Commodities that can use Breakdowns Characteristics - - High manufacturing cost as a % of sales Customers controls the design Many suppliers Examples – Construction Capital equipment Plastic parts Stampings Assemblies 27
Cost Breakdowns
Approach 1. General accounting refresher to better understand what information is contained in a cost breakdown. 2. Analyze each of the 5 areas of cost in detail through discussions and workshop examples. 29
5 Main Areas of Cost Selling, General, and Administrative Profit Labor SG&A Burden Material 30
Cost of Goods Sold Cost of Goods SG&A Profit Revenue Sold Material Direct Burden/ Cost Labor Cost Overhead 31
Material Cost Profit Labor SG&A Burden Material 32
Material Cost Simplified Material Cost per Unit of Measure Material Cost Amount of Material Used 33
However, It’s not that Simple Material specifications may be left to interpretation. Manufacturing processes are not 100% efficient in using raw materials. Suppliers mark up material cost to cover cost of procurement and storage. Purchased materials are scrapped . 34
Raw Materials - Purchased Parts Raw Materials / Purchased Fabrication Parts/Services Transformed in Assembled in Manufacturing Process Manufacturing Process Services provided by an outside company 35
Raw Material Cost Calculations 1 lb of Raw Raw Mat. Units * cost Per unit Material Costing 1 lb * $2 per Lb = $2 $2/lb Goes Into the Process 1 Part is Produced 1 Finished Part Weighs $2 / 1 Part = $2 per part .9 lbs Raw Mat Cost/Part * (1+Scrap %) = Total Raw Mat Cost/Part 1% of Finished Parts $2.00 per part * 1.01 = $2.02 are Scrapped in Process 36
Raw Material Cost Calculations What about the scrap? 1 lb of Raw Material Costing $2/lb Goes Into the Process .1lb of engineered or fabrication scrap 1 Finished Part Weighs occurs in production .9 lbs .009 lb of scrap occurs after production 1% of Finished Parts are 1% * .9 lb = .009 lb Scrapped in Process Total scrap produced .109 lb 37
Raw Material Cost Calculations The process produces .1 lbs of engineered scrap and .09 lbs of finished part scrap. 1 lb of Raw Material Costing $2/lb Goes Into The supplier sells the .109 lb of the Process engineered scrap for $.50 / lbs .109 lb * $.50/lbs = $.0545 1 Finished Part Weighs .9 lbs This Scrap Resale reduces the material cost 1% of Finished Parts are Scrapped in Process $2.02 - $.0545 = $1.9655 38
Example - Raw Material Cost Calculations 1 lb of Raw What is the cost of raw material the Material Costing supplier must purchase to produce $3/lb Goes Into 1 good part? the Process 1 Finished Part Raw Mat Cost/Part * (1+Scrap %) = Total Raw Mat Cost/Part Weighs .8 lbs $_____ per part * (1 + ___) = _______ 3.00 3.03 .01 1% of Finished Parts are Scrapped in Process 39
ExampleRaw Material Cost Calculations What about the scrap? 1 lb of Raw Material Costing $3/lb Goes Into the Process 0.2 ____lbs of Engineered or fabrication scrap occurs in 1 Finished Part production Weighs .8 lbs 0.008 _____lbs of Process scrap occurs after production 1% * .8 lb = .008 lbs 1% of Finished Parts are Scrapped in Process 0.208 Total scrap produced _______ lbs 40
Raw Material Cost Calculations 0.208 The supplier sells the ______lb of scrap for $.75 / lbs 1 lb of Raw 0.208 0.156 ____ lbs * $.75/lb = $_____ Material Costing $3/lb Goes Into the Process 1 Finished Part Weighs Total Raw Material Cost: .8 lbs 3.03 0.156 2.874 $______ - $______ = $____ 1% of Finished Parts are Scrapped in Process 41
Material Breakdown – Best Practices The breakdown has suppliers identify: Material Type Material Purchase Cost Gross, Net Weights Process Scrap Benefits from Resale/Reuse of Scrap Country/Region of Origin The Inteva breakdown has all of these!!!! 42
How Suppliers Incorrectly Quote
Incorrect/Inaccurate Quoted Weights Effective counter measures : Physically weigh parts yourself and compare against quoted weight. Compare quoted weight to CAD data weight. ________________________________ ________________________________ ________________________________ 44
