Is Your Manufacturing Plant Driven by Cost or Profit?


December 29, 2015

cost to profit

Historically, business executives have viewed manufacturing plants as cost centers because they are units that do not produce profit directly, but instead add to the operational costs of the organization. Increasingly, however, more business leaders are daring to challenge that paradigm by stating a case to recognize manufacturing units as profit centers. This, of course, has raised eyebrows.

The shift from the narrower perspective of the manufacturing plant as a cost center into a profit driver is supported in part by concepts from the balanced scorecard approach developed by Robert Kaplan and David Norton nearly 25 years ago. More than a measurement tool, the balanced scorecard is a management system. By bringing together measures that are focused on internal processes and external outcomes, the balanced scorecard promotes continuous improvement through strategic performance and results.

The balanced scorecard system views and evaluates an organization’s business units from four perspectives:

Shifting From a Cost Center to a Profit Driver

Taking these measures in the aggregate provides a case for shifting the view of a manufacturing plant from a cost center to a profit driver. Furthering this perspective, today’s plant managers are increasingly taking on more profit-driving responsibilities. This expanded role of today’s plant managers allows them to have an influential voice in critical decision-making activities that affect profits. Plant managers must maintain a broad awareness of the organization’s strategic place and value proposition in the market and how they can help position the plant for economic advantage.

Some manufacturing operations are achieving a profit-driving mindset by becoming better aligned with the manner in which the organization creates value—that is, sets itself apart from the competition—with its products. Manufacturing plants that are successful in making this shift are able to produce products that are well-aligned with the organization’s identity, while at the same time, remaining nimble and ready to meet the challenges of fluctuating customer requirements.

Of course, any such shift must be more than in name only. Here are two ways that manufacturing plants can reduce expenses and transform into a unit that contributes to profits:

  • Reduce overhead. Manufacturing operations can impact the bottom line in a positive way by streamlining processes and embracing more efficient production methods. Every dollar saved through improved processes and higher quality products increases the value of the cost center by decreasing overhead.
  • Support strategy. Plant managers should look for opportunities to reinforce the organization’s value strategy and, thus, enable the organization to sell more of its products. This could be accomplished through innovative manufacturing practices, improved quality, enhanced service, or greater speed. By helping the organization become more responsive to the demands of its customers, the result is potentially higher sales.

Many times, the new or improved practices that reduce overhead and support strategy are the result of shop-floor interactions between management and production workers—perhaps spurred by interactions through layered process audits (LPAs). By improving communication and collaboration through the LPA process, the organization’s leaders gain a better overall perspective of manufacturing operations. This enhanced view may enable plant managers to integrate manufacturing activities that contribute in new ways to the overall strategic goals of the organization.

Focusing on Manufacturing Plant Process Improvement

When implemented correctly, an LPA system is an effective method to spur an organization to the next level of performance through enhanced internal processes—one of the measures from the balanced scorecard approach. LPAs require the ongoing involvement of a cross-section of employees who routinely verify conformance to the organization’s core processes. Regularly scheduled LPAs help ensure that if processes are not followed, the situation is mitigated quickly and effectively. By involving multiple supervisory levels in the auditing process, opportunities are created for ongoing communication regarding process improvement.

Perhaps one of the most important benefits of LPAs is that they ensure that countermeasures are maintained so the organization does not expend additional resources to fix the same nonconformance again and again.

If a manufacturing plant is working to shift from a cost center to a profit driver, then consider the contributions that an LPA system can deliver in moving the organization closer to its goal.