quoting for manufacturing

Quoting, Estimatingand Scheduling For

Manufacturers

How To

MIE Solutions, Inc.

Quoting, Estimating and Scheduling ForManufacturers

How To

MIE Solutions, Inc.

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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 addedinto the product. There are many times materials required tomanufacturer 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 wherethe molds and castings would be included into the direct materialcosts because they specific for the product. When doing estimatesin this way you have the choice of amortizing the mold and castingcosts into the product or charge the customer separate as a onetime charge.

Other possible indirect material costs are nuts, bolts, screws orinexpensive items. Usually this would be added into the productcausing those materials to be direct costs but there are situationsdepending on the product being manufactured where these type ofitems would be indirect costs.

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Material Cost

Material cost is a big subject and will be handled in multiple blogentries. Material costs are costs that directly go into producing thedesired product. Material costs can be divided into both direct andindirect material costs. Direct costs are what we will be looking intobecause those costs are directly in the product.

Material can also be broken between raw materials which arecommodities 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 mayfluctuate daily is what we will deal with in the next few blogs entries.

Direct commodity material costs are those expenditures which canbe allocated directly to the cost of the specific product. Here is abasic 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 rawmaterial.

3. Total common materials, gauges and sizes to come up with totalrequirements

4. Sum all the weights with the requirements

5. Obtain supplier pricing

6. Total costs

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This is just a high level summary of calculating material costs. Wewill investigate calculating volumes, lengths and other type of rawmaterial calculations.

MIE Solutions provides software resources to help you manageyour direct and indirect costs throughout the product lifecycle fromquoting and estimating, job costing to invoicing.

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http://mie-solutions.com/mie/index.php/MIE-QuoteIt-Quoting-and-Estimating-Software/mie-quoteit.html




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Manufacturing Costs

Manufacturing costs consist of multiple elements which arrive at thefull cost. When estimating a product to be manufactured the entirecosts 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 itemslike nuts, bolts, screws. Raw material would be consideredcommodity items in which the costs may fluctuate widely.

Labor Costs – This includes the wages of the employee’s actuallymanufacturing the product.

Labor Overhead – This includes the overhead of the employee’swhich include benefits.

Machine Costs – This includes the costs of running the equipmentand 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 toread format so the manufacturer can operate profitable. Look foran ERP package like MIE Trak from MIE Solutions which is a ERPsoftware for manufacturers.

Please visit us at

http://www.mie-solutions.com

5

Direct and Indirect Costs

Fixed and Variable costs can now be broken down into two morecost types. Direct and Indirect costs classify the costs of partsbeing manufactured and are critical to calculating shop overheadrates. Direct costs are those costs that are directly associated withthe production of the product. Indirect costs are those costs whichdo not associate directly with the product being manufactured andcannot be determined for specific products.

Direct costs are attributed directly with the manufacturing of theproduct. For example, if a product is manufactured out of metal, themetal of the product are direct costs. The material used in theproduct being manufactured is specific for the given product and notshared among other products. Examples would include all bill ofmaterial used to make the product including items such as metal,wood, plastic, nuts, bolts, screws, paint, etc. Direct costs not onlyinclude the bill of material but also includes the direct labor of thecraftsman making the product. The direct labor costs and bill ofmaterial can be attributed directly to the manufacturing of theproduct.

Indirect costs on the other hand cannot be directly attributed to themanufacturing of the specific product. Examples of indirect costsare rent, electricity, office space. Employee’s not directly workingon manufacturing of products is also considered indirect becausethose employee’s are not specifically involved with the production ofthe specific product.

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In order to acquire a good estimate both direct and indirect costsshould be added into the cost of producing and manufacturing theproduct.

MIE Solutions provides software resources to help you manageyour direct and indirect costs throughout the product lifecycle fromquoting and estimating, job costing to invoicing.


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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 andvariable costs. Fixed costs are those cost that do not change basedon a quantity. That basically means the cost is fixed if you product1 or 1000 pieces. Some of these costs would be security, taxes,insurance and administration costs. These costs are called Fixedbecause they do not vary with the quantity being manufactured orthe level of production. Variable costs do vary based on quantityand level of production. Some examples of variable costs are directmaterial and direct labor costs.

There is a third category of fixed and variable costs which is oftenreferred to as mixed costs. Mixed costs are simple costs that arepart variable and part fixed. Example would be a heating oil or gas,there is a fixed amount that would be used regardless if themachines are running just to keep the building warm. The variablecosts would be the amount of oil consumed by the machine.

MIE Solutions provides a great solution to manage and organize allthe costs required including both fixed and variable costs.

Try this estimating software.






8

Job Costing Software

Job Costing has been around for many years to determine the costof manufacturing a given product. The process by which theexpenses are record is costing. Job costing software should makethe process of recording the transaction simpler and not moredifficult and time consuming. Job costing software is not like costaccounting because it does not incur the situation of debit-credittransactions. Job costing does use the same data to determineprofitability and to evaluate all the cost of manufacturing theproduct. Here are a few purposes which may help you determinethe 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 amanufactured item.

3. To determine the standard price of the product

4. To determine the selling price of a the product which wouldinclude 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 andthe 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

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be more cost effective to purchase some parts.

8. To compare the costs of manufacturing the item with differentprocesses.

Costing is an essential component to the manufacturing processesbecause without it you would be waiting until the end of the monthto see if you were profitable. Also, you would not know what jobswere profitable versus the losers.







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Cost Estimate Techniques

The basic cost estimate techniques involve analyzing the piecesthat make up a cost estimate. The first technique I would follow isto systematically go through the following steps and cost each oneout in detail. Once you have gone through the basic steps you willhave all the cost information required for the estimate.

1. Design Cost – This is step is skipped if you are manufacturingsomething for a customer and its already designed. Still thecustomer may want some help in the design area.

2. Engineering – This step is to engineer how the product will bemade. This could be exploding out the model into its componentpieces, programming the CNC machines including turret, mill, laserand waterjets. Costs hear may include the drafting costs.

3. Research and Development Costs – This step would entail itemssuch as research and development work, prototypes for thecustomer which is very much required when doing new products.

4. Material Costs – This step would be to create an entire explodedbill of material list with items, quantities and supplier costs. Thisstep can be automated using certain CAD systems which createexploded bills of materials. This information can be imported as anelectronic 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,

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a knowledgeable person on the machines used and time required ateach step is critical.

6. Quality Costs – This step would include all the quality itemsrequired to manufacturer the item. This would include things suchas SPC Inspection, regular inspection, scrap rate, first articles, etc.

7. Tooling Costs – This step goes well with the labor step where thelabor operation may require specific tools which need to bepurchased or made to manufacture or build the item.

8. Outsourced Services – This step is where you place the costswhich are outsourced to other suppliers. One example would bepainting if the paint process is not done in-house.

9. Overhead Costs – This is the last step but very critical. Overheadcosts include all costs which cannot be charged to the specificproduct but still is incurred.

MIE Solutions provides a great solution to manage and organize allthe costs required in this setup of cost estimating techniques.







