Helping Shops Get from Quote to Cash Sooner

Manufacturers should be focusing less on how to reduce labor costs, and more on looking at how to take time out of the process.

Want to improve your shop’s performance? Call in the experts. Since 1991, the Michigan Manufacturing Technology Center (MMTC) has been working with small and medium-sized manufacturers, including moldmakers, to improve their competitiveness. The state-wide organization has about 50 employees and is headquartered in Plymouth, Michigan.

“Sometimes companies quote work, win the work, and then at the end of the year wonder why they made less money,” says MMTC Research Director Dan Luria. “A lot of companies still use quoting systems that simply apply a burden rate to the direct labor a job requires, and do not take into account how to allocate overhead costs to particular jobs. They end up winning jobs they can’t make money on, and they lose jobs that they’d really like to get.”

That disconnect doesn’t just hurt the company that takes the job; it hurts the company that would have been perfect for the job, but didn’t get it.

Luria points to two dominant challenges for small and medium-sized mold shops. First, they must be able to achieve the speed and “leanness” required to remain cost competitive; second, shops must be able to accurately determine their real costs so they can quote jobs correctly. “That combination of being fast and having the right quotes is the key to success,” he says.

That’s where the MMTC comes in. The organization works with shops to develop what Luria calls an “activity-based” approach to costs. They examine costs in all areas of work—engineering, shipping, quality control—and determine to which jobs the company should assign these costs.

“It can be an eye-opener,” Luria says. “Shops often don’t distinguish between jobs that run well versus jobs that run poorly. Ten percent of your jobs may be responsible for 40 percent of your engineering costs; if you quote those different jobs the same way, you’re going to lose money. You need to quote high-cost jobs higher—you may not win them, but not winning jobs you lose money on is a good thing. The activity-based approach is the key to making money.”

Lowering costs is also critical. “But there is no direct way to attack costs in a mold shop; you need to use time as a proxy for cost,” explains Luria. “Let’s say we have a $20,000 tool, and a shop rate around $100/hour. That tool should take roughly 200 hours to make; for a one-shift operation, that’s five 40-hour weeks. Yet if you look at the quoted leadtime on that tool, it’s often six or nine months. Why?”
Part of the problem is a too-traditional view of resources, Luria says. “We used to think of the machine as being ‘free,’ with the only scarce resource being key people. But today, it makes more business sense to schedule key machines—which are typically going to be the more expensive 4- and 5-axis CNC machines—and then figure out a schedule and staffing plan to maintain high utilization of those machines.”

This is another aspect of the fact that shops often don’t account for indirect business functions, Luria says. “We’re very good at measuring those 200 hours that the machines have to run, but we’re not thinking about scheduling that job all the way from quote to cash. A lot of mold shops tell us, ‘We don’t make any money machining the tool, but we’re making a lot of money on engineering and on engineering changes.’ That’s a bizarre approach—it essentially says that efficiency doesn’t matter.”

As a state and federally funded organization, MMTC’s goal is to help companies develop competitive approaches through knowledge transfer—not by becoming a permanent consultant. “We work with shops that have not been exposed to the application of lean techniques or to activity-based costing, and train them to do those things. Then we move on.

Luria shares one final piece of advice. “Manufacturers should be focusing less on how to reduce labor costs, and more on looking at how to take time out of the process. More of that time is probably going to be because of the office than the shop. If you successfully attack time, the money will take care of itself.”

For More Information:
Michigan Manufacturing Technology Center (MMTC)
(888) 414 – 6682
dluria@mmtc.org
mmtc.org

 

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