cost justification - map your show...approach to machine cost justification: 1. the power of...
TRANSCRIPT
Cost Justification
Tom Clark INDEX CorporationPresident and CEO
September 12, 2018
Who I Am
Tom Clark
President & CEO, INDEX37 years of experience in the machine tool industry for both a Japanese Milling/EDM company and a German Precision Turning Company
My experience is in helping companies implement new, innovative production solutions to meet aggressive cost, quality and throughput goals
Three Common Oversights
As machine tools have evolved, the purchasing process hasn’t kept up
There are three areas frequently overlooked with the traditional approach to machine cost justification:
1. The power of done-in-one
2. Productivity’s impact on profitability
3. The impact of advanced technology
The Power of Done in One
A Complete Part in a Single Setup
Advanced machines incorporate diverse processes to fully produce parts in a single setup, streamlining workflow and improving accuracy
Many manufacturers overlook the full benefits when performing a cost analysis during their purchasing process
A Complete Part in a Single Setup
Can a significantly more expensive machine, with advanced capability provide a lower part cost and a better return on investment?
A Simple Case Study
Part: Connector housing
Material: 6061 aluminum
Dimensions: Ø2.00" x 0.75"
Qty: 10,000 pieces
Two Options for Production
• Option #1
• One 2-axis lathe with manual loading (Operation 10 and 20)
• One 4-axis mill with manual loading (Operation 30)
• Option #2
• One bar fed 9-axis lathe with 3 turrets & 2 Y axes
• All speeds, feeds and tooling are the same on both options
• Both options require a single operator
Some Assumptions
• Shop machine rate is $50/hour
• Employee rate is $30/hour
• Shop runs 1 shift/day (7 hours run time after breaks & lunch)
• Shop runs 52 weeks/year (260 days)
• Scrap rate is 3%/setup
• Programs are completed offline and are good
• Setup times are 5 minutes per tool per machine
• All machines are bought with cash must be paid off in one year
Option #1
• Operation 10 (2-axis lathe)• Finish turn OD features with 9 tools
• Load/unload time of 10 seconds each
• Approximate cycle time of 120 seconds
• Operation 20 (2-axis lathe)• Finish turn ID features with 9 tools
• Load/unload time of 10 seconds each
• Approximate cycle time of 130 seconds
• Operation 30 (4-axis mill)• Mill remaining features with 6 tools
• Load/unload time of 10 seconds each
• Approximate cycle time of 150 seconds
Option #1
2-axis lathe: $80,000
4-axis mill: $100,000
Total machine cost: $180,000
$180,000/52 weeks/40 hours per week = $86.50 hourly machine cost
Time to run 10,900 parts: 72,667 minutes
Time to setup 3 machines: 120 minutes
Total time required: 72,787 minutes (1,214 hours)
1,214 hours/7 hours per day = 174 days of run time to produce 10,900 parts
Option #1
174 days x 8 hours = 1,392 hours total run time
Machine cost – 1,392 hours x $86.50/hour: $120,408
Labor cost – 1,392 hours x $30/hour: $41,760
Shop rate cost – 1,392 hours x $50/hour: $69,600
Total cost $231,768
Cost per piece = $23.18
Option #2
• Operation 10 (9-axis lathe with 3 turrets & 2 Y axes)• Finish turn and mill all features
• 24 tools required
• Approximate cycle time of 125 seconds
Option #2
Machine cost: $600,000
$600,000/52 weeks/40 hours per week = $288.50 hourly machine cost
Time to run 10,900 parts: 21,458 minutes
Time to setup machine: 120 minutes
Total time required: 21,578 minutes (360 hours)
360 hours/7 hours per day = 52 days of run time to produce 10,300 parts
Option #2
52 days x 8 hours = 416 hours total run time
Machine cost – 416 hours x $288.50/hour: $120,016
Labor cost – 416 hours x $30/hour: $12,480
Shop rate cost – 416 hours x $50/hour: $20,800
Total cost $153,296
Cost per piece = $15.33
The Results