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Purpose of Cost Estimating

There are numerous purposes behind cost estimating which includethose below and others

1. A manufacturer can determine if the project or product is costeffective to manufacturer prior to the manufacturing process.

2. There are various alternatives to manufacturing and costestimating can determine the economical feasibility ofmanufacturing the project or product by different methods

3. A manufacturer can determine the selling price beforemanufacturing begins. This may or may not be a good ideabecause the product still needs to be priced at a value theconsumer will purchase the item.

4. In software estimating packages like MIE QuoteIt you have theability to create different quotes based on different manufacturingprocedures. This also carries through when you decide to purchasethe item because its cheaper to purchase the item then tomanufacturer it in-house.

5. Production cost estimator can set standards for production. InERP software, once a job is received it can be scheduled. Thescheduling standards start at the estimating stage of production. The more accurate these estimates are the less effort has to bedone during production scheduling.

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6. In a production line the estimate can be used to plan theequipment required to manufacture and the what the capitalrequirements are.

7. Personal are a key factor and an estimate can determine thepersonal required to manufacture the item.

If the estimate is not accurate the above items as to the purpose ofthe cost estimate are not accurate. If all your estimate bill ofmaterials, labor, outsourcing and resource requirements are wrongyou will not be successful. Losing work to competitors is one thingbut losing money on the job is another issue which costs more thanyou would losing the job to a competitor.







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Estimating The Costs

An interesting situation when doing estimates is which estimates doyou spend time on and which estimates are too costly to put theeffort into. In a tough economy its almost always the case you try tomake something your company is not really able to make at areasonable profit, but you still want to get the job just to keep yourmachines busy. This is a valid assumption in some cases but itshould be looked at as a business direction and/or a case by casebasis.

Estimating the costs of estimates is critical because you do not want90% of your effort to quote the machining, sheet metal, tubing orany other type of job and only get 10% of those jobs. The otherfactor that is really important is your ROI (return on investment). Estimating is a “best” guess and you are competing against otherswho 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

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the bill of material requirements would be much greater andtherefore require more effort to accumulate those costs. Assemblycosts are the largest unknown portion because of unknown factors,employee performance which makes it very difficult to quoteaccurately.

I leave you with the thought that you should try to do a rough cutlook at the part before expending a lot of wasteful hours trying tocome up with a good estimate.

Download the MIE QuoteIt software, its free to try and MIESolutions will help you get up and running to improve your quotingand estimating process. MIE Solutions has thousands of users oftheir flagship estimating software which helps companies everydayestimate quicker and more accurate.







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Cost Estimate Types

There are different types of cost estimates including “RoughApproximation” 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 informationalpurposes only. This type of estimate may not have geometry oreven materials but just a rough idea of the product. This type ofestimate would be used if someone is asking for a price to make abuilding of a certain square size or a box, etc. A lot of times thiswould result in prices like $200 per square foot or $20 per pound. Some examples of rough cost estimating would be highway costsper mile, weight of the object for shipping or linear foot cost to buildcabinets. This type of estimate and quoting can be good for asoftware system designed with CRM and quick estimating featureswhere you would just type in costs.

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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

http://mie-solutions.com/mie/index.php/crm_quoting_estimating_software.html

http://mie-solutions.com/mie/index.php/crm_quoting_estimating_software.html

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approximate weight. You would take (Material * Weight * Price PerUnit Weight)*(Labor Factor). The labor factor would adjust the pricebased on passed experience or similar jobs. A CRM package witha good quoting system would be an ideal candidate for this type ofcost estimate.

Detailed Estimate or Quote

A detailed cost estimate is one that fully details out the exploded billof materials and labor. Each component of the bill of materials iscost individually in order to arrive and a very accurate cost. Thelabor is still a best guess in most situations but there are standardswhich may be followed to make the quote more accurate. Examplewould be quoting jobs which require multiple labor steps tocomplete. Even with automation, the labor step with is critical toquote accurately. The end result of a detailed estimate or quote is afully exploded bill of materials with labor which can be evaluated. The larger and more complex the work is the more critical it is tohave accurate quotes. The goal is to create accurate, timely andconsistent quotes. Using a software package like MIE QuoteIt willimprove accuracy, time and effort and consistency.

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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

http://mie-solutions.com/mie/index.php/MIE-QuoteIt-Quoting-and-Estimating-Software/product-mie-quoteit-pro.html



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quoting software instead of the old method of quoting in excel.

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http://www.mie-solutions.com/

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Profit Improvement and Cost Reduction Part 1

Talking about profit improvement and cost reduction we cannotleave out the importance of estimating accurately. There are a fewways to reach the goal of both profit improvement and costreduction.

• Increase your prices which improves profit, but only if that doesnot 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 materialcosts

Increasing your prices without your costs going higher is a greatway to increase your profit. This is the best way to improve yourprices except for the fact that there is something called“competition” which will not exactly work with you to increase yourprices. Increasing prices has another great benefit which is you donot 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

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the supplier to come back towards the end of the job and ask formore money because the estimate was too low. This type ofsituation happens but should not happen if a good estimatingprocess is implemented in the business.

Improving the product mix is another way to create profitimprovements. The motivation here is you have covered some ofyour fixed overhead costs already and adding some new productswhich fit your area of expertise can increase sales withoutincreasing overhead costs too much.

Reducing costs is sometimes the easiest way to improve yourprofitability. There are many business processes which can beimproved in most organizations to reduce costs. For example, ifestimating is being done manually through paper and pencil or evena spreadsheet, moving to a software estimating and quotingpackage designed specifically for your situation can reduce yourcosts considerably. One example is when you can actually haveone person do between 3000 and 5000 a year. This is a lot ofestimates that are done accurately and done by a single person. Ifthis was done by 5 persons you could see the cost savingsimmediately.

MIE QuoteIt from MIE Solutions offers free quoting software for stepby step quoting. The quoting software is very user friendly andoffers customization of operations, materials, formulas and eventable lookups. Please visit our website and take a tour of the freequoting software instead of the old method of quoting in excel.



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Cost Estimating Versus Cost Accounting

What is the difference between cost estimating and costaccounting?

Cost estimating is a precursor to cost accounting because it done atthe beginning of the process. Lets define cost estimating as theestimation of the cost of a goods or services prior to the actualproduction of the goods or services. Cost estimating is used in boththe production of goods and services to perform a specified action.

Cost accounting or costing is different then cost estimating becauseits an analysis of the costs to actually product the goods or services. Cost accounting is done after the production while the costestimating 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 theexact cost estimate, the estimator is performing a best guess basedon previous knowledge. Cost estimating is a prediction while costaccounting is actually what expenses where where incurred duringthe production process.