Conflicting Material Types US vs. Asia vs. Europe material standards Effective countermeasures : Direct suppliers on which materials to use in quote with detailed specifications. Get engineering buy into equivalents prior to market test. ________________________________ ________________________________ ________________________________ 45
Material Type not Defined Effective counter measures : On existing part quotes, use the current supplier material. Obtain engineering buy in into possible material options. On a new part have engineering specify or have supply base make recommendations. Conduct an RFI prior to the RFQ. ________________________________ ________________________________ 46
Supplier Overstating Scrap Rates Effective counter measures: Audit supplier operations data to support quoted rates. – Quiet ops review audit. Benchmark scrap % from other quotes and compare to see if supplier is inline with competition Reviewing PPAP data ________________________________ ________________________________ ________________________________ 47
Inconsistent Supplier Scrap Rates Effective counter measures: Compare supplier previously quoted rates with current quoted rate. Check other suppliers across the same parts. Compare blank sizes. ________________________________ ________________________________ ________________________________ 48
Incorrect Scrap Resale Rates Effective counter measures: Question supplier about their scrap? Do they resell it? What is the value of their scrap. If there is value, supplier should quantify and credit customer. Audit material scrap invoices for accurate scrap credit Review against published indexes ALWAYS review with economic adjustments ________________________________ ________________________________ 49
Different Effective Dates Effective counter measures: Question supplier about the dates especially on new programs. Specify effective dates in RFQ. ________________________________ ________________________________ 50
Incorrect/Inaccurate Quoting Including hidden rebates or productivity Effective counter measures: Audit supplier component pricing through checking paid invoices of parts. Audit of supplier payments. Compare across suppliers. Obtain quote from supplier directly. ________________________________ ________________________________ ________________________________ 51
Incorrect Part or # of Parts Effective counter measure Check components parts against drawings to ensure the components are of spec. Suggest or direct specific second tier suppliers. ________________________________ ________________________________ ________________________________ 52
Uncompetitive Pricing Effective counter measures: Compare supplier component pricing to see where certain suppliers are uncompetitive. Suggest or direct specific second tier suppliers. Assist supplier with their purchasing practices. Ask for tier 2 cost breakdowns. ________________________________ ________________________________ ________________________________ 53
Other Potential Issues Potential issue: ________________ Effective counter measures: ________________________________ ________________________________ ________________________________ 54
Raw Materials Check List Area Items Check Type Material specifications are clear and consistent Quoted Cost Consistent between suppliers Quoted Cost Consistent with historical trends R Quoted Cost Consistent with published indices a Usage Gross part weights are consistent between suppliers w Usage Gross part weight has been verified by weighing Usage Net part weights are consistent between suppliers M Usage Net part has been weighed a Usage Weights have been verified to CAD Calculations t e Scrap Consistent scrap % between suppliers r Scrap Scrap % is consistent with historical quotes i Scrap % has been validated with process and record Scrap audit a l Scrap Supplier is providing "credit" for scrap resale Scrap Consistent Scrap Resale rates between suppliers Scrap Scrap Resale rates consistent with historical trends Scrap Scrap resale rates consistent with published indices 55