2-Machine Option 1-Machine Option
Run Time 174 days 52 days
Cost per part $23.18 $15.33
Amount of year required 56% 20%
And That’s Not Even Touching On…
• Improved part accuracy by eliminating transfer between operations
• Eliminated work in process through your facility
• Simplicity of scheduling one machine instead of multiple machines
In short, you’re making better parts faster and for less money
Video 1
Productivity’s Impact on Profitability
Throughput is Key
Increasing throughput on a machine will do more to impact your profitability than:
• A reduced purchase price
• Lower labor requirements
• Improved tool life
• Savings on power
• Reduced maintenance expenses
A Year in the Life of a Machine
Revenue $280,000 40,000 parts @ $7/part
Machine Payments $104,321 $600,000 machine financed at 5.75%
Labor $65,000 $65/hour labor rate, 50% labor requirement
Perishable Tooling $60,000 $1.50/part
Maintenance $20,000
Utilities $3,000
Profit $27,679
At a 50% Lower Purchase Price
Revenue $280,000 40,000 parts @ $7/part
Machine Payments $52,160 $300,000 machine financed at 5.75%
Labor $65,000 $65/hour labor rate, 50% labor requirement
Perishable Tooling $60,000 $1.50/part
Maintenance $20,000
Utilities $3,000
Profit $79,840
With 50% Less Labor
Revenue $280,000 40,000 parts @ $7/part
Machine Payments $104,321 $600,000 machine financed at 5.75%
Labor $32,500 $65/hour labor rate, 25% labor requirement
Perishable Tooling $60,000 $1.50/part
Maintenance $20,000
Utilities $3,000
Profit $60,179
With 50% Lower Tool Cost
Revenue $280,000 40,000 parts @ $7/part
Machine Payments $104,321 $600,000 machine financed at 5.75%
Labor $65,000 $65/hour labor rate, 50% labor requirement
Perishable Tooling $30,000 $0.75/part
Maintenance $20,000
Utilities $3,000
Profit $57,679
With 50% Higher Throughput
Revenue $420,000 60,000 parts @ $7/part
Machine Payments $104,321 $600,000 machine financed at 5.75%
Labor $65,000 $65/hour labor rate, 50% labor requirement
Perishable Tooling $60,000 $1.50/part
Maintenance $20,000
Utilities $3,000
Profit $137,679
Comparing the Effects
Action Resulting Revenue
Default $27,679
50% lower machine price $79,840
50% less labor $60,179
50% lower tooling cost $57,679
50% less maintenance cost $37,679
50% lower power cost $29,179
50% throughput increase $137,679
Paying More for Higher Throughput
Revenue $420,000 60,000 parts @ $7/part
Machine Payments $208,642 $1,200,000 machine financed at 5.75%
Labor $65,000 $65/hour labor rate, 50% labor requirement
Perishable Tooling $60,000 $1.50/part
Maintenance $20,000
Utilities $3,000
Profit $33,358 +21% compared to original scenario
The Value of Productivity
If paying twice as much for a machine for a 50% increase to throughput increases net profit by 21%, what does this say about the premium you should be willing to pay for:
• A machine with faster cutting speeds
• A machine with higher utilization rates
• A machine able to run when your shop is closed
Video 2
The Impact of Advanced Technology
Evaluating Your Growth Strategy
When you win new business that requires an investment, how do you proceed?
• Purchase just enough technology to effectively complete the work
• Invest in a solution that completes the work in the most efficient manner and provides capacity and capability for future growth
The Pitfall of Incremental Investment
Shops avoid investing in advanced machine because they prefer a larger number of small expenditures to fewer large ones.
• We want to match growth in expenditures to growth in sales
• It would be a waste to pay for the extra capacity before we need it
• What if we lose work?
First of All…
If you’re making investment decisions based on the assumption you’re going to lose work, you probably need to question your business model.
Develop a growth plan you’re confident in and take the steps needed to make it a reality.
