Manufacturers How To MIE Solutions, Inc. Quoting, Estimating and Scheduling For Manufacturers How To MIE Solutions, Inc. This file was generated by an automated blog to book conversion system. Its use is governed by the licensing terms of the original content hosted at jobshopestimating.wordpress.com. Powered by Pothi.com http://pothi.com Contents Indirect Material Costs 1 Material Cost 2 Manufacturing Costs 4 Direct and Indirect Costs 5 Fixed and Variable Costs 7 Job Costing Software 8 Cost Estimate Techniques 10 Purpose of Cost Estimating 12 Estimating The Costs 14 Cost Estimate Types 16 Profit Improvement and Cost Reduction Part 1 19 Cost Estimating Versus Cost Accounting 21 Estimating is more than Setup and Run Time Part 2 23 Estimating is more than Setup and Run Time Part 1 26 Estimating Software Guide 28 Job Shop Quoting Labor Hours Accumulation 30 How To : Manufacturing Hourly Rate Calculation 33 What is Forward and Backward Scheduling 36 Introduction To Job Shop Scheduling 39 Exploded Bill Of Materials 41 What Are Bill Of Materials? 43 Cost Estimating Purchased Parts Or Materials 45 Manufacturing Efficiency in Estimating 47 Job Shop Hours Defined 49 Fabrication Workcenter Overhead Rates 51 Machine Shop Rates Part 2 52 Machine Shop Rates Part 1 57 Standard Shop Rate 60 Calculating Shop Rates Using The Income Statement 62 Introduction To Shop Rates 67 Calculating Cycle Time with Estimating Software 69 Price Quote Software Handles Inspection 71 How To Estimate Handling Time 76 Manufacturing Estimating Cycle Time 79 Quoting Dependencies Between Operations 81 What is Setup Time? 83 Estimating 85 1 Indirect Material Costs Indirect material costs are those costs that are not directly added into the product. There are many times materials required to manufacturer a part but those materials are not put into the product. Examples of this situation are oils, lubricants for machines, sandpaper, molds and castings. There are some situations where the molds and castings would be included into the direct material costs because they specific for the product. When doing estimates in this way you have the choice of amortizing the mold and casting costs into the product or charge the customer separate as a one time charge. Other possible indirect material costs are nuts, bolts, screws or inexpensive items. Usually this would be added into the product causing those materials to be direct costs but there are situations depending on the product being manufactured where these type of items would be indirect costs.
2 Material Cost Material cost is a big subject and will be handled in multiple blog entries. Material costs are costs that directly go into producing the desired product. Material costs can be divided into both direct and indirect material costs. Direct costs are what we will be looking into because those costs are directly in the product. Material can also be broken between raw materials which are commodities and other items which would include pre-manufactured things including nuts, bolts, screws, hard drives, memory chips, etc. Raw materials dealing with commodities where their price may fluctuate daily is what we will deal with in the next few blogs entries. Direct commodity material costs are those expenditures which can be allocated directly to the cost of the specific product. Here is a basic outline of estimating the material cost 1. Catalog all the raw materials required from all the drawings. 2. Calculate the amount of material required for each cataloged raw material. 3. Total common materials, gauges and sizes to come up with total requirements 4. Sum all the weights with the requirements 5. Obtain supplier pricing 6. Total costs 3 This is just a high level summary of calculating material costs. We will investigate calculating volumes, lengths and other type of raw material calculations. MIE Solutions provides software resources to help you manage your direct and indirect costs throughout the product lifecycle from quoting and estimating, job costing to invoicing. h t t p : / / m i e - s o l u t i o n s . c o m / m i e / i n d e x . p h p / M I E - Q u o t e I t - Q u o t i n g - a n d - E s t i m a t i n g - S o f t w a r e / m i e - q u o t e i t . h t m l 4 Manufacturing Costs Manufacturing costs consist of multiple elements which arrive at the full cost. When estimating a product to be manufactured the entire costs are distributed between the following elements. Material Costs This includes both raw material which is reshaped, formed, etc to produce the item and purchased prefabricated items like nuts, bolts, screws. Raw material would be considered commodity items in which the costs may fluctuate widely. Labor Costs This includes the wages of the employees actually manufacturing the product. Labor Overhead This includes the overhead of the employees which include benefits. Machine Costs This includes the costs of running the equipment and machines to product the product. Engineering Costs This includes the costs like prototyping, testing, etc. Burden This includes all the other costs not included in the above. An ERP software system should report all these costs in an easy to read format so the manufacturer can operate profitable. Look for an ERP package like MIE Trak from MIE Solutions which is a ERP software for manufacturers. Please visit us at 5 Direct and Indirect Costs Fixed and Variable costs can now be broken down into two more cost types. Direct and Indirect costs classify the costs of parts being manufactured and are critical to calculating shop overhead rates. Direct costs are those costs that are directly associated with the production of the product. Indirect costs are those costs which do not associate directly with the product being manufactured and cannot be determined for specific products. Direct costs are attributed directly with the manufacturing of the product. For example, if a product is manufactured out of metal, the metal of the product are direct costs. The material used in the product being manufactured is specific for the given product and not shared among other products. Examples would include all bill of material used to make the product including items such as metal, wood, plastic, nuts, bolts, screws, paint, etc. Direct costs not only include the bill of material but also includes the direct labor of the craftsman making the product. The direct labor costs and bill of material can be attributed directly to the manufacturing of the product. Indirect costs on the other hand cannot be directly attributed to the manufacturing of the specific product. Examples of indirect costs are rent, electricity, office space. Employees not directly working on manufacturing of products is also considered indirect because those employees are not specifically involved with the production of the specific product. 6 In order to acquire a good estimate both direct and indirect costs should be added into the cost of producing and manufacturing the product. MIE Solutions provides software resources to help you manage your direct and indirect costs throughout the product lifecycle from quoting and estimating, job costing to invoicing. h t t p : / / m i e - s o l u t i o n s . c o m / m i e / i n d e x . p h p / M I E - Q u o t e I t - Q u o t i n g - a n d - E s t i m a t i n g - S o f t w a r e / m i e - q u o t e i t . h t m l 2UFVKSZ5Q6R5 7 Fixed and Variable Costs There are two main types of cost which are Fixed or Variable costs. If something is being manufactured it consists of both fixed and variable costs. Fixed costs are those cost that do not change based on a quantity. That basically means the cost is fixed if you product 1 or 1000 pieces. Some of these costs would be security, taxes, insurance and administration costs. These costs are called Fixed because they do not vary with the quantity being manufactured or the level of production. Variable costs do vary based on quantity and level of production. Some examples of variable costs are direct material and direct labor costs. There is a third category of fixed and variable costs which is often referred to as mixed costs. Mixed costs are simple costs that are part variable and part fixed. Example would be a heating oil or gas, there is a fixed amount that would be used regardless if the machines are running just to keep the building warm. The variable costs would be the amount of oil consumed by the machine. MIE Solutions provides a great solution to manage and organize all the costs required including both fixed and variable costs. Try this estimating software. h t t p : / / m i e - s o l u t i o n s . c o m / m i e / i n d e x . p h p / M I E - Q u o t e I t - Q u o t i n g - a n d - E s t i m a t i n g - S o f t w a r e / m i e - q u o t e i t . h t m l
8 Job Costing Software Job Costing has been around for many years to determine the cost of manufacturing a given product. The process by which the expenses are record is costing. Job costing software should make the process of recording the transaction simpler and not more difficult and time consuming. Job costing software is not like cost accounting because it does not incur the situation of debit-credit transactions. Job costing does use the same data to determine profitability and to evaluate all the cost of manufacturing the product. Here are a few purposes which may help you determine the need for a proper job costing software package. 1. To determine the actual costs of the manufactured item. 2. To determine the total costs of all the components of a manufactured item. 3. To determine the standard price of the product 4. To determine the selling price of a the product which would include profit above the actual costs. 5. To determine feasibility of manufacturing the product at a profit 6. To evaluate the accuracy of estimates. This is after the fact and the goal is to match or better the estimate cost. 7. To determine which components should be purchased versus those to be manufactured. In the day and age of outsourcing it may 9 be more cost effective to purchase some parts. 8. To compare the costs of manufacturing the item with different processes. Costing is an essential component to the manufacturing processes because without it you would be waiting until the end of the month to see if you were profitable. Also, you would not know what jobs were profitable versus the losers. Try this estimating software. h t t p : / / m i e - s o l u t i o n s . c o m / m i e / i n d e x . p h p / M I E - Q u o t e I t - Q u o t i n g - a n d - E s t i m a t i n g - S o f t w a r e / m i e - q u o t e i t . h t m l