Purchased Part Checklist Area Items Check Parts Purchased parts and services are in line with design P S u P Usage Number of purchased parts are consistent between suppliers e r a r c r v Sub-Suppliers Suppliers of purchased components are acceptable h t i a s c Scrap Consistent scrap % between suppliers s e e & s d Scrap Scrap % is consistent with historical quotes Scrap Scrap % has been validated with process and record audit 56
Labor Labor Profit SG&A Burden Material 57
Labor & Burden Costs Usually categorized together because their costs are generally based on a cost per hour. Labor Costs - costs associated with the amount of direct labor involved in the manufacturing a product. Burden Costs - costs associated with the overhead and indirect labor costs involved in the manufacturing of a product. 58
Labor Cost Simplified Labor Time Required for Production Labor Cost Labor Cost per Unit of Time 59
However, It’s not that Simple Pure (Gross) vs. Actual (Net) Cycle time Direct vs. Indirect Operators Direct Labor Rate vs. Fully Fringed Rate Process scrap needs to be accounted for in Labor cost 60
Labor Cost Calculations Downtime occurs for Process machine breakdown, can product changeovers, Efficiency produce 60 etc. Rate is 80% gross parts in an hour If downtime is planned at 20%, the 20% is referred to as the process inefficiency rate. Gross Parts Per Hour * (Efficiency Rate) = Net Parts per Hour 60 * 0.80 = 48 61
Labor Cost Calculations Operator Operator benefits pay is $10 cost the per hour company $5 per hour Direct Labor Rate + Fringe Rate = Fully Fringed Labor Rate $10 + $5 = $15 62
Labor Cost Calculations 2 Operators Fully Fringed 48 net parts Labor Rate per hour is $15/hr # of operators * (FF-labor rate) / Net Parts per hour = labor cost 2 * $15/hr / 48 = $0.625/part 63
Standard Hours Process time in hours required to produce 1 part 1 hour divided by Net Parts Per Hour = Standard Hours 48 Net Parts per Hour would result in: 1 hour/48 net parts/hour = 1/48 = .020833 64
Example - Labor Cost Calculations Process has 2 Operators a Gross $14 per hour. Pieces per Operator hour of 700 benefits cost with 85% Efficiency the company Rate $3 per hour *Gross pcs Hr * Efficiency Rate = Net Pieces Per Hour 595 .85 700 ________ * ____ = ______ (# of Ops * Fully Fringe Rate) / (Net Pieces/Hr) = labor cost per part $17.00 2 $.05714 595 ( _____ * ______ ) / (______) = __________ 65
Standard Hours for Our Example 1 hour divided by Net Parts Per Hours = Standard Hours 1 hour / 595 net parts/hour = 1/595 = .00168 Standard Hours * $34 = $.5712 66
Direct vs. Indirect Direct labor is applied to the actual production of the part. Examples: Stamping press operator Lead person – if tied to process Carpenter Indirect labor is not applied to the production of the part. Examples: Machine repair Janitor 67
Labor Breakdown – Best Practices Separates Direct Labor rates from fringe rates Captures Indirect Labor separately from direct labor usually in Burden/Overhead Captures gross and net production rates Clearly captures process inefficiency Utilizes rates in calculations that lead to final prices 68
Overstatement of Inefficiencies Effective counter measure: Have supplier breakdown their inefficiencies. Look for items that stand out from array of quotations received. Compare to other suppliers. Compare to historical quotes. ________________________________ ________________________________ ________________________________ 69
Overstated # of Direct Employees Effective countermeasures: Perform audit of supplier operations 6 months to a year after initial launch of product and compare to quote. Compare previous quotes to current quote. Compare to similar product quotes. Compare to PPAP/Control Plan/PFMEA. ________________________________ ________________________________ ________________________________ 70
Including Indirect in Direct Effective counter measures: Perform audit of supplier operations to determine which employees are direct and indirect. Understand where indirect employee costs are allocated, typically accounted in overhead. ________________________________ ________________________________ 71
