Introduction To Shop Rates

Labor used to produce products and services purchased by customers.
These man-hours are directly attributable to customer activity. Lab

A few years ago before computers, excel spreadsheets and calculators most organization used a standard shop rate for any labor that was occuring during a process.   Now that computers can easily calculate figures organizations have become much more accurate in trying to capture their true shop rates.   For the next few weeks in this blog I’m going to cover some of the details regarding shop rates and their affect on quoting and estimating.

In order to make a profit when running a business, you will need to determine what fees to charge.   The general way to determine the fees is to allocate the overhead cost to each machine on top of the actual labor costs.  Many times shop labor rates are thought of as how much an hour can I charge to perform a task.   This is basically true but shop rates can be broken down into many sub categories, i.e.  setup rate, cycle time rate, direct labor rate, overhead absorption rate and others.   I will begin by defining some terms that will 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 there may be a different ship rate for both setup and cycle time.  Each machine may have a different setup vs cycle time rate because of various factors like electricity or gas usage and consumables usage during the cycle time vs the setup time.

You should think of this blog as an online cost estimating class or course where we are going to review all the different areas regarding cost estimating.   Job cost estimating software will help you with these calculations and I highly recommend using MIE QuoteIt

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

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

Calculating Cycle Time with Estimating Software

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

Estimating setup and run time can be as simple or as complex as you desire.    Now its time for the final formula to be realized which includes 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 Be Produced)+(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 Be Produced)+(Inspection Time*Quantity Of Parts Inspected)

Cost estimating using good estimating software tools makes producing accurate quotes much simpler.    The formula given is only the first step in learning how to estimate.   I will talk about shop rates starting with my next blog.  Shop rates are critical part of an estimate because you may accurately estimate the time it takes, but if you do not have a handle on your shop rates you will not be profitable.

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

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

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 or service. We strive to satisfy our customer’s every reasonable requirement with speed, courtesy and honesty. Our pricing reflects the cost of providing high quality products and excellent service but remains fair. Our goal is to be known throughout the world for the development and production of innovative products. We endeavor to be regarded as the leading supplier of high technology in the sheet metal fabrication. We want our customers to be proud to own MIE products.

Price Quote Software Handles Inspection

Job shop estimating is not the most complex job in the job shop, but it does have a lot of little details which should be dealt with during the estimating process.   Inspection is a category of the cycle time which is not normally considered during the quoting process.    I mentioned earlier that the following formula which is normally used for machine time quoting which is for sheet metal, machine manufacturing, assembly and pretty much any other process.
Cycle Time Per Piece
(Handling Time / Quantity Manufactured Per Handling Time) + Run Time)
One piece of information that is missing from this formula is how to handle inspection time.   Inspection time can be included on the estimate in a variety of ways.
1.  Inspection time could be included in the run time because the employee may be able to actually inspect the parts being manufactured as the machine is running.  In the machining and sheet metal type of machinery this would work for lasers, turning machines, mills and lathes.   These machines usually do not require 100% dedication of the employee as they watch the part being processed 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 handle inspection 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 organization would be first articles.  First article inspections are required before the production run could be started.   This ensures that the parts are made accurately.
4.  Inspection can also be done during the actual production run for SPC.
Estimating software for industries such as metal quoting, machine shop quoting, sheet metal quoting, stamping need to be able to handle these different situations.   If these different situations.   If these scenarios are handled by your estimating software you will be able to manage any time of quote that requires inspection.
My next blog will give the formula that can be used to handle these four situations.
MIE QuoteIt handles this complex cycle time calculation by allowing the creation of user defined formulas.
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 or service. We strive to satisfy our customer’s every reasonable requirement with speed, courtesy and honesty. Our pricing reflects the cost of providing high quality products and excellent service but remains fair. Our goal is to be known throughout the world for the development and production of innovative products. We endeavor to be regarded as the leading supplier of high technology in the sheet metal fabrication. We want our customers to be proud to own MIE products.

Job shop estimating is not the most complex job in the job shop, but it does have a lot of little details which should be dealt with during the estimating process.   Inspection is a category of the cycle time which is not normally considered during the quoting process.    I mentioned earlier that the following formula which is normally used for machine time quoting which is for sheet metal, machine manufacturing, assembly and pretty much any other process.

Cycle Time Per Piece

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

One piece of information that is missing from this formula is how to handle inspection time.   Inspection time can be included on the estimate in a variety of ways.

1.  Inspection time could be included in the run time because the employee may be able to actually inspect the parts being manufactured as the machine is running.  In the machining and sheet metal type of machinery this would work for lasers, turning machines, mills and lathes.   These machines usually do not require 100% dedication of the employee as they watch the part being processed 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 handle inspection 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 organization would be first articles.  First article inspections are required before the production run could be started.   This ensures that the parts are made accurately.

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

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

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

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

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

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

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 or service. We strive to satisfy our customer’s every reasonable requirement with speed, courtesy and honesty. Our pricing reflects the cost of providing high quality products and excellent service but remains fair. Our goal is to be known throughout the world for the development and production of innovative products. We endeavor to be regarded as the leading supplier of high technology in the sheet metal fabrication. We want our customers to be proud to own MIE products.

How To Estimate Handling Time

Shop estimating is pretty complex and shop estimating software needs to be handle all types of scenarios.    One of those situations is handling time calculations.   Handling time is defined as the time it takes during the cycle time phase of production to move the material in place to begin a step and the time to remove the material at the end of the step.

The basic formula for estimating an operations cost is

Cycle Time Per Piece

(Handling Time + Run Time)

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

Examples

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

Now let’s assume that widget A is very large and it takes a forklift to move each piece into the forming machine.   In this situation the run time may be 30 seconds because that is the time it takes to form widget A once it’s in the machine.   The difference is the handling time is much larger because it may take 5 minutes to setup and remove widget A from the machine.   Separating the handling time and run time out in this situation becomes a bit more valuable because the handling time is takes such a large portion of the actual cycle time.

Last example is you are having widget A that needs to be cut on a laser.   A laser machine in my example is a machine where you put a sheet of raw material onto it which then the laser can cut out 1 or more widget A’s on a single sheet.   Let’s say to cut widget A the run time is 3 minutes per part.   Each widget A takes the same amount of time to cut but in this situation is the handling time is not one to one with each widget A.   The reason for this is the laser cuts multiple pieces of parts out of a single sheet.   The handling time is actually the time it takes to load the sheet into the machine and then the time to remove the widgets from the sheet and machine when the widgets have been cut.    Handling time is actually the time it takes to load the sheet divided by the number of parts a sheet makes.

The new cycle time formula is

Cycle Time Per Piece

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

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

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

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