Optimizing Manufacturing General and Administrative Costs

Comprehensive analysis of G&A resources is needed to cut cost and maintain effective management. Aggressive budget reductions without careful evaluation can degrade this essential backbone to your company.

Larry White, CMA, CFM, CPA, CGFM, Executive Director of the Resource Consumption Accounting Institute.
Larry White, CMA, CFM, CPA, CGFM, Executive Director of the Resource Consumption Accounting Institute.

General and administrative (G&A) costs are a challenge for manufacturers. In good times, G&A is often ignored. After all, it is a common belief that improvements in technology and process typically move costs from the front lines to the back office. In lean times, companies target G&A activities with aggressive budget reductions and tell them to do more with less. One reason this happens is traditional financial reporting lumps G&A into an amorphous line item for board and senior executive examination. Companies that engage in comprehensive, causal managerial cost, revenue, and profit analysis have a much better model to evaluate the value and performance of G&A resources.

The keys to effective G&A management are clarity of purpose, information, and consistency. Management should identify and model the external and internal customers and requirements G&A functions support, how they consume resources, and how they measure performance. Think of each G&A function as a specialty operation within your company and manage it like any other operation.

It is important to be clear about why G&A exists. A McKinsey report titled, “Driving Value Creation through G&A: Five Ways to Rethink your Approach,” identifies four critical ways G&A create value:  

  1. Stable Backbone: Keeping core processes running and meeting routine requirements.
  2. Nerve Center: Keeping critical information flowing throughout the organization.
  3. Dynamic Allocator: Evaluating and acquiring resources.
  4. Next-generation incubator: Ensuring the organization can move into the future. 

None of these roles provide a free pass to resources but understanding their role in value creation is essential to effective management.

Cost and performance information on G&A functions is usually the biggest hurdle. There are a myriad of excuses, such as: the work is too diverse, everyone does everything, and so on. All work boils down to ongoing processes and identifiable projects. Each has a customer or fulfills a requirement, each customer or requirement has a performance expectation, and the resource time can be tracked (even if it has not been in the past). Often G&A functions view their work as too complex to model; that position alone should form the basis for a process improvement project that will probably yield substantial results. Advanced managerial costing and profitability analytics approaches advocate causal modeling of G&A functions to ensure full understanding and effective management of the connections to product cost, customer costs, revenue generation, and business sustaining costs. 

Consistency in managing G&A functions is challenging. Manufacturers’ focus is on product innovation, manufacturing quality and efficiency, and sales. Creating time in a busy senior management and board agenda for a G&A review is hard. One way to approach it is benchmarking against competitors and similar sized manufacturers. However, benchmarking often becomes “floor-marking” when the evaluation is: “at least we are better than...”; this does not lead to improvement. A better approach is to ensure that G&A functions are actively using the same process improvement techniques as the manufacturing functions and can prove, with solid data, that they have improved cost, quality, and performance over prior periods. Rotating presentations on the best practices for specific G&A functions will also help senior management assess how the company G&A function is doing compared to the best in that profession.

A more Draconian and resource-intensive approach is to periodically “zero base” G&A functions by asking “Why does the company do ___?” Critically examine the resources, budget, and work activities for the function, then rebuild from core demands. The company can also investigate outsourcing the function. A zero-basing process will clarify the role and reason for a G&A function within a company.

G&A functions are essential and can be a competitive advantage if clearly focused on internal and external customer needs and company strategic objectives. In today’s competitive environment, manufacturers must consistently and methodically seek advantages in every component of the company—so don’t overlook G&A.

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