Cost estimating is a complex process and requires a person whounderstands 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

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Operational steps required to produce the product or services

Machine and Labor costs involved

Visually be able to understand all the areas of manufacturing fromthe requirements



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Estimating is more than Setup and Run Time Part 2

In the not to distant past many manufacturing processes were verylabor intensive. In countries such as China and India there is still agreat deal of manual labor intensive manufacturing. I remember asa child I worked in my Father’s sheet metal shop and the machine ofchoice was a Strippit 30/30. I have seen many of these machinesand they are still in use today and very reliable. One day thecompany purchased a Diacro VT-19 and it was a dream. Thismachine was able to be loaded with multiple tools unlike the 30/30where it was a one tool machine. The Diacro VT-19 was still amanual process machine but the great thing about the machine youcan create the entire part without removing the material. The 30/30was setup to punch 1 or more holes only if they were lined up andused the same tooling. Todays NC machines hold vastly moretools and also are automated where there is no manual interventionduring the run cycle.

Why should I mention this?

Estimating has changed and each of the three machines whichmake the ”same” part have different setup times. Needless to sayyou should use the best machine for the job.

Strippit 30/30

The Strippit 30/30 was setup by putting in a single punch, settingthe x and y stops. For each hole different hole these three stepshad to take place. The formula to estimate the setup time would be

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(Number Of Tool Changes)*(Time Per Tool Change) + (Number Of X Stop Changes) * (Time Per X Stop Change) + (Number of Y StopChanges)*(Time Per Y Stop Change)

This is a lot of effort and can be improved by automating themachine but these machines are still in use. The above formulawork and give you a reasonable accurate estimate. I’m currentlyignoring 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 whichwould be used to guide the material to the correct location so thepunch could put the whole in the correct spot. The formula toestimate 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 themachine to eliminate setting up the template.

I’ll Continue next time on the Automated CNC Machine and Laser,Waterjet or Plasma machines


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Estimating is more than Setup and Run Time Part 1

Many estimators put a lot of time into figuring out how to estimatesetup time. Setup time is a key component when doing estimatesfor basic operations like shearing, forming, laser, punch presss orany other operation which requires a setup process before aproduction run. Many estimators still think in $’s versus time whichwas the simple way to quote prior to computers becoming widespread. Setup time should be calculated as a time component andnot a dollar component. One of the biggest reasons for this is timewould only change if a machine became more automated versus $’scould change based on labor rate changing, overhead ratechanging, electricity prices rising, etc. Setup time can be as simpleas 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 besetup prior to the running of the job. The formula actually gets a bitmore complex if you are quoting based on multiple machines beingrun.

For example

10 identical machines. Each machine by itself takes 30 minutes tosetup and each machine could produce 10 parts per hour.

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If you are quoting 10 parts to be fabricated you would only want tosetup a single machine because a single machine can handle all theparts most efficiently. If you are quoting 25 parts, you can either runall the parts on 1 machine and therefore 1 setup time. This is ok butyou must also think of how long the parts will take to run. In thissituation the total time would be 3 hours and 30 minutes. You canalso setup 3 machines concurrently and the 25 parts would becompleted in 1 Hour and 30 minutes. There are trade-offs to thedecisions and no exact answer is right in all situations.

As you do your estimates make sure you think of the number ofmachines a job may be manufactured on simultaneously or you maybe leaving a lot of dollars on the table.



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Estimating Software Guide

There are many different type of software estimating package formade to order manufacturing Made to order manufacturing includesany custom job shop type work including sheet metal, machining,wood working, stamping, press work, printing which all requirecustomized quotes. Quotes include both operation and bill ofmaterial. Below you will find a checklist of items to look for whileyou are reviewing estimating software packages. ERP solutionproviders should provide as a minimum the items shown below inorder estimate most efficiently with the most accurate costingresults.

For more information please visit http://www.mie-solutions.com

MIE Solutions provides a set of products from quoting andestimating through full ERP solutions with document managent.

RFQ’s

Manage Request For Quotes (RFQ’s)

Request For Quote History

Request For Quote Workflow

PDF, Email Quote Letters To Buyer

Approval Workflow Process For Request ForQuotes

Quotes Multiple Quotes Per Item Master

Exploded Bill Tree On Screen

Multi-User

Handles Millions Of Quotes

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Handles Assemblies with 100000 Items

Compare Quotes

Compare Quotes

Combine Quotes To Create An Assembly

Merging Of Common Setups During AssemblyCalculations

Multiple Quantity Quotes Handling OptimizedBuild Quantity

Document Attachments

Multiple Reports

Operations Customized Operations

Operation Formulas

Operation Lookup Tables

Unique Rates Per Operation

Speed and Feed Tables

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 > 64Characters

Unlimited Length Comments

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Job Shop Quoting Labor Hours Accumulation

Labor time is very difficult to measure accurately when determiningmanufacturing time for a custom item. If you ask 10 people toestimate how long it will take to cut a piece of wood, pipe, etc youwould most likely find 10 different answers. It even gets moreextreme between the answers when there are large quantitiesinvolved or a large number of cuts involved. Another factor whichways heavily on the estimate is the experience of the person doingthe estimate. The person doing the estimate usually bases howthey calculate labor hours on how fast they think they could do thejob. The problem is different people perform the same tasks atdifferent speeds and this is very likely that no two people will do it atthe same speed.

One of the principles of effective labor estimating is the ability to usepast knowledge and standards such as averaging past jobperformance. Some think an opinion of a skilled technician ispreferred over complex methods but if there are detailed standardsavailable 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 ofmanufacturing process and engineering skills. We must haveaccurate estimates of labor hours to support scheduling andpromote 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

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is complex and estimators can’t say with certainty how long a jobmight take. Maintenance work isn’t assembly line work. Job timedepends on the actual condition of the equipment and the actualtechnician assigned. A estimator doesn’t always know exactly whatneeds to be done. The estimator doesn’t have perfect visionknowing exactly how many bolts need to be burned off. Theestimators doesn’t know the actual condition of the equipmentbefore dis-assembly. In addition, the person assigned to the jobmay or may not be a top technician. He or she might be theleast-skilled technician on the crew. Experience shows that the bestestimates are routinely off as much as 100 percent. A job estimatedto take five labor hours might take as many as 10 hours or as fewas two.

Some job shops instruct estimators to use industrial engineeringstandards for each tiny portion of a job. For example, estimatorsfigure how long each bolt should take to be removed times thenumber of bolts and then add how fast a typical person walks timesthe distance the job is from the shop. They add the job elementstogether for a total plan estimate. Not only does this type of estimatetake a long time, it’s not always very accurate or 100 percentcorrect. This method is more appropriate for estimating anassembly line task. The execution of an assembly line taskthousands of times in a week (or day) justifies the time spent on theestimate. Specific maintenance tasks are usually unique in theiractual conditions. There is free labor estimating software whichassists in estimating these labor costs.

Some estimators take strict averages of hours for previous executions of similar work. Some CMMS programs even average

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past work automatically. The problem with this approach is two-fold.First, execution of the work is, at best, an average. If technicianstook too long on past work, their performance carries into the futureestimate. The past performance also can include activities such astime associated with interrupting the work. Second, we want astandard, even if not an engineered one. We want to know how longthe job should take a qualified tech to perform, but we don’t want anestimate to include lesser-skilled technician efforts or unusual pastproblems.



