Are You Manufacturing

at Perfect Cost?
Gaining competitive
advantage through a
value-based analysis
by Joey Lanius and Russell Rasmus

With the recent market upturn, manufacturing is going strong. Yet, many
companies are challenged to keep up with increasing demand in a profitable
manner. Decisions are often based on a broken metrics system that does not
allow full visibility into manufacturing performance, operational value and
capacity. To create long-term competitive advantage, improve operational
agility and drive growth, companies need a better way to assess cost, value
and performance in their manufacturing operations.

New sources of supply,

right in front of you

Are your metrics broken?

The problem many companies face is that

Manufacturing is back. Capacity is tight around existing footprint capacity is often estimated
based on best guess rather than factson
the world. For many automotive functions, for
old and broken metrics that do not allow full
example, capacity utilization is nearing 100
percent. Companies are working every weekend. visibility into the manufacturing processes. As
a manufacturing executive for one US-based
Some have even cancelled planned shutdowns.
supplier recently noted, analysis is often based
Thats great news, but at the same time it
on recent production history. Whatever the costs
creates a dilemma for executives: how to fulfill were last year, companies aim to reduce those
demand, but do so profitably. One approach
costs by a certain (often arbitrary) percentage.
would be to invest in additional plants, but
Compounding this problem is the fact that,
a new facility would not come online for a
year or two, and that could be a risky bet in a when it comes to measuring manufacturing
performance, companies typically look at metrics
volatile marketplace.
that do not focus directly on business value. For
Whats a better alternative? In fact, new sources
example, overall equipment effectiveness (OEE)
of supply might be right in front of youhidden
measures process performance, but lacks a valuecapacity that could be leveraged more quickly
based view that combines both operational and
and cost effectively than capital-intense, longfinancial metrics and provides accurate visibility
lead investments in new facilities.
into the actual performance of plants.
Many companies have much more capacity
than they think they do. Indeed, Accenture
research shows that 63 percent of manufacturing
executives plan to get more out of what
By using newly discovered, existing
they already have invested within their
capacity in the network, companies
manufacturing and supply chain network.1
can meet demand faster while avoiding
By getting the most out of existing facilities,
Capex and reducing Opex.
companies can eliminate redundant capital
investment in capacity and free it up for growth,
innovation and increased competitiveness.

Finding the Perfect Cost

Digital: Are the right digital capabilities in

place to optimize manufacturing conversion
costs?

Whats a better way? In contrast to traditional

measures and approaches, Perfect Cost
is a strategic measure, using analytics and
other assessment tools, to help organizations
understand how they are tracking to the best
possible manufacturing performance across
the enterprise. Perfect Cost analysis combines
insights into financials, value and process
performance which can provide better visibility
into performance and unused capacity. By
using newly discovered, existing capacity in the
network, companies can meet demand faster
while avoiding Capex and reducing Opex.

Supply chain and manufacturing integration:

How well does the supply chain actually
deliver to manufacturing? How efficiently do
the two functions work together?
By performing this analysis, many organizations
find they have redundancies within their
manufacturing system. Addressing those
redundancies can drive significant additional
value.
Consider one global industrial equipment
company that performed a Perfect Cost analysis
across its manufacturing network, focusing in
particular on one of its major facilities which
was the best in the network. The company faced
two challenges. One was in finding opportunities
for cost reduction at the facility. A second
was determining whether another plant should
be brought online to provide manufacturing
capacity for one of its upcoming models.

Perfect Cost also gives executives the means

to monitor their operations as they make
improvements. Companies can look at the
difference between where they are today versus
an ideal Perfect Cost state and then develop
a roadmap to get there, with measurable
milestones along the way.

How Perfect Cost analysis works

By performing a Perfect Cost analysis, the

company found that it could run at 28
percent less than current costs. The result: the
company did not need a new manufacturing
facility in its network but could meet demand
with existing capabilities.

The Perfect Cost concept enables companies

to analyze performance of the manufacturing
network to understand current costs and future
perfect costs while understanding capacity to
meet current and future demand.
Analytics-based examination of the manufacturing
environment is conducted across multiple levers:
Capital utilization: What is my overall
utilization across the network, and where is
capacity underutilized?
Reliability: How reliable are my manufacturing
operations, including downtime, cost to
serve and maintenance? What are the costs
associated with shortfalls in reliability?
Labor utilization: How well are we using
available labor? How effective are layouts,
configurations and line balance?

Adopting a Perfect Cost

approach

Are you ready to manufacture

at Perfect Cost?

Its time to ask some hard questions about

your current manufacturing operations (see
sidebar). Perfect Cost analysis is potentially a
breakthrough method of finding extra capacity
at a lower cost per unit in the manufacturing
network. How can you make it happen? Here are
some keys to success:

Current approaches to assessing the

effectiveness of manufacturing are often
ineffective. Ask yourself:
Is your company operating in a
capacity-constrained environment
without any clear ideas for fulfilling
near-future demand?

Combine operational and financial metrics

to measure the value of your manufacturing
performance relative to Perfect Cost.

Does your organization determine

future targets by applying a standard
performance improvement to last years
performance?

Identify the value that can be driven from

manufacturing operations and rigorously
measure progress toward that target.

Does your organization utilize OEE as a

measure of manufacturing performance
without a clear link to value generated
by operations?

Use analytics to gain better visibility into

manufacturing value and opportunities.
Dont start with an arbitrary, fixed percentage
for year-on-year improvement. Define
value targets unique to your manufacturing
environment and business goals.

Does your manufacturing organization

often make decisions without a proper
focus on the value to be achieved?

Millions of dollars are at stake with

manufacturing operations improvements,
with a direct line to overall competitiveness.
Current approaches to gauging manufacturing
effectiveness too often rely on metrics that do
not provide sufficient visibility into capacity.
Thus, many companies have much more
capacity than they think they do. Perfect
Cost analysis is a way to find that capacity,
driving greater operational agility and higher
business growth.

Join the conversation:

About Accenture

@AccentureStrat

Accenture is a global management consulting,

technology services and outsourcing company,
with more than 336,000 people serving
clients in more than 120 countries. Combining
unparalleled experience, comprehensive
capabilities across all industries and
business functions, and extensive research
on the worlds most successful companies,
Accenture collaborates with clients to
help them become high-performance
businesses and governments. The company
generated net revenues of US$30.0 billion
for the fiscal year ended Aug. 31, 2014.
Its home page is www.accenture.com.

Contact the authors:

Joey Lanius
joey.d.lanius@accenture.com
Russell Rasmus
russell.rasmus@accenture.com

Additional contributor:
Kevin Luecht
kevin.d.luecht@accenture.com

References:
1

Global Manufacturing Research, Accenture, 2013

About Accenture Strategy

Accenture Strategy operates at the
intersection of business and technology. We
bring together our capabilities in business,
technology, operations and function strategy
to help our clients envision and execute
industry-specific strategies that support
enterprise wide transformation. Our focus
on issues related to digital disruption,
competitiveness, global operating models,
talent and leadership help drive both
efficiencies and growth. For more
information, follow @AccentureStrat or
visit www.accenture.com/strategy.

Copyright 2015 Accenture

All rights reserved.

This document makes descriptive reference to trademarks that may be owned

by others. The use of such trademarks herein is not an assertion of ownership
of such trademarks by Accenture and is not intended to represent or imply
the existence of an association between Accenture and the lawful owners of
such trademark.

Accenture, its logo, and

High Performance Delivered
are trademarks of Accenture.