10 Cost Estimate Techniques The basic cost estimate techniques involve analyzing the pieces that make up a cost estimate. The first technique I would follow is to systematically go through the following steps and cost each one out in detail. Once you have gone through the basic steps you will have all the cost information required for the estimate. 1. Design Cost This is step is skipped if you are manufacturing something for a customer and its already designed. Still the customer may want some help in the design area. 2. Engineering This step is to engineer how the product will be made. This could be exploding out the model into its component pieces, programming the CNC machines including turret, mill, laser and waterjets. Costs hear may include the drafting costs. 3. Research and Development Costs This step would entail items such as research and development work, prototypes for the customer which is very much required when doing new products. 4. Material Costs This step would be to create an entire exploded bill of material list with items, quantities and supplier costs. This step can be automated using certain CAD systems which create exploded bills of materials. This information can be imported as an electronic bill of material file into estimating systems. 5. Labor Costs This step would include both direct and indirect labor. A thorough knowledge of the required manufacturing steps and operations to be performed is necessary. Also, 11 a knowledgeable person on the machines used and time required at each step is critical. 6. Quality Costs This step would include all the quality items required to manufacturer the item. This would include things such as SPC Inspection, regular inspection, scrap rate, first articles, etc. 7. Tooling Costs This step goes well with the labor step where the labor operation may require specific tools which need to be purchased or made to manufacture or build the item. 8. Outsourced Services This step is where you place the costs which are outsourced to other suppliers. One example would be painting if the paint process is not done in-house. 9. Overhead Costs This is the last step but very critical. Overhead costs include all costs which cannot be charged to the specific product but still is incurred. MIE Solutions provides a great solution to manage and organize all the costs required in this setup of cost estimating techniques. Try this estimating software. h t t p : / / m i e - s o l u t i o n s . c o m / m i e / i n d e x . p h p / M I E - Q u o t e I t - Q u o t i n g - a n d - E s t i m a t i n g - S o f t w a r e / m i e - q u o t e i t . h t m l
12 Purpose of Cost Estimating There are numerous purposes behind cost estimating which include those below and others 1. A manufacturer can determine if the project or product is cost effective to manufacturer prior to the manufacturing process. 2. There are various alternatives to manufacturing and cost estimating can determine the economical feasibility of manufacturing the project or product by different methods 3. A manufacturer can determine the selling price before manufacturing begins. This may or may not be a good idea because the product still needs to be priced at a value the consumer will purchase the item. 4. In software estimating packages like MIE QuoteIt you have the ability to create different quotes based on different manufacturing procedures. This also carries through when you decide to purchase the item because its cheaper to purchase the item then to manufacturer it in-house. 5. Production cost estimator can set standards for production. In ERP software, once a job is received it can be scheduled. The scheduling standards start at the estimating stage of production. The more accurate these estimates are the less effort has to be done during production scheduling. 13 6. In a production line the estimate can be used to plan the equipment required to manufacture and the what the capital requirements are. 7. Personal are a key factor and an estimate can determine the personal required to manufacture the item. If the estimate is not accurate the above items as to the purpose of the cost estimate are not accurate. If all your estimate bill of materials, labor, outsourcing and resource requirements are wrong you will not be successful. Losing work to competitors is one thing but losing money on the job is another issue which costs more than you would losing the job to a competitor. Try this estimating software. h t t p : / / m i e - s o l u t i o n s . c o m / m i e / i n d e x . p h p / M I E - Q u o t e I t - Q u o t i n g - a n d - E s t i m a t i n g - S o f t w a r e / m i e - q u o t e i t . h t m l 14 Estimating The Costs An interesting situation when doing estimates is which estimates do you spend time on and which estimates are too costly to put the effort into. In a tough economy its almost always the case you try to make something your company is not really able to make at a reasonable profit, but you still want to get the job just to keep your machines busy. This is a valid assumption in some cases but it should be looked at as a business direction and/or a case by case basis. Estimating the costs of estimates is critical because you do not want 90% of your effort to quote the machining, sheet metal, tubing or any other type of job and only get 10% of those jobs. The other factor that is really important is your ROI (return on investment). Estimating is a best guess and you are competing against others who do their best to guess a reasonable price. The more accurate the cost estimate, the higher the costs will be. The reason is the more accurate the job cost estimate is the longer it takes to produce, increased upfront design work, and details to prepare the estimate increase. Now when you are estimating in a job shop environment where parts are made to order and engineer to order the cost of the estimate is also based on the value of the product. If the product is a panel, cutting a small tube or small machined part the costs are not that high to estimate. One of the reasons is the engineering time to estimate is low, most of the job is done by machines and not manual labor, and its small. On the other if the job was a vehicle, machine, house, addition to a house, etc the cost to estimate is much higher. The reasons would include 15 the bill of material requirements would be much greater and therefore require more effort to accumulate those costs. Assembly costs are the largest unknown portion because of unknown factors, employee performance which makes it very difficult to quote accurately. I leave you with the thought that you should try to do a rough cut look at the part before expending a lot of wasteful hours trying to come up with a good estimate. Download the MIE QuoteIt software, its free to try and MIE Solutions will help you get up and running to improve your quoting and estimating process. MIE Solutions has thousands of users of their flagship estimating software which helps companies everyday estimate quicker and more accurate. Try this estimating software. h t t p : / / m i e - s o l u t i o n s . c o m / m i e / i n d e x . p h p / M I E - Q u o t e I t - Q u o t i n g - a n d - E s t i m a t i n g - S o f t w a r e / m i e - q u o t e i t . h t m l
16 Cost Estimate Types There are different types of cost estimates including Rough Approximation of cost which can be a conceptual design, preliminary design and then a detailed estimate or quote. Rough Approximation The rough approximation is really prepared for informational purposes only. This type of estimate may not have geometry or even materials but just a rough idea of the product. This type of estimate would be used if someone is asking for a price to make a building of a certain square size or a box, etc. A lot of times this would result in prices like $200 per square foot or $20 per pound. Some examples of rough cost estimating would be highway costs per mile, weight of the object for shipping or linear foot cost to build cabinets. This type of estimate and quoting can be good for a software system designed with CRM and quick estimating features where you would just type in costs. h t t p : / / m i e - s o l u t i o n s . c o m / m i e / i n d e x . p h p / c r m _ q u o t i n g _ e s t i m a t i n g _ s o f t w a r e . h t m l Preliminary Design The preliminary design approach is similar to the rough cut estimate but you will know the materials. This is basically a function where you would cost out the materials and multiply it by some factor. The factor you would use would be based on some variable of labor. For example, to make a casting you would have a material and 17 approximate weight. You would take (Material * Weight * Price Per Unit Weight)*(Labor Factor). The labor factor would adjust the price based on passed experience or similar jobs. A CRM package with a good quoting system would be an ideal candidate for this type of cost estimate. Detailed Estimate or Quote A detailed cost estimate is one that fully details out the exploded bill of materials and labor. Each component of the bill of materials is cost individually in order to arrive and a very accurate cost. The labor is still a best guess in most situations but there are standards which may be followed to make the quote more accurate. Example would be quoting jobs which require multiple labor steps to complete. Even with automation, the labor step with is critical to quote accurately. The end result of a detailed estimate or quote is a fully exploded bill of materials with labor which can be evaluated. The larger and more complex the work is the more critical it is to have accurate quotes. The goal is to create accurate, timely and consistent quotes. Using a software package like MIE QuoteIt will improve accuracy, time and effort and consistency. h t t p : / / m i e - s o l u t i o n s . c o m / m i e / i n d e x . p h p / M I E - Q u o t e I t - Q u o t i n g - a n d - E s t i m a t i n g - S o f t w a r e / p r o d u c t - m i e - q u o t e i t - p r o . h t m l MIE QuoteIt from MIE Solutions offers free quoting software for step by step quoting. The quoting software is very user friendly and offers customization of operations, materials, formulas and even table lookups. Please visit our website and take a tour of the free 18 quoting software instead of the old method of quoting in excel. h t t p : / / w w w . m i e - s o l u t i o n s . c o m 19 Profit Improvement and Cost Reduction Part 1 Talking about profit improvement and cost reduction we cannot leave out the importance of estimating accurately. There are a few ways to reach the goal of both profit improvement and cost reduction. Increase your prices which improves profit, but only if that does not drive away customers. Increase sales if your fixed costs stay the same Improve your product mix to manufacturer more efficiently Reduce your costs including overhead, labor and raw material costs Increasing your prices without your costs going higher is a great way to increase your profit. This is the best way to improve your prices except for the fact that there is something called competition which will not exactly work with you to increase your prices. Increasing prices has another great benefit which is you do not need to work on cost reduction. Increasing sales if your fixed costs remain the same is another great way to increase profits. The difficult part is how to increase sales because if it was easy to increase sales everyone would be doing it. One method of increasing sales and improve profitability is to estimate accurately and quickly in order to provide a better service. When a price is given to a customer the customer does not want 20 the supplier to come back towards the end of the job and ask for more money because the estimate was too low. This type of situation happens but should not happen if a good estimating process is implemented in the business. Improving the product mix is another way to create