We recently toured the facilities of a rather small, but technically sound manufacturing firm in Northwest Ohio. This client we have worked with for many years and they have decent costing information given the size of their business. In the past, this manufacturer has benefited significantly from updating and maintaining their costing records. This allows the organization to be current and relevant to what is occurring on the shop floor, as well as with changes in the marketplace. The owner-manager is an experienced businessman who was previously employed at a much larger organization. His experience has helped him recognize the value and importance of investing capital in order to have accurate cost information.
The owner described to us that in the past it was somewhat impossible for one operator to manage two machines due to the layout of the plant and the machinery. The physical location of the machinery and raw materials had been changed to improve operating efficiency. As a result, it is now possible for one operator to run three machines.
The change in operators required, however, is not a hard and fast rule. The number depends on the types of jobs that are running, the experience of the operator, the availability of other supporting help, and the availability of factory supervision. The standard crew size is not consistent under today’s operations to refine the costing model to reflect one operator observing three machines. This leaves the owner-manager in a quandary regarding proper costs.
As we walked through the shop floor, it was apparent that there were efficiencies being realized by the reduced crew sizes. Nonetheless, as a machine controlled environment, a good part of the cost associated with the operations has less to do with labor and more to do with the cost of capital. The cost of capital includes maintaining and operating the equipment that is necessary to complete the manufacturing process.
The more important question involves the timing of a cost revision. Should a revision be done now with a re-cost all of the products using one operator and three machines? As we initiated this discussion, the owner-manager assumed his machine rates would be cut by a third when he went from one operator, two machines to one operator, three machines. However, as we delved deeper into the conversation, it became apparent that the only real efficiency gained was the spread of the labor cost into three categories, instead of two as done in the past. The other significant portion of the machine rates would not change at all because it was associated with the cost of operating the machines.
Although this is an ongoing discussion, we decided to leave things the same and as consistency increases related to the use of one more machine per operator, we will reconsider. Once this point it reached, we will cost all of the products and reset the quoting rates with the greater division of the direct labor component of these machine rates. To do so now, when many of the jobs are not operated, one man three machines would underestimate the cost of the product and overstate the profitability. Since this is not occurring all of the time, we would risk undercutting ourselves if we changed the rates now.
