Factory overhead is the cost a company incurs as part of the manufacturing process, but cannot be traced directly back to the production of a particular product. All of the indirect costs involved in maintaining and running a manufacturing firm – the cost of energy, the maintenance of machines, and so on – make up the factory overhead.
Why factory overhead matters
The tricky thing about factory overhead – also known as manufacturing overhead – is that it’s supremely variable and can be difficult to forecast. It is a catch-all category for every expense that isn’t a direct part of the manufacturing process and covers a multitude of things:
- Indirect labor: That includes everyone from the cleaners through to HR, marketing and even the CEO. The cost of anyone who isn’t directly involved in production is a factory overhead.
- Indirect materials: These are the materials supporting the manufacturing process but not directly used to make a product, such as stationary, safety equipment or cleaning products.
- Physical costs: The cost of the physical items that are required for manufacturing including property and machines – and their maintenance – as well as IT equipment.
- Financial costs: Some factory overheads are purely financial, for example taxes, insurance costs, and depreciation of machines or vehicles.
The challenge for businesses is that not all of this is fixed and isn’t always controllable. If the global price of oil goes through the roof, so does the cost of powering your factory. While the costs can’t be directly traced to a particular product, they are essential to the development and production process. They need to be allocated to products to fully reflect the actual cost of production. And as competition continues to bite, and margins get ever tighter, businesses that succeed are the ones who have a tight hold on costs – factory overhead included. Just because they’re more variable and harder to calculate doesn’t mean they can’t be managed or have more value squeezed from them.
Managing costs in the age of Industry 4.0
The complexity of factory overhead means that in a world of lean margins, it’s more important than ever to break down indirect costs, to drive out waste and to effectively allocate costs to products. Digital manufacturing solutions provide insight throughout the manufacturing process, giving the most accurate and in-depth picture of direct labor and material costs there is. With that visibility comes the opportunity to cut direct costs, for example, by reducing scrap materials and eliminating rework, or increasing workforce productivity.
Factory overhead: What lies beneath?
If factory overhead is essentially a bucket for a wide spectrum of essential but hard to assign costs, how do you root out the waste and spot opportunities for efficiency? The answer, of course, is data, which can give manufacturers unprecedented insight into absolutely everything happening in their business. Plants powered by the Industrial Internet of Things (IIoT) software offer real-time visibility into every aspect of operations. And that means the opportunity to uncover where savings can be made.
- Energy efficiency: IIoT energy and resource monitoring solutions can highlight ways to reduce consumption.
- Machine maintenance: Predictive maintenance technology driven by the IIoT helps spot problems before they happen, reducing downtime. With augmented reality-enabled maintenance, procedures can be resolved more quickly.
- Operational performance: Technology prevents unplanned downtime, increases quality, streamlines communications, and can reduce accidents.
Digital manufacturing creates leaner factory overhead
Factory overhead incorporates all the indirect costs involved in manufacturing, and it soon adds up. It can be the difference between whether a business turns a profit or not – but historically, it’s been one of the most challenging areas of business cost to monitor. Digital manufacturing solutions are changing that. The ability to collect, analyze and present data and actionable insights offers unprecedented opportunities to make efficiencies, use fewer resources, and reduce factory overhead.
In today’s competitive marketplaces, keeping a tight rein on all costs – factory overheadincluded – is essential. With digital manufacturing promising to cut overheads by as much as 15% and halve the time it takes to repair failed machinery, it has to be part of the solution to keeping pace and staying competitive. Digital manufacturing solutions can help to seamlessly break down the indirect costs of factory overhead.