profit improvements. The motivation here is you have covered some of your fixed overhead costs already and adding some new products which fit your area of expertise can increase sales without increasing overhead costs too much. Reducing costs is sometimes the easiest way to improve your profitability. There are many business processes which can be improved in most organizations to reduce costs. For example, if estimating is being done manually through paper and pencil or even a spreadsheet, moving to a software estimating and quoting package designed specifically for your situation can reduce your costs considerably. One example is when you can actually have one person do between 3000 and 5000 a year. This is a lot of estimates that are done accurately and done by a single person. If this was done by 5 persons you could see the cost savings immediately. MIE QuoteIt from MIE Solutions offers free quoting software for step by step quoting. The quoting software is very user friendly and offers customization of operations, materials, formulas and even table lookups. Please visit our website and take a tour of the free quoting software instead of the old method of quoting in excel. h t t p : / / w w w . m i e - s o l u t i o n s . c o m 21 Cost Estimating Versus Cost Accounting What is the difference between cost estimating and cost accounting? Cost estimating is a precursor to cost accounting because it done at the beginning of the process. Lets define cost estimating as the estimation of the cost of a goods or services prior to the actual production of the goods or services. Cost estimating is used in both the production of goods and services to perform a specified action. Cost accounting or costing is different then cost estimating because its an analysis of the costs to actually product the goods or services. Cost accounting is done after the production while the cost estimating is done prior to the costing of the goods and services. I like to think of cost estimating as being an educated guess. Unless there are simulations which can be run to determine the exact cost estimate, the estimator is performing a best guess based on previous knowledge. Cost estimating is a prediction while cost accounting is actually what expenses where where incurred during the production process. Cost estimating is a complex process and requires a person who understands the domain in which the cost estimating is taking place. Some of the items that are considered Product Design Materials and how they are used in the product or services 22 Operational steps required to produce the product or services Machine and Labor costs involved Visually be able to understand all the areas of manufacturing from the requirements MIE QuoteIt from MIE Solutions offers free quoting software for step by step quoting. The quoting software is very user friendly and offers customization of operations, materials, formulas and even table lookups. Please visit our website and take a tour of the free quoting software instead of the old method of quoting in excel. http://www.mie-solutions.com 23 Estimating is more than Setup and Run Time Part 2 In the not to distant past many manufacturing processes were very labor intensive. In countries such as China and India there is still a great deal of manual labor intensive manufacturing. I remember as a child I worked in my Fathers sheet metal shop and the machine of choice was a Strippit 30/30. I have seen many of these machines and they are still in use today and very reliable. One day the company purchased a Diacro VT-19 and it was a dream. This machine was able to be loaded with multiple tools unlike the 30/30 where it was a one tool machine. The Diacro VT-19 was still a manual process machine but the great thing about the machine you can create the entire part without removing the material. The 30/30 was setup to punch 1 or more holes only if they were lined up and used the same tooling. Todays NC machines hold vastly more tools and also are automated where there is no manual intervention during the run cycle. Why should I mention this? Estimating has changed and each of the three machines which make the same part have different setup times. Needless to say you should use the best machine for the job. Strippit 30/30 The Strippit 30/30 was setup by putting in a single punch, setting the x and y stops. For each hole different hole these three steps had to take place. The formula to estimate the setup time would be 24 (Number Of Tool Changes)*(Time Per Tool Change) + (Number Of X Stop Changes) * (Time Per X Stop Change) + (Number of Y Stop Changes)*(Time Per Y Stop Change) This is a lot of effort and can be improved by automating the machine but these machines are still in use. The above formula work and give you a reasonable accurate estimate. Im currently ignoring the other factors like gathering the tools, etc. Diacro VT-19 The Diacro VT-19 was setup by placing all the tools in the Turret. The last part of the setup would be to put in the template which would be used to guide the material to the correct location so the punch could put the whole in the correct spot. The formula to estimate the setup time would be (Number Of Tools)*(Time Per Tool)+(Time To Setup Template) This is a lot of effort and can be improved by automating the machine to eliminate setting up the template. Ill Continue next time on the Automated CNC Machine and Laser, Waterjet or Plasma machines MIE QuoteIt from MIE Solutions offers free quoting software for step by step quoting. The quoting software is very user friendly and offers customization of operations, materials, formulas and even table lookups. Please visit our website and take a tour of the free quoting software instead of the old method of quoting in excel. 25 http://www.mie-solutions.com 26 Estimating is more than Setup and Run Time Part 1 Many estimators put a lot of time into figuring out how to estimate setup time. Setup time is a key component when doing estimates for basic operations like shearing, forming, laser, punch presss or any other operation which requires a setup process before a production run. Many estimators still think in $s versus time which was the simple way to quote prior to computers becoming wide spread. Setup time should be calculated as a time component and not a dollar component. One of the biggest reasons for this is time would only change if a machine became more automated versus $s could change based on labor rate changing, overhead rate changing, electricity prices rising, etc. Setup time can be as simple as the following ideas from the simple to complex. Setup Time In Hours Setup Time In Minutes Setup Time In Seconds Setup time can be defined as the time it takes a machine to be setup prior to the running of the job. The formula actually gets a bit more complex if you are quoting based on multiple machines being run. For example 10 identical machines. Each machine by itself takes 30 minutes to setup and each machine could produce 10 parts per hour. 27 If you are quoting 10 parts to be fabricated you would only want to setup a single machine because a single machine can handle all the parts most efficiently. If you are quoting 25 parts, you can either run all the parts on 1 machine and therefore 1 setup time. This is ok but you must also think of how long the parts will take to run. In this situation the total time would be 3 hours and 30 minutes. You can also setup 3 machines concurrently and the 25 parts would be completed in 1 Hour and 30 minutes. There are trade-offs to the decisions and no exact answer is right in all situations. As you do your estimates make sure you think of the number of machines a job may be manufactured on simultaneously or you may be leaving a lot of dollars on the table. MIE QuoteIt from MIE Solutions offers free quoting software for step by step quoting. The quoting software is very user friendly and offers customization of operations, materials, formulas and even table lookups. Please visit our website and take a tour of the free quoting software instead of the old method of quoting in excel. http://www.mie-solutions.com 28 Estimating Software Guide There are many different type of software estimating package for made to order manufacturing Made to order manufacturing includes any custom job shop type work including sheet metal, machining, wood working, stamping, press work, printing which all require customized quotes. Quotes include both operation and bill of material. Below you will find a checklist of items to look for while you are reviewing estimating software packages. ERP solution providers should provide as a minimum the items shown below in order estimate most efficiently with the most accurate costing results. For more information please visit http://www.mie-solutions.com MIE Solutions provides a set of products from quoting and estimating through full ERP solutions with document managent. RFQs
Manage Request For Quotes (RFQs)
Request For Quote History
Request For Quote Workflow
PDF, Email Quote Letters To Buyer
Approval Workflow Process For Request For Quotes
Quotes Multiple Quotes Per Item Master
Exploded Bill Tree On Screen
Multi-User
Handles Millions Of Quotes 29
Handles Assemblies with 100000 Items
Compare Quotes
Compare Quotes
Combine Quotes To Create An Assembly
Merging Of Common Setups During Assembly Calculations
Bill Of Material Raw Materials Handling Dimensional characteristics
Blank Size Calculator
Scrap Calculator
Multiple Breakout Prices
Hardware Items
Outside Processing Items
Miscellaneous Vendor Quotes
Part Numbers and Descriptions > 64 Characters
Unlimited Length Comments