A shop at full capacity received an order for 200k parts annually. There were two investment options to complete the work:
A Real World Example
• Purchase 4 Swiss-type machines and produce 50k on each - $1.2 million ($300k/machine)
• Purchase a multi-spindle machine that could produce 300k - $1.8 million
A Real World Example
Additional details:
• Both types of machine require 1 operator per 2 machines at $60k/year per operator
• Assume tooling costs are similar
• $2/part revenue after tooling & material
• All machine purchases are financed over 7 years at 5.75%
The Swiss Option at 5% GrowthYear Revenue Machines M-Cost Operators O-Cost Profit
1 $400,000 4 $208,800 2 $120,000 $71,200
2 $420,000 5 $261,000 3 $180,000 ($21,000)
3 $441,000 5 $261,000 3 $180,000 $0
4 $463,050 5 $261,000 3 $180,000 $22,050
5 $486,203 5 $261,000 3 $180,000 $45,203
6 $510,513 6 $313,200 3 $180,000 $17,313
7 $536,038 6 $313,200 3 $180,000 $42,838
8 $562,840 6 $104,400 3 $180,000 $278,440
9 $590,982 6 $52,200 3 $180,000 $358,782
10 $620,531 7 $104,400 4 $240,000 $276,131
TOTALS $5,031,157 $2,140,200 $1,800,000 $1,090,957
Year Revenue Machines M-Cost Operators O-Cost Profit
1 $400,000 1 $312,000 1 $60,000 $28,000
2 $420,000 1 $312,000 1 $60,000 $48,000
3 $441,000 1 $312,000 1 $60,000 $69,000
4 $463,050 1 $312,000 1 $60,000 $91,050
5 $486,203 1 $312,000 1 $60,000 $114,203
6 $510,513 1 $312,000 1 $60,000 $138,513
7 $536,038 1 $312,000 1 $60,000 $164,038
8 $562,840 1 $0 1 $60,000 $502,840
9 $590,982 1 $0 1 $60,000 $530,982
10 $620,531 2 $312,000 1 $60,000 $248,531
TOTALS $5,031,157 $2,496,000 $600,000 $1,935,157
The Multi Option at 5% Growth
Swiss vs Multi at 5% GrowthYear Swiss Profits Multi Profits
1 $71,200 $28,000
2 ($21,000) $48,000
3 $0 $69,000
4 $22,050 $91,050
5 $45,203 $114,203
6 $17,313 $138,513
7 $42,838 $164,038
8 $278,440 $502,840
9 $358,782 $530,982
10 $276,131 $248,531
TOTALS $1,090,957 $1,935,157 77% Higher!
Year Swiss Profits Multi Profits
1 $71,200 $28,000
2 ($1,000) $68,000
3 $43,000 $112,000
4 $39,200 $160,400
5 $92,440 $213,640
6 $38,804 ($39,796)
7 $51,024 $24,624
8 $330,687 $407,487
9 $348,636 $485,436
10 $382,179 $571,179
TOTALS $1,396,170 $2,030,970
Swiss vs Multi at 10% Growth
56% Higher!
Year Swiss Profits Multi Profits
1 $71,200 $28,000
2 $39,000 $108,000
3 $82,800 $204,000
4 $85,800 $7,200
5 $59,640 $145,440
6 $173,328 $311,328
7 $207,994 $510,394
8 $379,072 $689,272
9 $501,327 $975,927
10 $620,912 $1,007,912
TOTALS $2,221,073 $3,987,473
Swiss vs Multi at 20% Growth
80% Higher!
Accounting for Unpredictability
Realistically it is not possible to maintain a steady growth rate for 10 straight years, so what if we:
• Randomly assigned a growth rate of -10% to 20% for each year
• Automatically reduced labor costs if a worker becomes redundant due to reduced demand
• Iterated the model with 100 sets of randomized growth rates
Simulation Results
• $3,912,928 – lowest simulated revenue
• $7,514,468 – highest simulated revenue
• $1,011,113 – average simulated profit with Swiss
• $1,713,668 – highest simulated profit with Swiss
• $1,641,047 – average simulated profit with Multi’s
• $2,858,468 – highest simulated profit with Multi’s
Simulation Results
Multi-spindles provided higher profitability than Swiss machines in 96% of the simulated cases.
On average, simulated profitability was 66% higher with multi-spindles than with Swiss.
Multi-spindles more than doubled profitability in 18% of simulated cases.
In Conclusion
As you spend time here at IMTS evaluating the future of your operations, be sure to take into account:
• The power of done-in-one
• Productivity’s impact on profitability
• The impact of advanced technology
Questions?
Visit us in booth 338136!