The hidden costs in manufacturing

Where they lurk and how to uncover them

The FABRICATOR November 2013
November 25, 2013
By: Dick Kallage

Taken individually or in combination, hidden costs greatly affect a company’s financial and competitive performance.

FABTECH® just keeps getting better. In fact, the entire purpose of FABTECH is improvement. But hidden in the flash of new and better equipment and the appeal of the latest practices and methods is the real question: How do I reduce my total unit costs to generate a sustainable competitive advantage? In other words, how do I improve beyond my company’s current norm, but also more than the competition?

To do this, you have to reduce those costs, and not just by improving the throughput rate of a given machine. You have to do some digging.

Over the past year in this column I have addressed a number of topics related to this. This has included the importance of selecting what to improve; that is, identifying all the areas of potential improvement, selecting the important few, and seeing those projects through to their completion. This is critical for achieving any real gains from your improvement initiatives. The what part and the discipline to follow through without diffusing your available resources are the prime distinguishing characteristics of companies that really do improve. Without these characteristics, no amount of talent or management or procedural competence can drive effective improvement.

Sometimes the what part is pretty apparent; you may need to improve the capabilities of people or machines. But usually the what isn’t apparent at all, because many root causes are hidden and not terribly obvious in common business metrics.

There are various hidden cost drivers. Some are inherent in almost any value-producing operation; others are most damaging in high-product-mix operations such as custom fabrication. Further, these costs tend to confound other improvement efforts unless they are exposed and dealt with. So let’s shed some light on the ones most pertinent to high-product-mix operations.


The amount of information flying around in high-product-mix shops still amazes me. Necessary information on what to build, when to build, what and when to order, changes in dates, quantities, revision levels, acceptable quality, and a host of other details can be overwhelming.

A lot can go wrong. In fact, the odds of something going wrong go up with the amount of information and its variety, and if that information is communicated unclearly. The information issue drives a lot of different kinds of waste. It can be a monster.

In a high-product-mix shop, the amount and variety of information aren’t likely to change. That’s not really under your control. But you can improve by translating the incoming information to a standard output format that is understood and actionable to a very high degree of accuracy.

The goal is to have a mechanism that provides correct information to the actual processing activities, especially those on the shop floor. The information needs to be correct, unambiguous, timely, understandable by anyone in the activity, and identically actionable—that is, it causes the same action regardless of who does it.

This is a pretty tall order. But when you do a root cause analysis of what went wrong and what generates unnecessary costs, you will find that information flaws almost always tops the list. You also will find that most of these flaws can be overcome.

Here’s a simple but common example: You just bought a new machine that can process parts 50 percent faster than the old one. That’s improvement, right? Well, not if you build to the wrong revision, or overbuild, or build the wrong thing at the wrong time. The throughput improvement will be eaten up by the costs incurred to make things right. And those costs will be buried. Although hidden, these costs are real, never-ending, and cumulative unless you do something about them.


Searching wastes are truly hidden because they almost look normal. We are very accustomed to seeing ourselves and others in the familiar activity of saying, “Let’s see … where can that be…” It’s perfectly normal, but also perfectly costly and completely avoidable.

The only good thing about search waste—a form of information waste and downtime waste—is that it is relatively easy to improve. Any sustained 5S/visual workplace initiative will cure 80 percent of it. It is one of the few improvements that in principle can be initiated easily. The only expertise required is in the sustaining plan and execution.

It’s hard to find any real reason to put up with search waste and its costs. They usually show up in efficiency variation and cumulatively contribute to everything from schedule disruptions to overdue orders, because search waste steals available time.

Excessive Material and People Movement

Here’s another simple one. It’s hidden because like search waste it’s hard to “see.” Moving material around a plant is perfectly normal. People moving around also is normal. But excessive movement of material and people has virtually the same effect as excessive searching. It’s another classic waste identified in lean principles. It is a bit harder to remove because it can involve plant and equipment layout changes, build quantity and scheduling discipline, and a focus on part flow. But like search waste, it is eminently improvable. It does take expertise to get an optimal solution. But improvements can be made bit by bit. Cells and virtual cells are good examples.

In general, when you actually “see” and measure the amount of cost linked to searching and excessively moving, you will be unpleasantly surprised. But understand those excessive searching and moving costs are only part of the total waste they contribute to.

Time lost is cumulative, and if not corrected, building excess capacity—with overtime, or even adding more people and machines—is the only tool left to recover that lost time. And adding that capacity costs money that you wouldn’t have spent if you had the movement waste under control. This is what makes this waste so hidden—and so expensive.


Everybody notices the big machine breakdowns, but few really pay attention to the other times a machine may be down. That’s why machine downtime is a big hidden cost. It’s a significant time robber and just as costly as other wastes. It kills labor efficiency, average throughput, and often has everyone chasing the wrong thing. Search waste is a contributor; so is excessive material movement and changeover times.

When you see inefficiencies in machine-related operations, start with finding the reasons for downtime on the machine. You may find a variety of causes: material movement, material availability, searching for tools, drawing clarifications, poor preventive maintenance, or unmeasured and unstandardized changeovers.

This is one of the most common and costly wastes at custom fabricators. It reduces machine capacity, causing missed schedules and the resulting expedites, unnecessarily adding machines and people to replace the lost capacity—capacity you didn’t even know you had in the first place.

Schedule Disruptions

This cost is not so hidden but is caused by the hidden drivers discussed here, as well as some others. Drivers vary, and can include rework, scrap, and expedites. Great companies protect their schedule sequence like gold because the disruptions cause so much waste. But to do this in the real world, you must remove the reasons for the disruptions. The best way is to have fast cycle times. To do that you must eliminate the hidden waste costs and operate in a lean flow environment: WIP control, small-lot processing, efficient transfer means, single-point scheduling.

Schedule disruptions have another name: chaos. The cost multiplication is huge and pervasive. The goal is no production meetings: The schedule is fixed, and everything is in sequence from start to finish. Believe me, this is doable and practical.

People Turnover

Most of the cost of hiring and training people is almost always hidden and significant. If you have high turnover, you have higher costs than you should have. Great companies make it a very big issue to track the real reasons people leave, simply because they are aware of the replacement costs. Often people are fired for inefficiency, but you need to know what is causing the inefficiency. Is it really the person—or is it because of some of the factors described here?

Hidden costs abound in any shop, but the ones described here are the most common. Every one of them is solvable. Taken individually or in combination, these hidden costs greatly affect a company’s financial and competitive performance.

Dick Kallage was a management consultant to the metal fabricating industry. Kallage was the author of The FABRICATOR's "Improvement Insights" column from May 2012 to March 2016.

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The FABRICATOR is North America's leading magazine for the metal forming and fabricating industry. The magazine delivers the news, technical articles, and case histories that enable fabricators to do their jobs more efficiently. The FABRICATOR has served the industry since 1971.

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