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How To : Manufacturing Hourly Rate Calculation

Sheet metal, CNC shops, machine shops and many other job shopsprovide a valuable service to their customers. For a job shop to bea profitable business, the service rate should cover the cost of doingbusiness plus have a certain amount of margin or profit built into theprice customers pay. If this is too low, you will be gaining new workbut this will only last as long as you have money in the bank. Youbusiness will fail because the owner needs to earn an income. If theprice is too high, customers will choose a competitor. Some highlevel ways to calculate your hourly shop rate is shown below. Hourly rate calculations are not that complicated but should belooked at carefully in order to be a profitable company.

Equipment

1. Calculate the cost per hour of operation and include a markupfor maintenance hours in your calculation to determine a fullyburdened cost per machine hour. The formula is: (machinepurchase cost + expected lifetime maintenance cost) / expectedhours of operating life. You can choose to do this per machine oran average of all machines.

Labor

2. Develop an hourly shop rate: (total annual labor costs + taxes +benefits + paid time off) / (total annual hours worked – breaksand training time). This is your direct labor cost per hour.

http://www.ehow.com/facts_5026992_much-machine-shops-charge-services.html

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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 ormachine hours for the year. This will be your overhead cost perhour.

Markup

4. Here’s where the shop earns its keep. The owner’s income andfuture growth for the shop depends on this calculation workingwell. Simple calculation is markup = 1 + (owner’s salary +benefits + annual earnings goal) / annual service hours) /(machine + labor + overhead cost per hour). Converted to apercentage, for example, this will come to something like 120percent, basically adding 20 percent profit to the cost of doingbusiness.

Service Rate Calculation – Average Rate

5. Use this formula when your machine costs are fairly similar fromone piece of equipment to another: Average overall shop rate =(average machine cost per hour + labor and overhead cost perhour) x markup x total hours for the job.

http://www.ehow.com/facts_5026992_much-machine-shops-charge-services.html

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Service Rate Calculation – Machine-SpecificRate

6. Use this formula when cost of equipment varies greatly frompiece to piece and not all machines are used in each service.Rate = (specific machine(s) cost per hour + labor & overheadcost per hour) x markup x total hours for the job.

MIE Solutions offers a made to order job shop ERP systemdesigned for the manufacturer of goods and products. Mostaccounting systems are designed for the basic AR, AP and GL sideof financials where a manufacturing software product deals with theactual production of the goods and services. MIE Trak is a fullfeatured ERP system for the made to order and engineer to ordermanufacturer.


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What is Forward and Backward Scheduling

MIE Solutions offers a made to order job shop ERP systemdesigned for the manufacturer of goods and products. Mostaccounting systems are designed for the basic AR, AP and GL sideof financials where a manufacturing software product deals with theactual production of the goods and services. MIE Trak is a fullfeatured ERP system for the made to order and engineer to ordermanufacturer.

If your estimating system is inaccurate your production schedulingsoftware or manufacturing scheduling software will give you verypoor results. If the quality of your estimates are good then thestandard scheduling for a production scheduling software will bemore precise.

What is scheduling?

Scheduling is a method where there is a set of x tasks which needto be completed on a set of y resources in an efficient manner. Wikipedia gives us a good definition of scheduling “Companies usebackward and forward scheduling to allocate plant and machineryresources, plan human resources, plan production processes andpurchase 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 _ ( pr o d u c t i o n _ p r o c e s s e s )

What is forward scheduling?

http://en.wikipedia.org/wiki/Scheduling_%28production_processes%29

http://en.wikipedia.org/wiki/Scheduling_%28production_processes%29

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Forward scheduling is taking a job with a number of tasks andallocates those tasks to resources as early as possible whenresources the resources allow. The first available time that theresource is available to be used the task should make use of it. Aswith all scheduling methods there are pros and cons on how theywork. Forward scheduling may result in jobs being completedearlier then the requested due date because forward schedulingschedules the tasks as early as possible. Forward scheduling tellsyou when a job could be completed vs completing the job whenrequired.

What is backwards scheduling?

Backwards scheduling is taking a job with a number of tasks andallocates those tasks to resources in reverse orders and schedulesthe task on the resource. Backwards scheduling requires adelivery date from the customer because the system schedulesbackwards from the delivery date to arrive at a start date. Backward scheduling tells the manufacturer if this date could be hitbased on the allocation of resources. Unlike forward schedulingwhich schedules into the future, backward scheduling couldpotentially schedule into the past because the resources where notavailable to complete the job. Backwards scheduling then may turnaround and actually forward schedule the job to tell the customerthe earliest delivery time.

Scheduling is very complex and this blog will try to go over manyaspects of scheduling from types of scheduling, np completeproblems, how to allocate resources, defining resources, etc.

Some of the benefits of scheduling include :

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• Process change-over reduction

• Inventory reduction, leveling

• Reduced scheduling effort

• Increased production efficiency

• Labor load leveling

• Accurate delivery date quotes

• Real time information

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Introduction To Job Shop Scheduling

Welcome to the MIE Solutions Job Shop Scheduling blog. MIESolutions ERP system provides a comprehensive job shopscheduling software to deal with the many problems scheduling ajob shop encounters.

Scheduling has become a critical factor in many job shops in orderto determine their capacity for more work and be able to scheduletheir work more efficiently. Job shop scheduling becomes more andmore difficult when you deal with assemblies and/or multiplecomponents 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

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the scheduling application the system is given the whole problemdata from the beginning and is required to answer schedulingproblem given in an optimal way. Because an online schedulingsystem does not know the whole input, an online algorithm is forcedto make decisions that may later turn out not to be optimal, and thestudy of online algorithms has focused on the quality ofdecision-making that is possible in this setting.

References : http://en.wikipedia.org/wiki/Job_Shop_SchedulingAdvanced ERP Scheduling Software

http://www.mie-solutions.com/mie/

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Exploded Bill Of Materials

Estimating large projects requires an exploded bill of materials inorder to get a good understanding of the requirements. The largerthe project you have to estimate the more in depth the bill ofmaterials will be. If you are estimating you want to make sure allthe bills of materials are entered correctly into the estimate but alsoyou want to enter the bill of materials efficiently. Your estimatingsystem should allow you to enter a proper bill of materials in orderto allow creation of the requirements in order to calculateminimums, setups and quantity discounts properly.

If a bill of material list is available as shown below you can mergeitems together

Part Number Name Quantity

Widget A 16 GAGE CRS 48×120 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

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bill of material together to arrive at a quantity required which was 13and would now be 9 through nesting. Setup and minimums canalso be reduced by aggregating the bills of material together.

You can see how beneficial an exploded bom is for quoting andestimating. Job costing starts at the estimating and quoting areaand extends throughout the ERP package. Job cost estimatingsoftware can save you a lot of time, money and energy and helpyou to win new work.

Next we will be talking about an indented or exploded bill of materialwhich includes labor. Most bills of materials do not include a roll upof labor which can be very good for seeing an aggregated view ofthe labor required to manufacture the job.

