Some Firms Chided for Using Outdated Cost-Control Plans

Orange County is a leading high-technology center, but consultants at a major accounting firm say that many manufacturers here--including some high-tech companies--fail miserably when it comes to using technology to manage costs.

That failure to identify and manage costs effectively means that the standard scapegoats--labor and real estate--aren’t always to blame for soaring expenses, consultants at Arthur Young & Co. said.

The accounting firm, in a survey of county manufacturers unveiled Tuesday at a cost-management seminar in Orange, found that Orange County manufacturers can’t do a proper job of tracking and controlling expenses because they are relying on 60-year-old concepts and methodologies.

‘Less Than Satisfactory’

Results of the survey, conducted by Arthur Young’s regional office in Costa Mesa, show that county manufacturers on average have “less than satisfactory” cost-management systems--utilizing only about 44% of the techniques now available to businesses.

At minimum, an adequate system should incorporate 70% of the computer software and planning strategies now available, said Patrick McGinty, head of Arthur Young’s consulting practice for mid-sized manufacturers in Southern California.

McGinty said that the major stumbling block to implementation of up-to-date cost systems is a fairly old-fashioned resistance to computerization.

One result of that failure to use modern technology is that some companies are erroneously blaming the county’s ever-escalating labor and land costs for eating away at profits when other, less visible factors are the real cause, said George Alexander, a cost-management specialist in Arthur Young’s Los Angeles office.

Labor Is Small Share

“They just assume that’s the case because that is what everyone assumes,” he said. “But studies show that in the electronics industry, direct labor is responsible for only about 10% to 20% of product cost.”

Alexander said the remainder of product cost comes from such things as management time, delays in obtaining raw materials, manufacturing inefficiencies, and inspection and repair costs.

The same, he said, holds true for occupancy costs--the cost of buying or leasing facilities. Because the dollar amounts involved can be sizable, rent or mortgage payments often are assumed to be the villain when profits begin falling. But just as often, Alexander said, they either are not to blame or can be minimized by managing other costs.

“It’s called the hollowing out of industry,” he said. “A company tracks its costs through labor so it decided to cut costs by sending its high-volume production overseas, or to Mexico, or even to Arizona or San Bernardino, and then finds out that costs don’t really drop that much because there were a lot of other factors involved.”

Collect Lots of Data

The survey findings, based on responses from 44 manufacturing firms in the county, show that most firms collect relatively large amounts of raw data about payroll and other labor costs, raw materials, production and shipping, materials waste, manufacturing errors and even customer complaints.

But, “they are terrible at using it to do anything productive,” McGinty said.

He added that the survey was conducted to measure the adequacy of county manufacturers’ cost-management systems “because cost management is the measure of a firm’s ability to react to a changing environment.”

“If you can’t manage your costs, and anticipate where they are coming from, then you are dead,” he warned.