased costs at the company level or within other departments. Developing the skill to identify and prevent cost reduction shifting between departments will be essential. Prepare a robust procedure outlining which reduction activities will be recognized, as well as how they will be measured and monitored
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9. Create Detailed Budgets

Provide departments with structured budget templates that include pre-defined formulas and built-in controls. This standardization ensures consistency and accountability. Consolidate departmental budgets to create a comprehensive company-wide budget.

The cost reduction targets must be included in the budget as this is a one of the most effective tools to monitor the Cost Target achievement.
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10. Implement Rigorous Monitoring

Establish a robust monthly monitoring process:

Organize the monitoring of both Budget vs. Actual analysis and the progress of implementing the Cost Reduction Activities Plan. Develop tools to visualize these metrics and make them accessible to all departments and executives. Each Department Head should regularly report on the current status of their Cost Reduction Plan implementation, including any deviations between Actual and Budgeted Costs per Unit, as well as absolute cost figures.

If a department falls behind the plan, they must not only explain the reasons for the shortfall but also propose a catch-up plan to address the gap. This plan should be documented and integrated into the forecast period for ongoing monitoring and accountability.

11. Foster a Culture of Cost Ownership

Cost control requires a shift in mindset across the organization. Finance should lead this cultural change by:
• Clearly communicating the importance of cost management for competitiveness and sustainability.
• Using visual tools to show progress, such as cost trends and targets.
• Organizing regular updates to reinforce accountability and celebrate milestones.
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12. Ensure Continuous Improvement

Cost control is not a one-time project—it’s an ongoing process. Regularly review progress, identify new opportunities for cost reduction, and adjust plans as necessary. With persistence and collaboration, the organization can meet and sustain its cost targets.
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In Conclusion
Manufacturing companies face unique cost control challenges, but with a structured approach, these challenges can be overcome. By combining data analysis, strategic planning, and cross-departmental collaboration, you can achieve ambitious cost targets and secure long-term profitability.
How does your organization approach cost control? Share your thoughts or best practices in the comments below!
At FinDep Consult, we bring a wealth of proven methods and best practices to help organizations master the art of cost control. From precise forecasting to actionable strategies and seamless implementation, our expertise ensures that your organization can not only meet but exceed its cost management goals. Let us guide you in transforming your cost control challenges into opportunities for growth and efficiency.