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Craig Cochran

Quality Insider

A Quality Lesson from Hopeulikit

Understand your true costs

Published: Monday, June 19, 2006 - 22:00

Last year I had the good fortune of doing some consulting with B&C Specialty Products in Hopeulikit, Georgia. B&C does light manufacturing, primarily plastic molding and assembly, and they distribute products produced by companies in the Far East. They have about 150 employees and are by far the biggest employer in Hopeulikit. B&C was a perfect place to learn about managing and quality. Every day presented a new lesson. Usually the lessons were hard-learned, but those are the ones that really stick with you. B&C was gracious enough to allow me to interview their personnel about things that came up during my time there. Here is another lesson: Understand your true costs. The scenario is described by the people who actually lived it.

—Guy Hockmeyer, director of sales and marketing

"This year is shaping up to the biggest year ever. The reason is simple: custom molding. That’s when companies ask us manufacture on their behalf. Some people also call it private label work, because the companies for which we mold put their own brand names on the products. We make it, and they sell it as if they had made it themselves. I fought and fought for us to get into this kind of business, but management refused to listen to reason. Now they’re listening, and custom molding is taking off like a rocket.

"It’s not the easiest market to get into. The dimensional tolerances are tighter and the visual requirements are more stringent. The upside is that we’re making a 50-percent profit margin on these babies. That’s the biggest margin of any of our product lines. If we can get longer production runs, we’ll be in the neighborhood of 60-percent margins. 

"We’re killing the competition in custom molding. Nobody can come close to matching our prices, and we get new customers all the time. One of our competitors even called me up last week. ’You’re murdering us,’ the poor rascal moaned. ’Let up a little on your pricing. Nobody can compete.’ Too bad, I told him. Get more efficient and you might be able to compete with us. If people think we’re just going to roll over and let them take market share, they’re crazy. This is the best opportunity we’ve had in years and we’re going to ride it as long as we can.

"I’ve instructed all my sales reps to jump on this. We’re on the verge of becoming the largest custom molder in our industry. This could end up doubling our net income this year. Doubling! That’s 100-percent growth, which is unheard of in our industry. I’m already starting to think about my bonus. I think it’s time to finally get that boat I’ve been dreaming about. Come see me this summer and I’ll take you out on the lake. I’ll call the boat “Market Share,” because that’s what we’re gaining every day. Some of our competitors won’t even be in business this time next year. I won’t shed a tear. "

—J. T. Ryan, president

"I hate surprises, especially when it comes to financial results. What a surprise I got last week when our third quarter results came in. Ouch! We made only $800 for the quarter. That’s a return on investment of about 0.0002 percent. Our owners would do better by investing in scratch-off lottery tickets. A few more quarters like this one, and we’ll be forced to close our doors. Somebody can turn this building into the world’s largest taco stand. God help us! 

"The only bright spot was custom molding. We’re breaking records in that product line. In fact, it might be the one thing that saves us this year, especially once the volumes grow. I’ve told everyone to dedicate themselves to making this product line a success, especially because our other areas are doing so poorly.

"Our industry is in decline in this country. The only thing that’s going to keep us in business is for every employee to play heads-up ball and look for new opportunities like this one. I’m a little ashamed to say that I wasn’t a supporter of this idea when I first heard it. After all, we have a well established product line and brand name. I didn’t like the idea of molding for other companies for their own brand names. It was pride. But now I’m sold on the idea, and I want everyone committed to making custom molding a success. We’re all in this together."

—James Mellow, molding operator

"We do a lot of custom molding these days. That’s molding we do under someone else’s brand name. It’s getting to be almost as big as our own molding. I like it because it gets me a lot of overtime. In fact, it’s going to pay for my family’s vacation this year. The only thing I don’t like is that we’re losing our shirts on these things. It doesn’t take a genius to know that the more of these we make, the more money we lose.

"The work order that comes to us in production includes the price per unit we’re charging. I’m taking a cost accounting class at the community college now, so I know a little about costing. Well, what we charge for custom molded parts averages around 50 percent of what it costs to make them. That includes labor, materials and overhead. Doesn’t sound bad, does it? It’s a 50-percent profit margin. The only problem is that we didn’t factor in all the special costs related to these things. First, there’s the set-up on custom molded parts. While we set up our own products in about 15 minutes, it takes us more than an hour to set up a custom-molded part. Also, it takes an extra operator to make adjustments at the control panel, while two other operators are at the hot end fine-tuning the molds. We usually have a supervisor hanging around trying to help, too.  These things aren’t factored into the labor costs we use.

"We cost the job just like it was one of our own parts. Once the parts are made, we have to do hand inspection and sorting, which we never do on our own parts. There’s also trimming and edge dressing on most of the parts, all done manually. Usually the inspecting, sorting and rework take longer than the original molding. To make the quantities needed within tolerances, we overproduce each order by about ten to twenty pieces. I’m telling you, custom molding is like a wound that won’t stop bleeding. If you add up all these costs, then our gross margin ends up being negative 10 percent. So, if we’re charging $2 for each piece, then we’re losing 40 cents on every sale. Tell me this is a business you want to go into: The more you make, the more you lose. What a concept! I worked up all these numbers on a spreadsheet and showed them to my supervisor. He didn’t even know what he was looking at, bless his heart. He told me to go back to my job and leave the numbers to the people in the front office. He said this was a business we’re going to be in, and that’s just the way it is. To my ears, it sounds like we’ve decided to commit suicide. Fine with me. I tried to tell them. Meanwhile, at least I’m getting some good overtime.”

When assessing your production cost, remember:

  • Understand the true costs for each of your products, especially the hidden costs at the front end and back end of the process
  • Pay special attention to products and services that require inordinate amounts of set-up, preparation, monitoring, inspection, sorting, rework and other similar tasks.
  • Don’t treat any project as if it were a sacred cow.
  • Evaluate every initiative on its own merit, using real data.
  • Be open to criticism and information from unexpected sources.
  • Don’t succumb to group-thinking.

 

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About The Author

Craig Cochran’s picture

Craig Cochran

Craig Cochran is a project manager with Georgia Tech’s Enterprise Innovation Institute. Cochran is the author of The Seven Lessons: Management Tools for Success; Problem Solving in Plain English; ISO 9001 in Plain English; Customer Satisfaction: Tools, Techniques, and Formulas for Success; The Continual Improvement Process: From Strategy to the Bottom Line; and Becoming a Customer-Focused Organization, all available from Paton Professional. His most recent book is ISO 9001:2015 in Plain English, also available from Paton Professional.