30 Job Shop Quoting Labor Hours Accumulation Labor time is very difficult to measure accurately when determining manufacturing time for a custom item. If you ask 10 people to estimate how long it will take to cut a piece of wood, pipe, etc you would most likely find 10 different answers. It even gets more extreme between the answers when there are large quantities involved or a large number of cuts involved. Another factor which ways heavily on the estimate is the experience of the person doing the estimate. The person doing the estimate usually bases how they calculate labor hours on how fast they think they could do the job. The problem is different people perform the same tasks at different speeds and this is very likely that no two people will do it at the same speed. One of the principles of effective labor estimating is the ability to use past knowledge and standards such as averaging past job performance. Some think an opinion of a skilled technician is preferred over complex methods but if there are detailed standards available these metrics should produce more accurate results. Estimating labor hours for a job is a chore and can be very tedious. Estimators are some of the better employees with knowledge of manufacturing process and engineering skills. We must have accurate estimates of labor hours to support scheduling and promote productivity. One of the ways to have a quality labor estimate is using labor hour cost performance trending where a job is run through the manufacturing steps, reviewed and continually improved based on the actual costs to perform the work. The nature of job shop work 31 is complex and estimators cant say with certainty how long a job might take. Maintenance work isnt assembly line work. Job time depends on the actual condition of the equipment and the actual technician assigned. A estimator doesnt always know exactly what needs to be done. The estimator doesnt have perfect vision knowing exactly how many bolts need to be burned off. The estimators doesnt know the actual condition of the equipment before dis-assembly. In addition, the person assigned to the job may or may not be a top technician. He or she might be the least-skilled technician on the crew. Experience shows that the best estimates are routinely off as much as 100 percent. A job estimated to take five labor hours might take as many as 10 hours or as few as two. Some job shops instruct estimators to use industrial engineering standards for each tiny portion of a job. For example, estimators figure how long each bolt should take to be removed times the number of bolts and then add how fast a typical person walks times the distance the job is from the shop. They add the job elements together for a total plan estimate. Not only does this type of estimate take a long time, its not always very accurate or 100 percent correct. This method is more appropriate for estimating an assembly line task. The execution of an assembly line task thousands of times in a week (or day) justifies the time spent on the estimate. Specific maintenance tasks are usually unique in their actual conditions. There is free labor estimating software which assists in estimating these labor costs. Some estimators take strict averages of hours for previous executions of similar work. Some CMMS programs even average 32 past work automatically. The problem with this approach is two-fold. First, execution of the work is, at best, an average. If technicians took too long on past work, their performance carries into the future estimate. The past performance also can include activities such as time associated with interrupting the work. Second, we want a standard, even if not an engineered one. We want to know how long the job should take a qualified tech to perform, but we dont want an estimate to include lesser-skilled technician efforts or unusual past problems. MIE QuoteIt from MIE Solutions offers free quoting software for step by step quoting. The quoting software is very user friendly and offers customization of operations, materials, formulas and even table lookups. Please visit our website and take a tour of the free quoting software instead of the old method of quoting in excel. http://www.mie-solutions.com 33 How To : Manufacturing Hourly Rate Calculation Sheet metal, CNC shops, machine shops and many other job shops provide a valuable service to their customers. For a job shop to be a profitable business, the service rate should cover the cost of doing business plus have a certain amount of margin or profit built into the price customers pay. If this is too low, you will be gaining new work but this will only last as long as you have money in the bank. You business will fail because the owner needs to earn an income. If the price is too high, customers will choose a competitor. Some high level ways to calculate your hourly shop rate is shown below. Hourly rate calculations are not that complicated but should be looked at carefully in order to be a profitable company. Equipment 1. Calculate the cost per hour of operation and include a markup for maintenance hours in your calculation to determine a fully burdened cost per machine hour. The formula is: (machine purchase cost + expected lifetime maintenance cost) / expected hours of operating life. You can choose to do this per machine or an average of all machines. Labor 2. Develop an hourly shop rate: (total annual labor costs + taxes + benefits + paid time off) / (total annual hours worked breaks and training time). This is your direct labor cost per hour. 34 Overhead 3. Any costs not directly involved in machining a part is overhead. These include costs for administrative staff salary, equipment, furniture, building lease, maintenance and office supplies. Calculate the annual costs of these, then divide by total labor or machine hours for the year. This will be your overhead cost per hour. Markup 4. Heres where the shop earns its keep. The owners income and future growth for the shop depends on this calculation working well. Simple calculation is markup = 1 + (owners salary + benefits + annual earnings goal) / annual service hours) / (machine + labor + overhead cost per hour). Converted to a percentage, for example, this will come to something like 120 percent, basically adding 20 percent profit to the cost of doing business. Service Rate Calculation Average Rate 5. Use this formula when your machine costs are fairly similar from one piece of equipment to another: Average overall shop rate = (average machine cost per hour + labor and overhead cost per hour) x markup x total hours for the job. 35 Service Rate Calculation Machine-Specific Rate 6. Use this formula when cost of equipment varies greatly from piece to piece and not all machines are used in each service. Rate = (specific machine(s) cost per hour + labor & overhead cost per hour) x markup x total hours for the job. MIE Solutions offers a made to order job shop ERP system designed for the manufacturer of goods and products. Most accounting systems are designed for the basic AR, AP and GL side of financials where a manufacturing software product deals with the actual production of the goods and services. MIE Trak is a full featured ERP system for the made to order and engineer to order manufacturer. http://www.mie-solutions.com 36 What is Forward and Backward Scheduling MIE Solutions offers a made to order job shop ERP system designed for the manufacturer of goods and products. Most accounting systems are designed for the basic AR, AP and GL side of financials where a manufacturing software product deals with the actual production of the goods and services. MIE Trak is a full featured ERP system for the made to order and engineer to order manufacturer. If your estimating system is inaccurate your production scheduling software or manufacturing scheduling software will give you very poor results. If the quality of your estimates are good then the standard scheduling for a production scheduling software will be more precise. What is scheduling? Scheduling is a method where there is a set of x tasks which need to be completed on a set of y resources in an efficient manner. Wikipedia gives us a good definition of scheduling Companies use backward and forward scheduling to allocate plant and machinery resources, plan human resources, plan production processes and purchase materials. h t t p : / / e n . w i k i p e d i a . o r g / w i k i / S c h e d u l i n g _ ( p r o d u c t i o n _ p r o c e s s e s ) What is forward scheduling? 37 Forward scheduling is taking a job with a number of tasks and allocates those tasks to resources as early as possible when resources the resources allow. The first available time that the resource is available to be used the task should make use of it. As with all scheduling methods there are pros and cons on how they work. Forward scheduling may result in jobs being completed earlier then the requested due date because forward scheduling schedules the tasks as early as possible. Forward scheduling tells you when a job could be completed vs completing the job when required. What is backwards scheduling? Backwards scheduling is taking a job with a number of tasks and allocates those tasks to resources in reverse orders and schedules the task on the resource. Backwards scheduling requires a delivery date from the customer because the system schedules backwards from the delivery date to arrive at a start date. Backward scheduling tells the manufacturer if this date could be hit based on the allocation of resources. Unlike forward scheduling which schedules into the future, backward scheduling could potentially schedule into the past because the resources where not available to complete the job. Backwards scheduling then may turn around and actually forward schedule the job to tell the customer the earliest delivery time. Scheduling is very complex and this blog will try to go over many aspects of scheduling from types of scheduling, np complete problems, how to allocate resources, defining resources, etc. Some of the benefits of scheduling include : 38 Process change-over reduction Inventory reduction, leveling Reduced scheduling effort Increased production efficiency Labor load leveling Accurate delivery date quotes Real time information 39 Introduction To Job Shop Scheduling Welcome to the MIE Solutions Job Shop Scheduling blog. MIE Solutions ERP system provides a comprehensive job shop scheduling software to deal with the many problems scheduling a job shop encounters. Scheduling has become a critical factor in many job shops in order to determine their capacity for more work and be able to schedule their work more efficiently. Job shop scheduling becomes more and more difficult when you deal with assemblies and/or multiple components which need to be made in an efficient manner. Job Shop Scheduling is an optimization problem in which ideal jobs are assigned to resources at particular times. The most basic version is as follows: We are given n jobs J1, J2, Jn of varying sizes, which need to be scheduled on m identical machines, while trying to minimize the total length of the schedule (that is, when all the jobs have finished processing). Scheduling job shops is much more complex then the basic version above because there are many more constraints involved. In the above method the machines are identical which is not going to happen in an actual job shop. Online problem vs offline problem In an online scheduling system the scheduling application looks at a single piece of information at a time and does not know whats coming down the pipeline. In this situation the entire input is not known from the start. Because it does not know the whole input, an online algorithm is forced to schedule the job without knowledge of the entire input available at the start. The online algorithm needs to make a decision about that job before the next job is presented. In an offline scheduling system 40 the scheduling application the system is given the whole problem data from the beginning and is required to answer scheduling problem given in an optimal way. Because an online scheduling system does not know the whole input, an online algorithm is forced to make decisions that may later turn out not to be optimal, and the study of online algorithms has focused on the quality of decision-making that is possible in this setting. References : http://en.wikipedia.org/wiki/Job_Shop_Scheduling Advanced ERP Scheduling Software http://www.mie-solutions.com/mie/ 41 Exploded Bill Of Materials Estimating large projects requires an exploded bill of materials in order to get a good understanding of the requirements. The larger the project you have to estimate the more in depth the bill of materials will be. If you are estimating you want to make sure all the bills of materials are entered correctly into the estimate but also you want to enter the bill of materials efficiently. Your