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Manufacturers to put more emphasis on costs

NEW YORK (Reuters) - U.S. industrial companies, which for years have touted their dedication to lean manufacturing operations, are increasing efforts to further cut production costs to offset soaring prices for raw materials like oil, chemicals and steel.

As companies struggle to maintain profit margins in an atmosphere where almost everything they use -- from oil to steel to plastics -- is more expensive, there is greater emphasis on thinking creatively and making more cuts.

Options include investing in more efficient equipment, performing energy audits of facilities and finding those small things that add up, like fitting efficient lighting.

Some companies, such as electrical products maker Cooper Industries Ltd CBE.N, are going back to basics and evaluating their product designs, looking for ways of using less raw materials.

“Some of our products haven’t been redesigned in 25, 30 years and with material costs so much higher now it’s a huge, huge economic payback for us to redesign and take out some of the material content,” Cooper Chief Executive Kirk Hachigian told an investor conference.

Unprecedented energy costs pose particular challenges to smaller firms that lack the resources of large multinationals, said Keith Updike, a senior director at BBK, an international business advisory firm.

“It’s going to impact all manufacturers,” Updike said. “You’re not just worried about your facility, but you also have to worry about the supply base.”

Manufacturers can reduce costs by anywhere from 2 to 10 percent by cutting scrap and factory downtime and taking waste out. They also need to better monitor suppliers for potential disruptions to the supply chain, Updike said.

Even companies that have touted their so-called ‘lean’ manufacturing techniques are finding fresh room for improving their practices. “You’re never really there,” Updike said.

MORE CREATIVE

Companies say they’re looking to be more innovative in the way they run their operations and the way they make their products.

Kennametal Inc KMT.N, a maker of industrial tools and specialty metals, has held energy audits of its production plants, making changes like cutting lighting costs and upgrading to more efficient air compressors.

The company is also taking smaller, more immediate steps, such as changing its fleet of about 700 cars to more fuel efficient four-cylinder vehicles, said Jim Cebula, Kennametal’s global director of purchasing.

“It’s caused us to be more creative,” Cebula said, adding that his department now gets a lot more attention from top executives than it used to.

Cooper is fitting all of its manufacturing facilities with high-output fluorescent bulbs, CEO Hachigian said, and more of that kind of effort is needed.

TROUBLED SUPPLIERS

For many large multinationals, the commodity boom presents an opportunity to generate sales of energy-efficient technology, and those companies are largely able to pass on higher costs to their customers. For more see <ID:nN23172290>

But many smaller manufacturers have limited international exposure or are tied more closely to slower-growing markets like residential construction and the U.S. car industry.

If high commodity costs persist, these companies have some options, BBK’s Updike said.

Longer term, more suppliers will move close to customers to reduce transport costs; companies may adjust their factory hours to reduce energy use during peak periods; and they will invest in more efficient machinery.

Still, some small suppliers may be forced out of business if they are not able to raise prices.

“The smaller guys can’t absorb it as well,” he said. “You’re going to have more troubled suppliers.”

Reporting by Nick Zieminski; editing by Patrick Fitzgibbons and Tim Dobbyn

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