MIE Solutions provides software products to make your businessprocess more efficient so please take a look at our product linebelow. MIE Trak and QuoteIt are two products which provide anefficient 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 hp / M I E - Q u o t e I t /


http://www.mie-solutions.com/mie/index.php/MIE-QuoteIt/


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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 tomanufacture 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. Whenyou are required to estimate the time to manufacture a finishedproduct you must take into account the bill of material of the finishedproduct.

Bills of materials for quoting and cost estimating can be brokendown into 3 categories. The first category is raw material. Rawmaterial are those bill of material items that are the building blocksto create a finished or final product. This would include items suchas wood, sheets of metal, coils, wire, plastic, rubber, etc. Thesetype off bills of materials are usually some sort of commodity,especially when you get into sheet metal, wood, etc. The secondcategory is hardware. Hardware are those bill of material itemswhich can be purchased and added to a finished product or it couldbe consumable which is used in the production of the finishedproduct. Examples would be nuts, bolts, screws, etc. Examples ofconsumables would be paint and gas. The third category of bills ofmaterial would be outside services. Outside services would bepurchased 3rd party processes like machining, painting, silkscreening which are added to a finished product.

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All three of these types of bill of material, raw material, hardwareand outside processing make up your bill of material list. Estimatingsoftware makes it much easier to manage bills of material thenspreadsheets and paper.







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Cost Estimating Purchased Parts Or Materials

Bill of material items are those items which are purchased as rawmaterials and used to combine with other products and services toproduce a new product. Job costing bill of materials is a criticalstep in the estimating and quoting process. Classic ERP and MRPsoftware provides tools to help estimating the bill of materials.

When you are performing cost estimates for purchased parts ormaterials there is a need to determine if these purchased parts canbe manufactured internally or are they economically better to bepurchased. When larger quantities of materials are used it is oftenbetter to purchase these parts from suppliers who are experts inproducing these materials. The specialization of companies toproduce goods and services is critical to producing a finishedproduct within costs. There are two ways to get a cost estimate onpurchased parts. The first way is to actually get specific bids fromone or more suppliers and have the supplier respond back with theirbid. The second method requires looking up in some sort of catalogand using the cost from the suppliers catalog as the cost. The firstmethod is a more desired approach because the catalog could beout of date or the possibility that a relationship could occur betweenyou and the supplier giving you a potential discounted price.




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Manufacturing Efficiency in Estimating

How many of you have estimated a job and wonder how anyonecould do it any cheaper and make money? Well your not alone inyour thinking. There are manufacturers that are using reverseauctions in order to try to get more work and pick up newcustomers. The problem is when you have a buyer that is 100%fixated on the price and ignoring the many other many factorspresents a difficult problem.

Manufacturing efficiency is one of the areas where you can competefor jobs. One example I heard of this past week is a largegovernment contract was one by a supplier because of price. Thismachine shop could have produced this widget by manuallypunching the part, but they decided to spend some extra money upfront and create a die for the job. This machine shop had thetechnical expertise to create the die when two other machine toolmakers would not make for them. This machine shop is now able tomake these parts very efficiently and one the job because all theother shops that competed with him did not base their quote on adie.

This tells us that manufacturing parts efficiently can overcome manyother issues of price during the bidding stage. Some ways thatmanufacturing can be more efficient is automatic loaders, roboticwelders, automated punch presses, lasers, business software, cadsoftware, 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

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efficient.

MIE Solutions provides software products to make your businessprocess more efficient so please take a look at our product linebelow.






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Job Shop Hours Defined

In job shop estimating where does efficiency play a role? When youare estimating generally ask yourself how many “Man Hours” arerequired 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 doesnot 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 1resource and therefore you can finish the task with 5 people working8 hours in 1 day.

Direct Hours

Amount of time that an employee is performing a task specific to awork order.

Indirect Hours

Amount of time that an employee is performing a task that is notbeing 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 thatis an educated guess.

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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 minimumexpenditure of time or effort.

Worker Productivity or Effectiveness

Worker productivity is the time spent on a task versus the time theyare actually getting paid for.

Worker productivity will never be 100% because of the timeinterferences a worker keeps from doing their assignedassignments. These include things like using the restroom,meetings, e-mails, chatting, break time, etc. The time betweendirect hours and indirect house is the effectiveness rate. This is notthe the same as efficiency where its calculated as the measure ofones performances performing a given task.

The next blog post will go into more detail and examples of job shopefficiency and effectiveness.






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Fabrication Workcenter Overhead Rates

When you quote a job and its operations you need to make sureyou quote it accurately. Its very important to know that when youquote a job that your rates are high enough to actually turn a profit.

View This Pollonline survey

Welcome to the MIE Solutions Job Shop Estimating blog.Fabrication software as in sheet metal software and manufacturingsoftware deals with shop rates extensively for costing. Pleasecomment and continue following as I continue investigatingproduction control and job shop software.


http://answers.polldaddy.com/poll/2007715/

http://polldaddy.com/features-surveys/


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Machine Shop Rates Part 2

Welcome to the MIE Solutions Job Shop Estimating blog. Fabrication software as in sheet metal software and manufacturingsoftware deals with shop rates extensively for costing.

There are basically 3 ways to calculate overhead absorption rateswhich is used to provide your shop sell rate during quoting andestimating.

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 absorptionhas both positive’s and negatives.

Percentage Overhead Absorption Rate

What does an overhead percentage mean? An example would bea 150% overhead percentage which means that for every $1.00 ofdirect labor billed to the customer, the business must collect anadditional $1.50 ($1.00 x 150%) for that custom just to cover costs. There are potentially large variations between total direct laborwage and direct labor cost. The question is how do we figure theoverhead absorption rate.

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Definitions

Business Expenses

All expenses found on the company’s income statement (alsoknown as the

profit and loss statement).

All expenses found on the company’s income statement (alsoknown 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 subcontractorsthat can be billed directly to a customer’s account. Overheadexpenses are absorbed by the business and factored into the sellingprice as a percentage of the direct labor cost. They includeindirect costs such as accounting, advertising, depreciation, indirectlabor, insurance, interest, legal fees, rent, repairs, supplies, taxes,telephone, travel, and utilities.

Direct Labor

Labor used to produce products and services purchased bycustomers. These man-hours are directly attributable to customeractivity.

Indirect Labor

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Labor used to provide supporting services to the business suchas accounting, clerical, custodial, customer services, management,purchasing, sales, and warehousing. These man-hours supportbusiness functions that are not directly chargeable to the customer.

Direct Materials

Materials used in the final product or service purchased bycustomers. These materials are charged directly to the customer’saccount.

Overhead Percentage

Ratio between direct labor and overhead expenses. Thispercentage is used to allocate overhead expenses proportionatelyto direct labor dollars billed to customers.

How To Calculate Overhead Percentage

Step 1 Determine the “average” hourly wage paid to direct laboremployees.

Step 2 Estimate direct labor workdays available in the calendaryear.

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.

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Step 6 Estimate all overhead expenses for work year to includenon-billable direct labor.

Step 7 Calculate the annual overhead percentage.