estimating system should allow you to enter a proper bill of materials in order to allow creation of the requirements in order to calculate minimums, setups and quantity discounts properly. If a bill of material list is available as shown below you can merge items together Part Number Name Quantity Widget A 16 GAGE CRS 48120 10 Widget B 16 GAGE CRS 48X120 3 Widget C 14 GAGE CRS 48X36 5 When you are estimating you generally would price each of these components separately and then roll the costs up for a grand total. By creating an exploded bill of material which merges these items together you can actually get a more accurate cost because buying 13 if an item may be less expensive then purchasing 10 and 3. The other advantage is if you are using raw materials like sheet stock, tubing, wood, etc. you may have the opportunity to nest the 42 bill of material together to arrive at a quantity required which was 13 and would now be 9 through nesting. Setup and minimums can also be reduced by aggregating the bills of material together. You can see how beneficial an exploded bom is for quoting and estimating. Job costing starts at the estimating and quoting area and extends throughout the ERP package. Job cost estimating software can save you a lot of time, money and energy and help you to win new work. Next we will be talking about an indented or exploded bill of material which includes labor. Most bills of materials do not include a roll up of labor which can be very good for seeing an aggregated view of the labor required to manufacture the job. MIE Solutions provides software products to make your business process more efficient so please take a look at our product line below. MIE Trak and QuoteIt are two products which provide an efficient way to do job shop cost estimating. h t t p : / / w w w . m i e - s o l u t i o n s . c o m / m i e / h t t p : / / w w w . m i e - s o l u t i o n s . c o m / m i e / i n d e x . p h p / M I E - Q u o t e I t / 43 What Are Bill Of Materials? A good definition of Bill of materials comes from wikipedia Bill of materials (BOM) is a list of the raw materials, sub-assemblies, intermediate assemblies, sub-components, components, parts and the quantities of each needed to manufacture an end item or final product. All products have bill of material from engineering bill of materials, manufacturing bill of materials and service bill of materials. When you are required to estimate the time to manufacture a finished product you must take into account the bill of material of the finished product. Bills of materials for quoting and cost estimating can be broken down into 3 categories. The first category is raw material. Raw material are those bill of material items that are the building blocks to create a finished or final product. This would include items such as wood, sheets of metal, coils, wire, plastic, rubber, etc. These type off bills of materials are usually some sort of commodity, especially when you get into sheet metal, wood, etc. The second category is hardware. Hardware are those bill of material items which can be purchased and added to a finished product or it could be consumable which is used in the production of the finished product. Examples would be nuts, bolts, screws, etc. Examples of consumables would be paint and gas. The third category of bills of material would be outside services. Outside services would be purchased 3rd party processes like machining, painting, silk screening which are added to a finished product. 44 All three of these types of bill of material, raw material, hardware and outside processing make up your bill of material list. Estimating software makes it much easier to manage bills of material then spreadsheets and paper. MIE Solutions provides software products to make your business process more efficient so please take a look at our product line below. MIE Trak and QuoteIt are two products which provide an efficient way to do job shop cost estimating. h t t p : / / w w w . m i e - s o l u t i o n s . c o m / m i e / h t t p : / / w w w . m i e - s o l u t i o n s . c o m / m i e / i n d e x . p h p / M I E - Q u o t e I t / 45 Cost Estimating Purchased Parts Or Materials Bill of material items are those items which are purchased as raw materials and used to combine with other products and services to produce a new product. Job costing bill of materials is a critical step in the estimating and quoting process. Classic ERP and MRP software provides tools to help estimating the bill of materials. When you are performing cost estimates for purchased parts or materials there is a need to determine if these purchased parts can be manufactured internally or are they economically better to be purchased. When larger quantities of materials are used it is often better to purchase these parts from suppliers who are experts in producing these materials. The specialization of companies to produce goods and services is critical to producing a finished product within costs. There are two ways to get a cost estimate on purchased parts. The first way is to actually get specific bids from one or more suppliers and have the supplier respond back with their bid. The second method requires looking up in some sort of catalog and using the cost from the suppliers catalog as the cost. The first method is a more desired approach because the catalog could be out of date or the possibility that a relationship could occur between you and the supplier giving you a potential discounted price. MIE Solutions provides software products to make your business process more efficient so please take a look at our product line below. MIE Trak and QuoteIt are two products which provide an efficient way to do job shop cost estimating. h t t p : / / w w w . m i e - s o l u t i o n s . c o m / m i e / 46 h t t p : / / w w w . m i e - s o l u t i o n s . c o m / m i e / i n d e x . p h p / M I E - Q u o t e I t / 47 Manufacturing Efficiency in Estimating How many of you have estimated a job and wonder how anyone could do it any cheaper and make money? Well your not alone in your thinking. There are manufacturers that are using reverse auctions in order to try to get more work and pick up new customers. The problem is when you have a buyer that is 100% fixated on the price and ignoring the many other many factors presents a difficult problem. Manufacturing efficiency is one of the areas where you can compete for jobs. One example I heard of this past week is a large government contract was one by a supplier because of price. This machine shop could have produced this widget by manually punching the part, but they decided to spend some extra money up front and create a die for the job. This machine shop had the technical expertise to create the die when two other machine tool makers would not make for them. This machine shop is now able to make these parts very efficiently and one the job because all the other shops that competed with him did not base their quote on a die. This tells us that manufacturing parts efficiently can overcome many other issues of price during the bidding stage. Some ways that manufacturing can be more efficient is automatic loaders, robotic welders, automated punch presses, lasers, business software, cad software, estimating software and many other areas. In this economy I would suggest looking at all your machines and capabilities to try to determine where they can be made more 48 efficient. MIE Solutions provides software products to make your business process more efficient so please take a look at our product line below. h t t p : / / w w w . m i e - s o l u t i o n s . c o m / m i e / h t t p : / / w w w . m i e - s o l u t i o n s . c o m / m i e / i n d e x . p h p / M I E - Q u o t e I t / 49 Job Shop Hours Defined In job shop estimating where does efficiency play a role? When you are estimating generally ask yourself how many Man Hours are required to producing the part or performing a specific operation. Lets define some terms first Man Hours Man hours is the total time to accomplish a given task. This does not mean that if a task if 40 man hours it will take five 8 hour days. You could potentially accomplish the task using more then 1 resource and therefore you can finish the task with 5 people working 8 hours in 1 day. Direct Hours Amount of time that an employee is performing a task specific to a work order. Indirect Hours Amount of time that an employee is performing a task that is not being applied to a specific work order. This includes sweeping, cleaning, accounting, etc. Estimated Hours Amount of time an estimator puts towards a specific task or job that is an educated guess. 50 Actual Work Hours The actual hours an employee spends performing a specific task Efficiency Efficiency is the ability to accomplish a given task with the minimum expenditure of time or effort. Worker Productivity or Effectiveness Worker productivity is the time spent on a task versus the time they are actually getting paid for. Worker productivity will never be 100% because of the time interferences a worker keeps from doing their assigned assignments. These include things like using the restroom, meetings, e-mails, chatting, break time, etc. The time between direct hours and indirect house is the effectiveness rate. This is not the the same as efficiency where its calculated as the measure of ones performances performing a given task. The next blog post will go into more detail and examples of job shop efficiency and effectiveness. h t t p : / / w w w . m i e - s o l u t i o n s . c o m / m i e / h t t p : / / w w w . m i e - s o l u t i o n s . c o m / m i e / i n d e x . p h p / M I E - Q u o t e I t / 51 Fabrication Workcenter Overhead Rates When you quote a job and its operations you need to make sure you quote it accurately. Its very important to know that when you quote a job that your rates are high enough to actually turn a profit. View This Poll online survey Welcome to the MIE Solutions Job Shop Estimating blog. Fabrication software as in sheet metal software and manufacturing software deals with shop rates extensively for costing. Please comment and continue following as I continue investigating production control and job shop software. h t t p : / / w w w . m i e - s o l u t i o n s . c o m 52 Machine Shop Rates Part 2 Welcome to the MIE Solutions Job Shop Estimating blog. Fabrication software as in sheet metal software and manufacturing software deals with shop rates extensively for costing. There are basically 3 ways to calculate overhead absorption rates which is used to provide your shop sell rate during quoting and estimating. 