Uncompetitive Wage Rates Effective counter measures: Comparative data, other supplier data, industry standard, online government data. Audit supplier operations labor rate data to support quoted rates. If applicable, audit supplier union contracts. ________________________________ ________________________________ ________________________________ 72
Labor Checklist Operator Wage Rates Consistent with previous quotes Operator Wage Rates Consistent with industry norms Operator Wage Rates Consistent with regional norms Fringe rates are in the normal range of 25- Operator Wage Rates 35% of labor rate L Production Rates Consistent with previous quotes a Production Rates Consistent with competitors b o Production Rates Consistent with PPAP r Production Rates Verified by Audit Inefficiency Rates Consistent with previous quotes Inefficiency Rates Consistent with competitors Inefficiency Rates Consistent with PPAP Inefficiency Rates Verified by Audit 73
Session 2
Objectives for this Training Session 1 – July 11 - Raw Material and Labor Increase understanding of the cost detail suppliers provide in their quotations. Review common ways suppliers inaccurately quote. Session 2 – July 18 Burden and SG&A Increase understanding of the cost detail suppliers provide in their quotations. Review common ways suppliers inaccurately quote. Review top ways to: Improve analysis of the cost impacts of design changes. use the cost breakdown information to negotiate costs of design changes. 75
5 Main Areas of Cost Selling, General, and Administrative Profit Labor SG&A Burden Material 76
Example - Raw Material Cost Calculations How many parts must the supplier plan to produce if the supplier needs 100 good finished parts? 2 lbs of Raw Material Costing # of finished parts required * 1 + Scrap % $2/lb Goes Into the Process 100 * (1 + .02) = 102 1 Finished Part What is the cost of the raw materials required to Weighs .8 lbs produce 100 good parts? Raw Mat Cost/Part * (1+Scrap %) = Total Raw Mat Cost/Part 2% of Finished Parts are $_____ per part * (1 + ___) = _______ 2.00 2.04 .02 Scrapped in Process 77
ExampleRaw Material Cost Calculations What about the scrap? 2 lb of Raw Material Costing $2/lb Goes Into the Process 1.2 ____lbs of Engineered or fabrication scrap occurs in 1 Finished Part production Weighs .8 lbs .016 _____lbs of Process scrap occurs after production 2% * .8 lb = .016 lbs 2% of Finished Parts are Scrapped in Process 1.216 Total scrap produced _______ lbs 78
Raw Material Cost Calculations 1.216 The supplier sells the ______lb of scrap for $.75 / lbs 2 lb of Raw 1.216 0.912 ____ lbs * $.75/lb = $_____ Material Costing $2/lb Goes Into the Process 1 Finished Part Weighs Total Raw Material Cost: .8 lbs 2.04 0.912 1.128 $______ - $______ = $____ 2% of Finished Parts are Scrapped in Process 79
Example - Labor Cost Calculations Process has 2 Operators a Gross $15 per hour. Pieces per Operator hour of 600 benefits cost with 80% Efficiency the company Rate $4 per hour *Gross pcs Hr * Efficiency Rate = Net Pieces Per Hour 480 .80 600 ________ * ____ = ______ (# of Ops * Fully Fringe Rate) / (Net Pieces/Hr) = labor cost per part $19.00 2 $.07917 480 ( _____ * ______ ) / (______) = __________ 80
Burden / Overheads
So far, we have talked about Labor and Material Costs. Selling, General, and Administrative Profit Labor SG&A Burden Material 82
Burden / overheads Vs SG&A Burden or Overhead: Manufacturing costs associated with the production of a part. SG&A Front office, corporate costs. 83
Does anyone have some examples of burden and SG&A? 84
What’s Included in Burden Salaried Labor Salaried Labor Indirect Labor Material Operation Supervisors handlers Fringe Benefits Supervisors Team Engineering Workers Comp Leaders Materials Health Care Training Management Insurance Fringe Benefits Maintenance Pension Services and Supplies Fringe Benefits Health Care Insurance Telephone & Vacation Pay Services and Supplies Communications Workers Comp Rent/Mortgage Building/Capital Pension Insurance Services & Supplies Depreciation Operation Supplies Tools Utilities Gas Electricity Water 85
