By Mark Porter
This is probably the most misunderstood concept I have experienced in the Finishing/Binding Industry. Too many companies do an estimate by calculating each operation and then simply adding up the numbers. There is no addition of markup at the bottom. This signifies that they do not practice the concepts of cost accounting that are vital to any job oriented manufacturing business of which the post press industry belongs.
When I first bring up the concept that Estimating & Selling are two different functions most companies respond that the market dictates the selling price. This is 100% true but the market does not dictate your cost to produce the job and it certainly does not stop you from evaluating if this job, at the market price, covers your costs and generates a desirable return.
The estimating process should use the production standards that you have determined through time studies and experience. The times should then be multiplied by hourly cost rates that accurately reflect the cost of running the machine per hour. These rates are called Budgeted Hourly Rates (BHR) and they encompass financing charges, labor costs, miscellaneous materials and an allocation of overheads. Assumptions are made on the number of shifts and productivity levels that will be obtained and now you have an accurate cost per hour to operate each piece of equipment.
When these hourly rates are applied to the production standards determined you now have an accurate representation of how much the proposed job will cost. You can now evaluate the risk and desired return and markup the estimate accordingly to determine the selling price.
If the market will not bear your desired price you now have all the data required to evaluate at what market price you are unwilling or unable to bid on this job. There may even be times when you will bid on work that is below cost - BUT YOU WILL KNOW YOU ARE BELOW COST.
Once the time standards and Budgeted Hourly Rates are in place it is vital that all companies monitor their production processes to ensure they are staying at the production standards that estimating is using. This is done through the constant monitoring of production factors such as labor and machine time and the constant comparison of estimate and actual calculations.
The results will provide valuable data for you to manage your business in a more profitable manner.
Tuesday, June 16, 2009
Subscribe to: Posts (Atom)