1. Company Overhead Absorption Rate 2. Percentage Overhead Absorption Rate 3. Work Center Overhead Absorption Rate Each of these three ways of calculating your overhead absorption has both positives and negatives. Percentage Overhead Absorption Rate What does an overhead percentage mean? An example would be a 150% overhead percentage which means that for every $1.00 of direct labor billed to the customer, the business must collect an additional $1.50 ($1.00 x 150%) for that custom just to cover costs. There are potentially large variations between total direct labor wage and direct labor cost. The question is how do we figure the overhead absorption rate. 53 Definitions Business Expenses All expenses found on the companys income statement (also known as the profit and loss statement). All expenses found on the companys income statement (also known as the profit and loss statement). Overhead Expenses All costs found on the income statement except for direct labor, direct materials, and costs attributable to outside subcontractors that can be billed directly to a customers account. Overhead expenses are absorbed by the business and factored into the selling price as a percentage of the direct labor cost. They include indirect costs such as accounting, advertising, depreciation, indirect labor, insurance, interest, legal fees, rent, repairs, supplies, taxes, telephone, travel, and utilities. Direct Labor Labor used to produce products and services purchased by customers. These man-hours are directly attributable to customer activity. Indirect Labor 54 Labor used to provide supporting services to the business such as accounting, clerical, custodial, customer services, management, purchasing, sales, and warehousing. These man-hours support business functions that are not directly chargeable to the customer. Direct Materials Materials used in the final product or service purchased by customers. These materials are charged directly to the customers account. Overhead Percentage Ratio between direct labor and overhead expenses. This percentage is used to allocate overhead expenses proportionately to direct labor dollars billed to customers. How To Calculate Overhead Percentage Step 1 Determine the average hourly wage paid to direct labor employees. Step 2 Estimate direct labor workdays available in the calendar year. Step 3 Estimate billable direct labor hours for work year. Step 4 Estimate billable direct labor dollars for work year. Step 5 Estimate non-billable direct labor dollars for work year. 55 Step 6 Estimate all overhead expenses for work year to include non-billable direct labor. Step 7 Calculate the annual overhead percentage. Example Would your shop rate be Avg Direct Labor Rate +Overhead Rate (Average Direct Labor Rate x Overhead %) is Direct Labor Costs Is this your sell rate? No Referencing h t t p : / / w w w . m i s s o u r i b u s i n e s s . n e t / d o c s / c a l c u l a t e _ o v e r h e a d . p d f A machine shop rate for a job shop manufacturer is not that difficult to compute once you have your income sheet calculations available. Its important to calculate your shop rate for estimating accurately because if you are off by much you will be losing money continuously. A sheet metal software package needs to be able to handle calculating overhead rates based on percentage if its applicable to the specific industry. h t t p : / / w w w . m i e - s o l u t i o n s . c o m The mission of MIE Solutions is to apply advanced technology to improve manufacturing productivity and quality in the field of fabrication. At MIE Solutions, we do not compromise product quality 56 or service. We strive to satisfy our customers every reasonable requirement with speed, courtesy and honesty. Our pricing reflects the cost of providing high quality products and excellent service but remains fair. Our goal is to be known throughout the world for the development and production of innovative products. We endeavor to be regarded as the leading supplier of high technology in the sheet metal fabrication. We want our customers to be proud to own MIE products. 57 Machine Shop Rates Part 1 Welcome to the MIE Solutions Job Shop Estimating blog. MIE Solutions ERP system provides a comprehensive job shop software to deal with the many problems issues a job shop encounters. Estimating has become a critical factor in many job shops in order to determine the best price for custom and made to order manufactured parts. There are basically 3 ways to calculate overhead absorption rates which is used to provide your shop sell rate during quoting and estimating. 1. Company Overhead Absorption Rate 2. Work Center Overhead Absorption Rate 3. Percentage Overhead Absorption Rate Each of these three ways of calculating your overhead absorption has both positives and negatives. Company Overhead Absorption Rate A machine shop rate for a job shop manufacturer is not that difficult to compute once you have your income sheet calculations available. Its important to calculate your shop rate for estimating accurately because if you are off by much you will be losing money continuously. 58 Budgeted Costs Below you will find an example of a ficticious company and its associated budgeted costs. Direct Materials..$1,500,000 Direct Labor.$400,000 Indirect Costs Rent (Factory uses 80% of floorspace).$620,000 Utilities.$75,000 Salary For Production Supers.$300,000 Indirect Materials..$45,000 Total Indirect Costs..$1,040,000 Sales Commissions.$200,000 Advertising..$20,000 Machine Hours Assuming an 8 hour day, 5 days a week with working 52 weeks a year you would get Hours per Day..8 59 Hours per Week40 Hours per Year.2080 Hours Per Year for 10 Machines20,800 There are a lot of assumptions that are being made here which will be discussed in much more detail in future blogs but this is the simple case. What is your budgeted overhead rate? $1,040,000/20800 = $50 Is this what you want to use for your quoting hourly shop rate? The answer is No h t t p : / / w w w . m i e - s o l u t i o n s . c o m 60 Standard Shop Rate Do you remember when it was time to quote and you sat down with your specifications, pencil and paper and started to write down how long each processes would take to manufacture the given specifications. You would add up all the setup time, then go through and add up all the cycle time per process by hand, and if not by hand, an expensive calculator. Once you finished adding up the estimated time you then did one last calculation like this Labor Dollars = ((Setup Time)/(Pieces Being Quoted)) + Cycle Time)*(Shop Rate) Shop labor rates a fews years ago usually consisted of a single shop rate for every machine and operation in your shop including machine shops, sheet metal shops to wood working and plastic job shops. To calculate a quote the shop rate was much simpler when there was only a single rate. Now with the advent of computers you can have shop rates that are specific to each machine because the actual calculation is done by a computer now. A single shop rate had some advantages at that time but those advantages are not applicable in todays advanced manufacturing facilities. Plant-wide versus departmental versus individual machine burden rates If overhead does not vary between departments you can use a plant-wide shop rate. This is the least desired approach because lower cost departments would be absorbing costs from other more expensive departments. If overhead varies from department to 61 department (rates or drivers) and overhead is significant, departmental burden rates may result in a more accurate allocation of overhead. If burden rates between machines in a department vary significantly a more accurate approach would be specific overhead absorption rates. QuoteIt from MIE Solutions offers the ability to have the most accurate estimating process because you are able to have specific overhead absorption rates per machine. Once you being quoting and estimating using machine specific overhead you will be more capable of competing in this highly competitive job shop environment. The next discussion will give examples of how to calculate machine specific shop rates. h t t p : / / w w w . m i e - s o l u t i o n s . c o m / m i e / h t t p : / / w w w . m i e - s o l u t i o n s . c o m / m i e / i n d e x . p h p / M I E - Q u o t e I t / 62 Calculating Shop Rates Using The Income Statement We are going to spend the next few posts reviewing what an income sheet is and how the income sheet will help you determine you shop rates. From Wikipedia the definition of income statement is Income statement, also called profit and loss statement (P&L) and Statement of Operations, is a companys financial statement that indicates how the revenue (money received from the sale of products and services before expenses are taken out, also known as the top line) is transformed into the net income (the result after all revenues and expenses have been accounted for, also known as the bottom line). The purpose of the income statement is to show managers and investors whether the company made or lost money during the period being reported. An income statement is the primary source of information which enables you to calculate your overhead absorption rates. Overheads are the total cost of all indirect materials, indirect labour and indirect expenses. All expenses that you cannot attribute directly to the manufacturing of a product or service are included in overheads. Here are some common items and definitions of those items on the income statement. These items would not be used in the overhead absorption calculation 63 Net Sales: amount of money made from the goods or the services that you sold. This is what you were physically paid. It is the price of the sale minus any discounts that you gave out and minus the value of any goods returned or services that were not needed. Cost of Goods Sold or Cost of Sales: amount of money it took you to be able to have the goods or services ready. Includes things such as materials and labor costs incurred to make the product or labor that supplied the service. You may have a cost related to a service as well as a good. Overhead is also included in here. Gross Margin: a calculation area on the income statement. The value is Net sales Cost of sales. This shows how much money you receive compared to what it cost to made the good or service. The gross margin shows you how much money you have available to pay your expenses and still make a profit. Selling and Administrative Expenses: costs involved in getting the product or service ready to sell that are not directly related to the product itself. It includes salaries for people not directly involved with the making of the product or performance of the service, advertising, office expenses, etc. Research and development costs are usually included in this section. Selling and Administrative Expenses: costs involved in getting the product or service ready to sell that are not directly related to the product itself. It includes salaries for people not directly 64 involved with the making of the product or performance of the service, advertising, office expenses, etc. Research and development costs are usually included in this section. Operating Income: income from selling your product or service minus the cost to make the good or service directly, and minus costs associated with running the particular type of business. It can also be thought of as gross margin expenses incurred to operate your business. This reveals the amount your company has left over after paying its own costs to function as a business entity. Dividend and Interest Income: additional money that you receive from ownership and investments externally. Dividends are your portion of another companys earnings. Interest income is money that you make as a result of allowing someone else to borrow money from you. It is safety money in the event that your business is not profitable in