Example

Would your shop rate be Avg Direct Labor Rate +OverheadRate (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 difficultto compute once you have your income sheet calculations available. Its important to calculate your shop rate for estimating accuratelybecause if you are off by much you will be losingmoney continuously. A sheet metal software package needs to beable to handle calculating overhead rates based on percentage if itsapplicable to the specific industry.


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

http://www.missouribusiness.net/docs/calculate_overhead.pdf

http://www.missouribusiness.net/docs/calculate_overhead.pdf


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or service. We strive to satisfy our customer’s every reasonablerequirement with speed, courtesy and honesty. Our pricing reflectsthe cost of providing high quality products and excellent service butremains fair. Our goal is to be known throughout the world for thedevelopment and production of innovative products. We endeavorto be regarded as the leading supplier of high technology in thesheet metal fabrication. We want our customers to be proud to ownMIE products.

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Machine Shop Rates Part 1

Welcome to the MIE Solutions Job Shop Estimating blog. MIESolutions ERP system provides a comprehensive job shop softwareto deal with the many problems issues a job shop encounters. Estimating has become a critical factor in many job shops in orderto determine the best price for custom and made to ordermanufactured parts.

There are basically 3 ways to calculate overhead absorption rateswhich is used to provide your shop sell rate during quoting andestimating.

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 absorptionhas both positive’s and negatives.

Company Overhead Absorption Rate

A machine shop rate for a job shop manufacturer is not that difficultto compute once you have your income sheet calculations available. Its important to calculate your shop rate for estimating accuratelybecause if you are off by much you will be losingmoney continuously.

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Budgeted Costs

Below you will find an example of a ficticious company and itsassociated 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 ayear you would get

Hours per Day………………………………………..8

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Hours per Week………………………………………40

Hours per Year……………………………………….2080

Hours Per Year for 10 Machines…………………20,800

There are a lot of assumptions that are being made here which willbe discussed in much more detail in future blogs but this is thesimple 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? Theanswer is No



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Standard Shop Rate

Do you remember when it was time to quote and you sat down withyour specifications, pencil and paper and started to write down howlong each processes would take to manufacture the givenspecifications. You would add up all the setup time, then gothrough and add up all the cycle time per process by hand, and ifnot by hand, an expensive calculator. Once you finished adding upthe estimated time you then did one last calculation like this

Labor Dollars = ((Setup Time)/(Pieces Being Quoted)) + CycleTime)*(Shop Rate)

Shop labor rates a fews years ago usually consisted of a singleshop rate for every machine and operation in your shop includingmachine shops, sheet metal shops to wood working and plastic jobshops. To calculate a quote the shop rate was much simpler whenthere was only a single rate. Now with the advent of computersyou can have shop rates that are specific to each machine becausethe actual calculation is done by a computer now. A single shoprate had some advantages at that time but those advantages arenot applicable in todays advanced manufacturing facilities.

Plant-wide versus departmental versus individual machineburden 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

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department (rates or drivers) and overhead is significant,departmental burden rates may result in a more accurate allocationof overhead. If burden rates between machines in a departmentvary significantly a more accurate approach would be specificoverhead absorption rates.

QuoteIt from MIE Solutions offers the ability to have the mostaccurate estimating process because you are able to have specificoverhead absorption rates per machine.

Once you being quoting and estimating using machine specificoverhead you will be more capable of competing in this highlycompetitive job shop environment.

The next discussion will give examples of how to calculate machinespecific shop rates.






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Calculating Shop Rates Using The Income Statement

We are going to spend the next few posts reviewing what an incomesheet is and how the income sheet will help you determine you shoprates.

From Wikipedia the definition of income statement is

Income statement, also called profit and loss statement (P&L)and Statement of Operations, is a company’s financial statementthat indicates how the revenue (money received from the sale ofproducts and services before expenses are taken out, also knownas the “top line”) is transformed into the net income (the result afterall revenues and expenses have been accounted for, also known asthe “bottom line”). The purpose of the income statement is toshow managers and investors whether the company made or lostmoney during the period being reported.

An income statement is the primary source of information whichenables you to calculate your overhead absorption rates. Overheads are the total cost of all indirect materials, indirect labourand indirect expenses. All expenses that you cannot attributedirectly to the manufacturing of a product or service are included inoverheads.

Here are some common items and definitions of those items on theincome statement.

These items would not be used in the overhead absorptioncalculation

http://en.wikipedia.org/wiki/Financial_statement

http://en.wikipedia.org/wiki/Revenue

http://en.wikipedia.org/wiki/Net_income

http://en.wikipedia.org/wiki/Management

http://en.wikipedia.org/wiki/Investor

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• Net Sales: amount of money made from the goods or theservices that you sold. This is what you were physically paid. It isthe price of the sale minus any discounts that you gave out andminus the value of any goods returned or services that were notneeded.

• Cost of Goods Sold or Cost of Sales: amount of money it tookyou to be able to have the goods or services ready. Includesthings such as materials and labor costs incurred to make theproduct or labor that supplied the service. You may have a costrelated to a service as well as a good. Overhead is also includedin here.

• Gross Margin: a calculation area on the income statement. Thevalue is Net sales – Cost of sales. This shows how much moneyyou receive compared to what it cost to made the good orservice. The gross margin shows you how much money youhave available to pay your expenses and still make a profit.

• Selling and Administrative Expenses: costs involved in gettingthe product or service ready to sell that are not directly related tothe product itself. It includes salaries for people not directlyinvolved with the making of the product or performance of theservice, advertising, office expenses, etc. Research anddevelopment 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

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involved with the making of the product or performance of theservice, advertising, office expenses, etc. Research anddevelopment costs are usually included in this section.

• Operating Income: income from selling your product or serviceminus the cost to make the good or service directly, and minuscosts associated with running the particular type of business. Itcan also be thought of as gross margin – expenses incurred tooperate your business. This reveals the amount your companyhas left over after paying it’s own costs to function as a businessentity.

• Dividend and Interest Income: additional money that you receivefrom ownership and investments externally. Dividends are yourportion of another company’s earnings. Interest income is moneythat you make as a result of allowing someone else to borrowmoney from you. It is safety money in the event that yourbusiness is not profitable in one year. It allows a business to relyon sources outside of its self.

• Operating expenses: additional expenses incurred in carryingout the firm’s day to day activities, but not directly associatedwith production. Examples including payroll, salescommissions, employee benefits, taxes.

These items would be used in the overhead absorptioncalculation

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• Depreciation and Amortization: subtraction from the value ofasset because of wear over time. These are figured out basedon the life of an asset or how much it is used.

• Employee benefits: those benefits directly associated with theemployee’s performing activities out directly associated withproduction.

• Indirect Labor: employee’s performing maintenance, repairs,cleanup around the production area in order to create products.

• Utilities: would include gas, electrical, water associated with theproduction activities.

• Manufacturing Consumables: gases, rods, sandpaper and othermaterials directly related to production activities.

• Building Expenses: expenses including rent, lease payments,mortgage and other expenses.

• Insurance: insurance that is not included in direct employeeexpenses, i.e. insurance on machines.

The next post will deal with how to break these expenses specificmachines.

