For manufacturers faced with rising material costs, increased labor rates and worldwide competition, having issues with production overrun can be the final nail in the coffin. Some may not be concerned with the causes of overrun, or may even see the costs of production overrun as merely a drop in the bucket in terms of their overall cost structure. However, production overrun is a serious issue and it does cause expenditures to rise. So, what causes a company to produce too much? More importantly, as a manufacturer, how can your team put plans in motion to protect against these rising costs?
Before delving into the root causes of production overrun, it’s important to review the costs associated with producing too much. Production overrun has a cumulative effect of rising production and inventory costs by overextending material requirements and usage. Think of how production overrun affects manufacturing. What are the consequences to the company when it produces too much?
First, it always means more material will be used, which therefore means more material purchased. Second, it always means more production resources will be drained and more machine time spent manufacturing product that may or may not be sold. Third, it raises inventory holding costs as overproduced product often ends up gathering dust in inventory. Production overrun leads to material waste and possible issues of inventory obsolescence and inventory damage.
- Production overrun leads to higher material costs
- Production overrun drains manufacturing resources
- Production overrun adds to higher inventory cost of ownership
The above video explains how to go about designing a lean manufacturing work cell. To read more, please go to: Manufacturing Work Cell Optimization: Design, Layout and Analysis
Understanding the issue of production overrun, what are the root causes?
1. Improper Work Orders
It’s not uncommon for work orders to specify incorrect material usage. In fact, in a number of companies this is one of the biggest causes of production overrun. Some companies don’t even use work orders or use an antiquated and outdated approach to managing their work orders and material allocation. Make sure to have clearly defined work orders that cover all material requirements.
2. Incorrect Bill of Materials
Incorrect and incomplete bill of materials is often a major cause of production overrun. It’s often the reason why material usage is all out of whack in the first place. For companies that don’t use software to manage their production, working from an incorrect bill of materials can often start everything off on the wrong foot.
One of the best ways to reduce your inventory skews and use more common parts is by performing a sub-structure or sub-assembly analysis. It allows you to clean up your bill of materials by eliminating redundant parts. In the end, you use more common sub-components. To learn more, please go to: Bill of Materials Essentials: Substructure and Sub-assembly Analysis
3. Natural Incidence of Defective Product
Depending upon the type of product being manufactured, or the industry itself, there may be an inherent failure rate that manufacturers must account for. For instance, in the optical media industry manufacturers who make CD’s and DVD’s typically have a 1-2% failure rate in CD production and a 3-4% failure rate in DVD production. In these circumstances production overrun is a necessity in order to meet the quantity ordered by customers.
4. Defective Product as a Result of Poor Maintenance
While having to produce more than needed because of an inherent flaw in the product design may be an acceptable cause of production overrun, having to produce more than needed because of high failure rates caused by poor machinery maintenance, is something else entirely. However, this is yet another cause of production overrun and it’s amazing to think how companies can continue on this course without doing a cost benefit analysis.
5. Larger Production Runs Because of MOQ Material Requirements
Sometimes companies must purchase an minimum order quantity (MOQ) on parts and materials. This happens from time to time and is understood as simply the costs of doing business. However, some of these companies then accept an order for a finished product quantity that is well below the material purchased. For example, a company may be forced to buy enough material to make 600 units, but then proceed with an order from a customer for only 500 – without any guarantee of selling or using the remaining material.
The company may then decide to either hold the material in inventory or produce 100 more units in anticipation for the “next order”. However, the longer they hold that material in inventory, or the longer they wait for that order, the less gross profit they make on the sale because of the costs to hold the overrun in inventory over time.
What are the Solutions to Production Overrun?
While some of the solutions to production overrun are fairly obvious, such as cleaning up bill of material outlines, fixing work orders etc, some aren’t so obvious. In the case of point #4 – “Defective Product as a Result of Poor Maintenance”, it merely involves doing a cost benefit analysis of the costs of the overrun versus the costs of repairing the equipment.
How many additional units are produced daily, weekly or monthly and what is the cost to the company relative to the costs of fixing or buying new equipment? Defective maintenance should never be a cause of production overrun, but it is. However, what about point #5? Is there a solution to that situation? There is and it’s summarized below.
Establish Minimum Order Quantities and Transfer Portion of Costs to Customers
If your company is forced to manufacture more than needed in order to meet a customer’s order volume, then make it a point to either include that additional cost in your prices, or establish an MOQ of your own, or state that the customer must purchase the overrun.
In the example of the company that is forced to purchase enough to make 600 units but only sells 500, their gross profit calculation must include the 500 units sold minus the costs of the extra material and holding costs of inventory for the remaining 100 units. When that is properly analyzed, companies often decide that they MUST transfer this cost to their customers.
“Volumes are subject to a 10+ additional production volume overrun”
When tackling the root causes of production overrun make sure to eliminate these causes altogether. If your company has no other choice but to produce overruns, then make sure to pass that cost onto your customers. You don’t have to pass on the entire amount, but you must be cognizant of the costs of production overrun and how it affects your gross profit per sale. One of the more important aspects of business success, is to protect your gross profit.
Comments