one year. It allows a business to rely on sources outside of its self. Operating expenses: additional expenses incurred in carrying out the firms day to day activities, but not directly associated with production. Examples including payroll, sales commissions, employee benefits, taxes. These items would be used in the overhead absorption calculation 65 Depreciation and Amortization: subtraction from the value of asset because of wear over time. These are figured out based on the life of an asset or how much it is used. Employee benefits: those benefits directly associated with the employees performing activities out directly associated with production. Indirect Labor: employees performing maintenance, repairs, cleanup around the production area in order to create products. Utilities: would include gas, electrical, water associated with the production activities. Manufacturing Consumables: gases, rods, sandpaper and other materials directly related to production activities. Building Expenses: expenses including rent, lease payments, mortgage and other expenses. Insurance: insurance that is not included in direct employee expenses, i.e. insurance on machines. The next post will deal with how to break these expenses specific machines. Reference: Merrill Lynch. (2003). How to Read a Financial Report. h t t p : / / w w w . m i e - s o l u t i o n s . c o m / m i e / 66 h t t p : / / w w w . m i e - s o l u t i o n s . c o m / m i e / i n d e x . p h p / M I E - Q u o t e I t / 67 Introduction To Shop Rates Labor used to produce products and services purchased by customers. These man-hours are directly attributable to customer activity. Lab A few years ago before computers, excel spreadsheets and calculators most organization used a standard shop rate for any labor that was occuring during a process. Now that computers can easily calculate figures organizations have become much more accurate in trying to capture their true shop rates. For the next few weeks in this blog Im going to cover some of the details regarding shop rates and their affect on quoting and estimating. In order to make a profit when running a business, you will need to determine what fees to charge. The general way to determine the fees is to allocate the overhead cost to each machine on top of the actual labor costs. Many times shop labor rates are thought of as how much an hour can I charge to perform a task. This is basically true but shop rates can be broken down into many sub categories, i.e. setup rate, cycle time rate, direct labor rate, overhead absorption rate and others. I will begin by defining some terms that will be used. When quoting you need to know what your shop rates are and how to calculate them. The two basic shop rates you will need to determine are your Cost and Sell as hourly shop rates. You will also need to calculate this for every machine in your business because each machine may have different shop rates depending on costs and expenses required to run the machine. Lets not forget 68 there may be a different ship rate for both setup and cycle time. Each machine may have a different setup vs cycle time rate because of various factors like electricity or gas usage and consumables usage during the cycle time vs the setup time. You should think of this blog as an online cost estimating class or course where we are going to review all the different areas regarding cost estimating. Job cost estimating software will help you with these calculations and I highly recommend using MIE QuoteIt h t t p : / / w w w . m i e - s o l u t i o n s . c o m / m i e / h t t p : / / w w w . m i e - s o l u t i o n s . c o m / m i e / i n d e x . p h p / M I E - Q u o t e I t / 69 Calculating Cycle Time with Estimating Software Calculating the entire operation costs depends on both setup and cycle time. In order accurately estimate your costs to complete a job you must be as accurate as possible during the estimating process. If you spend too much time estimating you will be burning a lot of cycles which costs money. If you do not accurately estimate you are potentially losing jobs and or losing the job you one because it costs more to produce then you have estimated. Estimating setup and run time can be as simple or as complex as you desire. Now its time for the final formula to be realized which includes setup time and cycle time with all its details. The setup formula again is (Staging Time + Setup Time + Transit Time + Tear Down Time) The cycle time formula is (Handling Time * Run Time) *( Quantity To Be Produced)+(Inspection Time*Quantity Of Parts Inspected) The operation formula becomes (Staging Time + Setup Time + Transit Time + Tear Down Time) + (Handling Time * Run Time) *( Quantity To Be Produced)+(Inspection Time*Quantity Of Parts Inspected) 70 Cost estimating using good estimating software tools makes producing accurate quotes much simpler. The formula given is only the first step in learning how to estimate. I will talk about shop rates starting with my next blog. Shop rates are critical part of an estimate because you may accurately estimate the time it takes, but if you do not have a handle on your shop rates you will not be profitable. h t t p : / / w w w . m i e - s o l u t i o n s . c o m / m i e / i n d e x . p h p / M I E - Q u o t e I t / h t t p : / / w w w . m i e - s o l u t i o n s . c o m / m i e / The mission of MIE Solutions is to apply advanced technology to improve manufacturing productivity and quality in the field of fabrication. At MIE Solutions, we do not compromise product quality or service. We strive to satisfy our customers every reasonable requirement with speed, courtesy and honesty. Our pricing reflects the cost of providing high quality products and excellent service but remains fair. Our goal is to be known throughout the world for the development and production of innovative products. We endeavor to be regarded as the leading supplier of high technology in the sheet metal fabrication. We want our customers to be proud to own MIE products. 71 Price Quote Software Handles Inspection Job shop estimating is not the most complex job in the job shop, but it does have a lot of little details which should be dealt with during the estimating process. Inspection is a category of the cycle time which is not normally considered during the quoting process. I mentioned earlier that the following formula which is normally used for machine time quoting which is for sheet metal, machine manufacturing, assembly and pretty much any other process. Cycle Time Per Piece (Handling Time / Quantity Manufactured Per Handling Time) + Run Time) One piece of information that is missing from this formula is how to handle inspection time. Inspection time can be included on the estimate in a variety of ways. 1. Inspection time could be included in the run time because the employee may be able to actually inspect the parts being manufactured as the machine is running. In the machining and sheet metal type of machinery this would work for lasers, turning machines, mills and lathes. These machines usually do not require 100% dedication of the employee as they watch the part being processed by the machine. 2. Inspection time could be included as part of G&A overhead. There could be a basic markup that is added to the quote to handle inspection time. 3. Inspection time can be a separate operation. In this situation while the inspection operation is being performed it does not allow more parts to be produced until the inspection operation is complete. An example in the sheet metal and machining 72 organization would be first articles. First article inspections are required before the production run could be started. This ensures that the parts are made accurately. 4. Inspection can also be done during the actual production run for SPC. Estimating software for industries such as metal quoting, machine shop quoting, sheet metal quoting, stamping need to be able to handle these different situations. If these different situations. If these scenarios are handled by your estimating software you will be able to manage any time of quote that requires inspection. My next blog will give the formula that can be used to handle these four situations. MIE QuoteIt handles this complex cycle time calculation by allowing the creation of user defined formulas. http://www.mie-solutions.com/mie/index.php/MIE-QuoteIt/ http://www.mie-solutions.com/mie/ The mission of MIE Solutions is to apply advanced technology to improve manufacturing productivity and quality in the field of fabrication. At MIE Solutions, we do not compromise product quality or service. We strive to satisfy our customers every reasonable requirement with speed, courtesy and honesty. Our pricing reflects the cost of providing high quality products and excellent service but remains fair. Our goal is to be known throughout the world for the development and production of innovative products. We endeavor to be regarded as the leading supplier of high technology in the sheet metal fabrication. We want our customers to be proud to own MIE products. 73 Job shop estimating is not the most complex job in the job shop, but it does have a lot of little details which should be dealt with during the estimating process. Inspection is a category of the cycle time which is not normally considered during the quoting process. I mentioned earlier that the following formula which is normally used for machine time quoting which is for sheet metal, machine manufacturing, assembly and pretty much any other process. Cycle Time Per Piece (Handling Time / Quantity Manufactured Per Handling Time) + Run Time) One piece of information that is missing from this formula is how to handle inspection time. Inspection time can be included on the estimate in a variety of ways. 1. Inspection time could be included in the run time because the employee may be able to actually inspect the parts being manufactured as the machine is running. In the machining and sheet metal type of machinery this would work for lasers, turning machines, mills and lathes. These machines usually do not require 100% dedication of the employee as they watch the part being processed by the machine. 2. Inspection time could be included as part of G&A overhead. There could be a basic markup that is added to the quote to handle inspection time. 74 3. Inspection time can be a separate operation. In this situation while the inspection operation is being performed it does not allow more parts to be produced until the inspection operation is complete. An example in the sheet metal and machining organization would be first articles. First article inspections are required before the production run could be started. This ensures that the parts are made accurately. 