When the same product costs more to make at one plant than at another, the difference can be explained by the underlying cost drivers. Plants have three categories of cost driver:
- Scale: the effect of volume on cost per unit made
- Efficiency: relative productivity, utilization, and process complexity
- Factor costs: input costs (such as labor), operating costs (such as fuel), and logistics costs (such as shipping)
A company’s specific cost drivers should be customized on the basis of industry and types of production. A detailed analysis reveals the most relevant cost drivers and the relative effect of each. As shown in the exhibit below, a plant’s cost per unit of production goes up or down depending on the interplay of drivers such as yearly production volume (scale), equipment utilization rates (a measure of efficiency), and local labor rates (a factor cost). Armed with this information, companies can make better decisions about how to structure the optimal manufacturing network.
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Jim Woods teaches CEO’s how to get the most out of their people and their organizations.
Jim is president of InnoThink Group and Leadership Matters. He is a leader in workplace learning, productivity, performance, and leadership training solutions. For over 25 years, we have helped companies improve their performance, productivity, and bottom-line results.