Reference: Merrill Lynch. (2003). How to Read a Financial Report.



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Introduction To Shop Rates

Labor used to produce products and services purchased bycustomers.

These man-hours are directly attributable to customer activity. Lab

A few years ago before computers, excel spreadsheets andcalculators most organization used a standard shop rate for anylabor that was occuring during a process. Now that computers caneasily calculate figures organizations have become much moreaccurate in trying to capture their true shop rates. For the next fewweeks in this blog I’m going to cover some of the details regardingshop rates and their affect on quoting and estimating.

In order to make a profit when running a business, you will need todetermine what fees to charge. The general way to determine thefees is to allocate the overhead cost to each machine on top of theactual labor costs. Many times shop labor rates are thought of ashow much an hour can I charge to perform a task. This is basicallytrue but shop rates can be broken down into many sub categories,i.e. setup rate, cycle time rate, direct labor rate, overheadabsorption rate and others. I will begin by defining some terms thatwill 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

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there may be a different ship rate for both setup and cycle time. Each machine may have a different setup vs cycle time ratebecause of various factors like electricity or gas usage andconsumables usage during the cycle time vs the setup time.

You should think of this blog as an online cost estimating class orcourse where we are going to review all the different areasregarding cost estimating. Job cost estimating software will helpyou with these calculations and I highly recommend using MIEQuoteIt






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Calculating Cycle Time with Estimating Software

Calculating the entire operation costs depends on both setup andcycle time. In order accurately estimate your costs to complete ajob you must be as accurate as possible during the estimatingprocess. If you spend too much time estimating you will be burninga lot of cycles which costs money. If you do not accuratelyestimate you are potentially losing jobs and or losing the job youone because it costs more to produce then you have estimated.

Estimating setup and run time can be as simple or as complex asyou desire. Now its time for the final formula to be realized whichincludes 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 BeProduced)+(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 BeProduced)+(Inspection Time*Quantity Of Parts Inspected)

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Cost estimating using good estimating software tools makesproducing accurate quotes much simpler. The formula given isonly the first step in learning how to estimate. I will talk about shoprates starting with my next blog. Shop rates are critical part of anestimate because you may accurately estimate the time it takes, butif you do not have a handle on your shop rates you will not beprofitable.



The mission of MIE Solutions is to apply advanced technology toimprove manufacturing productivity and quality in the field offabrication. At MIE Solutions, we do not compromise product qualityor service. We strive to satisfy our customer’s every reasonablerequirement with speed, courtesy and honesty. Our pricing reflectsthe cost of providing high quality products and excellent service butremains fair. Our goal is to be known throughout the world for thedevelopment and production of innovative products. We endeavorto be regarded as the leading supplier of high technology in thesheet metal fabrication. We want our customers to be proud to ownMIE products.




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Price Quote Software Handles Inspection

Job shop estimating is not the most complex job in the job shop, butit does have a lot of little details which should be dealt with duringthe estimating process. Inspection is a category of the cycle timewhich is not normally considered during the quoting process. Imentioned earlier that the following formula which is normally usedfor machine time quoting which is for sheet metal, machinemanufacturing, assembly and pretty much any other process.

Cycle Time Per Piece

(Handling Time / Quantity Manufactured Per Handling Time) + RunTime)

One piece of information that is missing from this formula is how tohandle inspection time. Inspection time can be included on theestimate in a variety of ways.

1. Inspection time could be included in the run time because theemployee may be able to actually inspect the parts beingmanufactured as the machine is running. In the machining andsheet metal type of machinery this would work for lasers, turningmachines, mills and lathes. These machines usually do not require100% dedication of the employee as they watch the part beingprocessed 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 handleinspection 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

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organization would be first articles. First article inspections arerequired before the production run could be started. This ensuresthat the parts are made accurately.

4. Inspection can also be done during the actual production run forSPC.

Estimating software for industries such as metal quoting, machineshop quoting, sheet metal quoting, stamping need to be able tohandle these different situations. If these different situations. Ifthese scenarios are handled by your estimating software you will beable to manage any time of quote that requires inspection.

My next blog will give the formula that can be used to handle thesefour situations.

MIE QuoteIt handles this complex cycle time calculation by allowingthe creation of user defined formulas.



The mission of MIE Solutions is to apply advanced technology toimprove manufacturing productivity and quality in the field offabrication. At MIE Solutions, we do not compromise product qualityor service. We strive to satisfy our customer’s every reasonablerequirement with speed, courtesy and honesty. Our pricing reflectsthe cost of providing high quality products and excellent service butremains fair. Our goal is to be known throughout the world for thedevelopment and production of innovative products. We endeavorto be regarded as the leading supplier of high technology in thesheet metal fabrication. We want our customers to be proud to ownMIE products.

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Job shop estimating is not the most complex job in the job shop, butit does have a lot of little details which should be dealt with duringthe estimating process. Inspection is a category of the cycle timewhich is not normally considered during the quoting process. Imentioned earlier that the following formula which is normally usedfor machine time quoting which is for sheet metal, machinemanufacturing, assembly and pretty much any other process.


(Handling Time / Quantity Manufactured Per Handling Time) + RunTime)

One piece of information that is missing from this formula is how tohandle inspection time. Inspection time can be included on theestimate in a variety of ways.

1. Inspection time could be included in the run time because theemployee may be able to actually inspect the parts beingmanufactured as the machine is running. In the machining andsheet metal type of machinery this would work for lasers, turningmachines, mills and lathes. These machines usually do not require100% dedication of the employee as they watch the part beingprocessed 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 handleinspection time.

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3. Inspection time can be a separate operation. In this situationwhile the inspection operation is being performed it does not allowmore parts to be produced until the inspection operation iscomplete. An example in the sheet metal and machiningorganization would be first articles. First article inspections arerequired before the production run could be started. This ensuresthat the parts are made accurately.

4. Inspection can also be done during the actual production run forSPC.

Estimating software for industries such as metal quoting, machineshop quoting, sheet metal quoting, stamping need to be able tohandle these different situations. If these different situations. Ifthese scenarios are handled by your estimating software you will beable to manage any time of quote that requires inspection.

My next blog will give the formula that can be used to handle thesefour situations.

MIE QuoteIt handles this complex cycle time calculation by allowingthe creation of user defined formulas. Download the free trial of thesoftware at the following url.



The mission of MIE Solutions is to apply advanced technology to improve manufacturing productivity and quality in the field of

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fabrication. At MIE Solutions, we do not compromise product qualityor service. We strive to satisfy our customer’s every reasonablerequirement with speed, courtesy and honesty. Our pricing reflectsthe cost of providing high quality products and excellent service butremains fair. Our goal is to be known throughout the world for thedevelopment and production of innovative products. We endeavorto be regarded as the leading supplier of high technology in thesheet metal fabrication. We want our customers to be proud to ownMIE products.

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How To Estimate Handling Time

Shop estimating is pretty complex and shop estimating softwareneeds to be handle all types of scenarios. One of those situationsis handling time calculations. Handling time is defined as the time ittakes during the cycle time phase of production to move thematerial in place to begin a step and the time to remove the materialat the end of the step.