4. Inspection can also be done during the actual production run for SPC. Estimating software for industries such as metal quoting, machine shop quoting, sheet metal quoting, stamping need to be able to handle these different situations. If these different situations. If these scenarios are handled by your estimating software you will be able to manage any time of quote that requires inspection. My next blog will give the formula that can be used to handle these four situations. MIE QuoteIt handles this complex cycle time calculation by allowing the creation of user defined formulas. Download the free trial of the software at the following url. http://www.mie-solutions.com/mie/index.php/MIE-QuoteIt/ http://www.mie-solutions.com/mie/ The mission of MIE Solutions is to apply advanced technology to improve manufacturing productivity and quality in the field of 75 fabrication. At MIE Solutions, we do not compromise product quality or service. We strive to satisfy our customers every reasonable requirement with speed, courtesy and honesty. Our pricing reflects the cost of providing high quality products and excellent service but remains fair. Our goal is to be known throughout the world for the development and production of innovative products. We endeavor to be regarded as the leading supplier of high technology in the sheet metal fabrication. We want our customers to be proud to own MIE products. 76 How To Estimate Handling Time Shop estimating is pretty complex and shop estimating software needs to be handle all types of scenarios. One of those situations is handling time calculations. Handling time is defined as the time it takes during the cycle time phase of production to move the material in place to begin a step and the time to remove the material at the end of the step. The basic formula for estimating an operations cost is Cycle Time Per Piece (Handling Time + Run Time) Under many situations there is a one-to-one relationship between the run time and the handling time. Examples Lets say you are fabricating 1000 widgets. Each widget must go through the step of forming, which is basically bending the material. If it takes an employee 30 seconds to form each widget, the estimated run time would be 30 seconds per piece. The handling time is in direct correlation to the run time because you are forming a single widget at a time. In this situation you include the handling time into the run time or keep it separate for more accurate reporting. 77 Now lets assume that widget A is very large and it takes a forklift to move each piece into the forming machine. In this situation the run time may be 30 seconds because that is the time it takes to form widget A once its in the machine. The difference is the handling time is much larger because it may take 5 minutes to setup and remove widget A from the machine. Separating the handling time and run time out in this situation becomes a bit more valuable because the handling time is takes such a large portion of the actual cycle time. Last example is you are having widget A that needs to be cut on a laser. A laser machine in my example is a machine where you put a sheet of raw material onto it which then the laser can cut out 1 or more widget As on a single sheet. Lets say to cut widget A the run time is 3 minutes per part. Each widget A takes the same amount of time to cut but in this situation is the handling time is not one to one with each widget A. The reason for this is the laser cuts multiple pieces of parts out of a single sheet. The handling time is actually the time it takes to load the sheet into the machine and then the time to remove the widgets from the sheet and machine when the widgets have been cut. Handling time is actually the time it takes to load the sheet divided by the number of parts a sheet makes. The new cycle time formula is Cycle Time Per Piece ((Handling Time / Quantity Manufactured Per Handling Time) + Run Time) 78 Estimating your cycle times is a critical area for any manufacturer to be profitable. Cost estimating MIE Solutions provides software to help you do this calculations as efficiently as possible through their MRP and ERP systems quoting package. Machine shops and sheet metal shops use these types of forumulas every day to improve their estimating and quoting process. h t t p : / / w w w . m i e - s o l u t i o n s . c o m / m i e / i n d e x . p h p / M I E - Q u o t e I t / h t t p : / / w w w . m i e - s o l u t i o n s . c o m / m i e / 79 Manufacturing Estimating Cycle Time One of the most difficult aspects of estimating is figuring out what the cycle time may be for a process. There are many factors which affect the cycle time which are not fixed including skill level of the person running the machine, reliability of the machine, maintenance of the machine, inspection of the parts being run, the quality of the material and others. In future discussions we will go over these different aspects of estimating but right now we are discussing at the high level, what is cycle time? Cycle time is defined as the handling time + run time. Handling time is the time spent as the operator loads and unloads the part being manufactured from the machine. Run time is the time the operator spends at the machine running the part or the time the machine is running by itself, i.e. a cnc machine. Some operations require the operator to be present during the running of the part and others do not. The basic formula for estimating an operations cost is Cycle Time Per Piece (Handling Time + Run Time) Total Estimating Operation Time Setup Time + Cycle Time 80 or (Staging Time + Setup Time + Transit Time + Tear Down Time) + (Handling Time * Run Time) * Quantity To Be Produced Estimating your cycle times is a critical area for any manufacturer to be profitable. Cost estimating MIE Solutions provides software to help you do this calculations as efficiently as possible through their MRP/ERP systems quoting package. h t t p : / / w w w . m i e - s o l u t i o n s . c o m / m i e / i n d e x . p h p / M I E - Q u o t e I t / h t t p : / / w w w . m i e - s o l u t i o n s . c o m / m i e / 81 Quoting Dependencies Between Operations I talked previously about job cost estimating setup time. The four areas that were spoken about where staging time, setup time, transit time and tear down time. Each one of these 4 processes actually would add costs to an estimate. Lag time does not add costs to an actual estimate under most circumstances. When there are dependencies between operations, delays in handling, transportation, transmission or thinking time, etc. between operation steps we refer to this as lag time. Lag time does not usually add costs to a operation step because there is no activity actually being performed except for taking up space on the manufacturing shop floor. If there were large lag times you may consider putting a dollar value on the floor space but this may be overkill during the quoting and estimating process. On the other hand lag time is a critical factor during scheduling of a job shop. This lag time is critical in ERP/MRP systems in order to properly handle dependencies between operation steps. The objective is to minimize the time a job is sitting idle with no work being performed. Reducing cycle time by decreasing the queue time between manufacturing steps is a basic principle of lean manufacturing to reduce work in process inventory. Quoting and Estimating is not an area where lag time is usually considered because there are direct costs that could be attributed. As prepare your estimate keep in mind lag time because it will be used in scheduling the job shop. 82 MIE Solutions products including MIE QuoteIt and MIE Trak both can help a job shops quoting and estimating process more accurate. h t t p : / / w w w . m i e - s o l u t i o n s . c o m / m i e / i n d e x . p h p / M I E - Q u o t e I t / h t t p : / / w w w . m i e - s o l u t i o n s . c o m / m i e / 83 What is Setup Time? In order to begin a detailed look into quoting and estimating Im going to start by giving some definitions. Setup Time Setup time is the time it takes to make the first accepted piece which includes bringing all the tools, jigs and fixtures, setup those jigs and fixtures for a particular batch quantity. Operation run time or cycle time, is the time spent to complete each unit through the machine. Setup time can be simple or complex and it really depends on the process being performed. Setup time is usually independent of the actual run time because once a machine is setup it can be continually run without setting the machine up a second time. Setup time can actually be broken down into a few categories. Staging Time The time required to gather materials, dies or any other equipment required to get the machine running. Staging can potentially be performed during the running of another job through the machine because it may not actually require the machine to be available. A simple definition is time spent on a machine or process prior to a manufacturing run. Setup Time 84 The time required to bring this production batch quantity to an actionable state. Transit Time Transit time is the time to move a particular batch quantity to another step in the process. Tear Down Time The time required to remove all the equipment that was required to be setup on the machine making it ready for the next process. A job may continue to the next operation during the tear down time because this time does not affect the actual job, only the machine. A simple definition is the time to take down a machine or process after a manufacturing run. Quoting and ERP packages should provide the capability for these setup time variations in order to allow your estimating , costing and even scheduling to be as accurate as possible. h t t p : / / w w w . m i e - s o l u t i o n s . c o m / m i e / i n d e x . p h p / M I E - Q u o t e I t / h t t p : / / w w w . m i e - s o l u t i o n s . c o m / m i e / 85 Estimating Welcome to the MIE Solutions blog about Job Shop Quoting and Estimating This is the beginning of a blog for all job shop estimators to provide information and feedback about how to estimate job shop jobs in the made to order job shop environments. A little background of myself. As a child in Junior High School I found a passion for the early computer systems, which would drive much of his future work. I created and sold his first computer program, Arrow Data Systems, which was an early CAD/CAM system for the Apple 2e Computer. In the late 1980s after seeing my father (a sheet metal manufacturer) come home many nights estimating, I saw an opportunity to optimize his effort through computer technology. Shortly thereafter the FabriTRAK Production Control package was developed. The Quote It! estimating package was developed out of the FabriTRAK system to become one of the leading sheet metal estimating packages in the world. I have been to and consulted 100s of companies in the best way to use computer software technology to streamline and make the process of quoting more accurate. Im looking for feedback as we discuss the estimation process in order for all readers to improve their estimating, which in turn, improves your win rate and profitability. 86 When an RFQ or RFP is received you begin the process of estimating. You can estimate and quote the job using paper and pencil, a spreadsheet or estimating software. In this very competitive market I suggest using estimating software in order to be most competitive and I will discuss and hopefully get feedback on ways the software should work to best satisfy the made to order manufacturer. h t t p : / / w w w . m i e - s o l u t i o n s . c o m / m i e / i n d e x . p h p / M I E - Q u o t e I t / h t t p : / / w w w . m i e - s o l u t i o n s . c o m / m i e /