In the world of high volume production, most woodworking managers have a fairly accurate personal intuition about costs. When batch sizes get smaller, however, that intuition either doesn't exist or provides faulty guidance. In this chapter we are going to try and develop some accurate guiding principals about variations in modern woodworking plants. What happens to costs when set-up time changes, or cycle time changes, or machine cost changes or labor cost changes? Is it more important to have faster set-up or faster cycle time?
There is no single answer to these financial questions. Each company will have a different answer depending on the costs and operation of that company. It is important that the furniture manager truly understand what will happen to his or her costs as certain variables change.
To make this easier, we have supplied a simple software program that will operate on a PC running Windows 95. Using this program, your actual numbers can be input into the formulas and you can see the actual costs of processing your product. It is easy to vary each of the parameters and see the effect on the processing cost.
If you sit down with this package and some typical parts for an hour or two, you will develop a real good feeling for how cost vary as different parameters vary within your plant. This should develop an intuitive feeling that is accurate and this intuition should provide you with guidance in your day to day management decisions.
In the remainder of this chapter we will detail the use of the software program.
The program is intended to operate on an IBM PC or compatible running Windows 95. To install the program, place the enclosed floppy disk in the appropriate drive and type:
Where "A" is the drive number. The system will then guide you through the steps necessary to complete the installation.
Once installed and started, the program will display the screen shown here.
This screen displays the formula as described in Chapter 1. At the top, three fields define the batch to be run. Each of the four cost areas, machine cost, labor and overhead, tooling cost and handling cost have a separate area where all the factors can be input. As the necessary factors affecting the cost area are input, the batch cost and total cost for the area will be displayed at the bottom of the area.
Each cost area has several fields or input boxes. Each field contains a single number that affects the manufacturing cost. You will notice that when you move the mouse pointer over one of these fields, an information box appears detailing the information that should be entered in the box. This is intended to give you a quick review of the appropriate input number. These information boxes are not an adequate substitute for the more detailed information included in Chapter 1 of this book. Make certain that you have read and that you understand the concepts in Chapter 1 before you attempt to use the software package to develop cost data.
At the top of the screen you will find the Part Information area. This area contains three input fields.
Batch Size - This is the total number of parts that will be run using the current set-up.
Cycle Time - This is the time in minutes required to load, process and unload a part.
Setup Time - This is the time in minutes required to set-up the machine for the production run.
The first cost area is machine cost. There are eight input boxes required to determine the machine portion of the processing cost.
Machine Price - This is the cost of the machine in dollars that has been capitalized and is being depreciated.
Useful Life - This is the period of time in years over which the machine is being depreciated.
Interest Rate - This is the rate of interest that you could have earned on the money used to buy the or the interest you would pay to borrow money to purchase the machine.
Cost of Factory Space - This is the cost to build or purchase the factory floor space per square foot.
Floor Space Used - This is the amount of factory floor space required to house both the machine and the inventory required to support the machine.
Value of Inventory - This is the value of the average inventory associated with the machine in dollars.
Maintenance Cost - This is the average material, labor and overhead cost associated with maintenance of the machine for one year in dollars.
Machine Utilization - This is the percent of the total time based on a single shift, eight hour a day operation (2,080 hours/year) that the machine is either being set-up or is running production. A two-shift operation would be 200%, a three-shift operation up to 300%.
The next area is labor and overhead. In this area you will input the hourly direct labor and the associated factory overhead. Review the description of the labor and overhead rate in Chapter 1 to make certain that you use the full burdened labor rate.
Setup Rate - This is the hourly direct labor cost and the associated factory overhead. If the machine operator must remain idle while the machine is set-up by another, the rate is the total for both the set-up labor and the operator labor.
Operating Rate - This is the per-hour direct labor cost and the associated factory overhead for the machine operator. If more than one operator is required, the number is the total per-hour labor and overhead for all operators required to run production on the machine.
The next area is tooling. In this area we will try and determine the tooling cost associated with processing a part. If a part requires more than one tool, we will average the cost and life information to try and develop a reasonable approximation of the tooling cost.
Total Cost of All Tools - This is the total cost to purchase all tools required to process the part.
Avg Parts/Tool - This is the average number of parts that can be processed by a tool.
Sharpening Cost - This is the average cost of sharpening a tool.
No. of Sharpenings - This is the number of times a tool can be sharpened before it must be discarded.
The final area concerns the cost to move material from the previous production center to the current production center. There are six input fields in this area.
Equipment Cost - This is the cost of the fork truck or other material handling equipment required to move material to the production center.
Useful Life - This is the period of time in years over which the material handling equipment is depreciated.
Utilization - This is the percent of a single shift during which the equipment is being operated.
Labor and Overhead Rate - This is the per-hour direct labor cost and the factory overhead associated with the material handling effort.
Trip Time - This is the average time in minutes required to move a skid of material from the previous production center to the current production center and then return.
Parts/trip - This is the maximum number of parts that can be moved in a single material handling trip.
After all input fields have been entered, press the "Calculate" button and the costs will be re-calculated using the current numbers.
Now that you have the basic tool, it is time to play with the numbers. Set up the package with a set of typical numbers for your company. Now, play with the numbers. Change a parameter, batch size for example and see how the cost changes. Change another parameter, machine cost of setup time and again see the part cost change.
Within an hour or two, you should begin to develop a new intuition about how various factors and combinations of factors affect your costs. Playing with the different cost parameters you should be able to develop a real understanding of what different decisions about your operation of your factory will do to your costs.
To develop an even more detailed understanding, perform the calculations for a series of different machines and see how combining operations will affect costs.
This exercise will take some time and effort but the final result will be well worth the effort. The understanding you develop will provide some guiding principals that will make the transition to a more profitable company easy to understand. The intuition will make the difficult decisions clear.
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