The basic formula for estimating an operations cost is


(Handling Time + Run Time)

Under many situations there is a one-to-one relationship betweenthe run time and the handling time.

Examples

Let’s say you are fabricating 1000 widgets. Each widget must gothrough the step of forming, which is basically bending the material. If it takes an employee 30 seconds to form each widget, theestimated run time would be 30 seconds per piece. The handlingtime is in direct correlation to the run time because you are forminga single widget at a time. In this situation you include the handlingtime into the run time or keep it separate for more accuratereporting.

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Now let’s assume that widget A is very large and it takes a forklift tomove each piece into the forming machine. In this situation the runtime may be 30 seconds because that is the time it takes to formwidget A once it’s in the machine. The difference is the handlingtime is much larger because it may take 5 minutes to setup andremove widget A from the machine. Separating the handling timeand run time out in this situation becomes a bit more valuablebecause the handling time is takes such a large portion of the actualcycle time.

Last example is you are having widget A that needs to be cut on alaser. A laser machine in my example is a machine where you puta sheet of raw material onto it which then the laser can cut out 1 ormore widget A’s on a single sheet. Let’s say to cut widget A therun time is 3 minutes per part. Each widget A takes the sameamount of time to cut but in this situation is the handling time is notone to one with each widget A. The reason for this is the laser cutsmultiple pieces of parts out of a single sheet. The handling time isactually the time it takes to load the sheet into the machine and thenthe time to remove the widgets from the sheet and machine whenthe widgets have been cut. Handling time is actually the time ittakes to load the sheet divided by the number of parts a sheetmakes.

The new cycle time formula is


((Handling Time / Quantity Manufactured Per Handling Time) + RunTime)

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Estimating your cycle times is a critical area for any manufacturer tobe profitable. Cost estimating MIE Solutions provides software tohelp you do this calculations as efficiently as possible through theirMRP and ERP systems quoting package. Machine shops andsheet metal shops use these types of forumulas every day toimprove their estimating and quoting process.






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Manufacturing Estimating Cycle Time

One of the most difficult aspects of estimating is figuring out whatthe cycle time may be for a process. There are many factors whichaffect the cycle time which are not fixed including skill level of theperson running the machine, reliability of the machine, maintenanceof the machine, inspection of the parts being run, the quality of thematerial and others. In future discussions we will go over thesedifferent aspects of estimating but right now we are discussing atthe 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 unloadsthe part being manufactured from the machine.

Run time is the time the operator spends at the machine running thepart or the time the machine is running by itself, i.e. a cnc machine. Some operations require the operator to be present during therunning of the part and others do not.

The basic formula for estimating an operations cost is


(Handling Time + Run Time)

Total Estimating Operation Time

Setup Time + Cycle Time

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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 tobe profitable. Cost estimating MIE Solutions provides software tohelp you do this calculations as efficiently as possible through theirMRP/ERP systems quoting package.






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Quoting Dependencies Between Operations

I talked previously about job cost estimating setup time. The fourareas that were spoken about where staging time, setup time,transit time and tear down time. Each one of these 4 processesactually would add costs to an estimate. Lag time does not addcosts to an actual estimate under most circumstances.

When there are dependencies between operations, delays inhandling, transportation, transmission or thinking time, etc. betweenoperation steps we refer to this as lag time. Lag time does notusually add costs to a operation step because there is no activityactually being performed except for taking up space on themanufacturing shop floor. If there were large lag times you mayconsider putting a dollar value on the floor space but this may beoverkill during the quoting and estimating process.

On the other hand lag time is a critical factor during scheduling of ajob shop. This lag time is critical in ERP/MRP systems in order toproperly handle dependencies between operation steps. Theobjective is to minimize the time a job is sitting idle with no workbeing performed. Reducing cycle time by decreasing the queuetime between manufacturing steps is a basic principle of leanmanufacturing to reduce work in process inventory.

Quoting and Estimating is not an area where lag time is usuallyconsidered because there are direct costs that could be attributed. As prepare your estimate keep in mind lag time because it will beused in scheduling the job shop.

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MIE Solutions products including MIE QuoteIt and MIE Trak bothcan help a job shops quoting and estimating process moreaccurate.






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What is Setup Time?

In order to begin a detailed look into quoting and estimating I’mgoing to start by giving some definitions.

Setup Time

Setup time is the time it takes to make the first accepted piecewhich includes bringing all the tools, jigs and fixtures, setup thosejigs and fixtures for a particular batch quantity. Operation run timeor cycle time, is the time spent to complete each unit through themachine.

Setup time can be simple or complex and it really depends on theprocess being performed. Setup time is usually independent of theactual run time because once a machine is setup it can becontinually run without setting the machine up a second time. Setuptime can actually be broken down into a few categories.

Staging Time

The time required to gather materials, dies or any other equipmentrequired to get the machine running. Staging can potentially beperformed during the running of another job through the machinebecause it may not actually require the machine to be available. Asimple definition is time spent on a machine or process prior to amanufacturing run.

Setup Time

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The time required to bring this production batch quantity to anactionable state.

Transit Time

Transit time is the time to move a particular batch quantity toanother step in the process.

Tear Down Time

The time required to remove all the equipment that was required tobe setup on the machine making it ready for the next process. Ajob may continue to the next operation during the tear down timebecause this time does not affect the actual job, only the machine. A simple definition is the time to take down a machine or processafter a manufacturing run.

Quoting and ERP packages should provide the capability for thesesetup time variations in order to allow your estimating , costing andeven scheduling to be as accurate as possible.






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Estimating

Welcome to the MIE Solutions blog about Job Shop Quoting andEstimating

This is the beginning of a blog for all job shop estimators to provideinformation and feedback about how to estimate job shop jobs in themade to order job shop environments.

A little background of myself.

As a child in Junior High School I found a passion for the earlycomputer systems, which would drive much of his future work. Icreated and sold his first computer program, Arrow Data Systems,which was an early CAD/CAM system for the Apple 2e Computer. Inthe late 1980′s after seeing my father (a sheet metal manufacturer)come home many nights estimating, I saw an opportunity tooptimize his effort through computer technology. Shortly thereafterthe FabriTRAK Production Control package was developed. TheQuote It! estimating package was developed out of the FabriTRAKsystem to become one of the leading sheet metal estimatingpackages in the world.

I have been to and consulted 100′s of companies in the best way touse computer software technology to streamline and make theprocess of quoting more accurate.

I’m looking for feedback as we discuss the estimation process inorder for all readers to improve their estimating, which in turn,improves your win rate and profitability.

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When an RFQ or RFP is received you begin the process ofestimating. You can estimate and quote the job using paper andpencil, a spreadsheet or estimating software. In this verycompetitive market I suggest using estimating software in order tobe most competitive and I will discuss and hopefully get feedbackon ways the software should work to best satisfy the made to ordermanufacturer.






quoting for manufacturing

Documents

manufacturing costs

indirect costs

variable costs

purpose of cost estimating

material costmaterial

estimating software

job shop scheduling

calculating shop rates