Allocating Burden 86
Allocating Burden to Part Cost Simplified Burden Cost $8,900,000 Burden Cost Per Part $4.45 Net Pieces 2,000,000 87
However Different part designs Different mfg processes Multiple plants 88
Cost Allocation – Spreading the costs around. 89
Allocating Cost of Goods Sold Burden/Overhead Cost by Total Machine Department Total Cost Hours Available Cost per Hour Inj. Molding $4,500,000 45,000 $100.00 Welding $2,000,000 30,000 $66.67 Assembly $2,400,000 100,000 $24.00 1. Costs are assigned to departments or individual machine types. 2. The total machine hours are calculated for each group. Machine Burden Cost Costs Hours Per Hour 90
Allocating Cost of Goods Sold Burden/Overhead Cost by Total Machine Department Total Cost Hours Available Cost per Hour Inj. Molding $4,500,000 45,000 $100.00 Welding $2,000,000 30,000 $66.67 Assembly $2,400,000 100,000 $24.00 1. Costs are assigned to departments or individual machine types. 2. The total machine hours are calculated for each group. Machine Burden Cost Costs Hours Per Hour 91
Allocating Cost of Goods Sold Burden/Overhead Cost by Total Machine Department Total Cost Hours Available Cost per Hour Inj. Molding 50 ton $500,000 10,000 $50 Inj. Molding 100 ton $1,500,000 15,000 $100 Inj. Molding 200 ton $2,500,000 20,000 $125 Welding $2,000,000 30,000 $66.67 Assembly $2,400,000 100,000 $24.00 Burden costs will vary by machine size. Suppliers who do not recognize this will: ▪ Be uncompetitive on small machines ▪ Lose money on large machines 92
Allocating Cost of Goods Sold How wrong is a supplier’s quote if they used an overstated cost of $100 per hour when the cost should have been $50 per hour and the part takes .5 machine hours to make? Burden cost per hour / number of parts produced per hour = burden cost/part They quoted: $100 / 2 = $50 They should have quoted: $50 / 2 = $25 93
Burden Costs Profit Labor SG&A Burden Material 94
Fixed and Variable Variable Cost Fixed Cost Stay the same regardless of the As volume increases or part volume. decreases generally these costs increase or decrease by proportional amounts. Examples: Examples: Material Cost Building rent Direct Labor Cost Interest payments Consumable tools & MRO Software costs 95
What’s Included in Burden Variable Burden Fixed Burden Variable & Fixed Burden Indirect Labor Salaried Labor Salaried Labor Material Operation Supervisors handlers Fringe Benefits Supervisors Team Engineering Workers Comp Leaders Materials Training Health Care Maintenance Management Insurance Fringe Benefits Fringe Benefits Pension Services and Supplies Vacation Pay Health Care Workers Insurance Telephone & Comp Services and Supplies Communications Pension Rent/Mortgage Services & Supplies Building/Capital Operation Insurance Supplies Depreciation Tools Utilities Gas Electricity Water 96
Burden Cost Simplified Burden Cost Per Hour Burden Cost Per Part Net Pieces Per hour 97
Burden Cost Calculations Process requires a Fixed Burden rate of $75/hr 48 Net Parts and a out per Hour Variable Burden rate of $25/hr (Fixed Burden Rate/Hr + Variable Burden Rate/Hr) / # of Net parts out per Hr = Total Burden Cost ( $75 + $25 ) / 48 = $2.08 per part 98
Burden Cost Calculations Process requires a Fixed Burden rate of 40 Net Parts $175/hr and a out per Hour Variable Burden rate of $25/hr (Fixed Burden Rate/Hr + Variable Burden Rate/Hr) / # of Net parts out per Hr = Total Burden Cost ( $175 + $25 ) / 40 = $5.00 per part 99
Burden Cost Calculations - Alternative Process requires a Part requires Fixed Burden a Net Std Hr rate of $75/hr of 0.02083 and a Variable Burden rate of $25/hr (Fixed Burden Rate/Hr + Variable Burden Rate/Hr) * Net Standard Hour = Total Burden Cost ( $75 + $25 ) * 0.02083 = $2.08 per part 100
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