4 steps to calculate the manufacturing cost of sheet metal ...

In today&#;s competitive markets, understanding the structure of the costs of a product is essential to the improvement of the process as well as to a correct pricing strategy.

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The production cycle of a sheet metal product involves several phases from the raw material to the product ready for delivery which include: cutting, roll forming, bending, welding, punching, laser cutting, assembly of possible accessories, painting and packaging.

My previous articles are focused on:

We have seen how some of these parameters, for example the Efficiency of a machine or its Hourly Cost, depend from a number of estimations and strategic decisions the entrepreneur has to take. We have always to bear in mind, that the result of the calculation will be affected by all these decisions.

Here, I will use some of the concepts and ideas of these articles and propose a method to estimate the production cost of a single sheet metal product, and of a full batch.

You can find more details related to these concepts into the book &#;The Revolution of Efficiency&#; that you can request here:

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Step one: breaking down the production cycle

The formulas described in the previous article are meant to calculate the hourly cost and efficiency of a single machine or system.

Since production cycles can be so different from one another, and may include different phases, we need to brake the production cycle down to simpler processes, as shown in the picture below.

In this way the output of Machine 1 becomes the input of Machine 2, carrying on its production cost as if it were a new raw material.

Now, it is possible to focus on one of these production cycles at a time. Let&#;s start from Machine 1.

Step two: calculate the cost of the raw materials

The manufacturing of one product requires one or more types of raw materials.

For example, a standalone roll former for drywall studs requires coils of galvanized steel. In the case it is a complete system with roll forming and packaging, the raw materials will be: metal coils, straps and timber tiles.

At this point, we need to calculate or estimate the amount of raw material that will be required to manufacture one single product, including the scrap generated in the process. In the first article, I showed how Elleci could generate an average gain of 15,9% on the raw material costs, by moving a set of articles to more efficient technologies.

Let&#;s take as an example the product F of the a.m. article. The product has dimensions 415x685mm, thickness 1mm and is obtained from a sheet metal plate with dimension ×. We can fit 6 parts in this sheet, with a scrap of 19%. In this case, we need to consider that the amount of raw material per one piece is a plate with dimensions 700x500mm, thickness 1mm.

The cost of the raw material per one piece is given by this formula:

In the previous example, assuming 0,7 Euro per kg as the Material cost per kg, and density of steel 7,8 kg/dm3 we obtain:

RAW MATERIAL COST = 7 * 5 * 0,01 * 7,8 * 0,7 = 1,91 Euro

This procedure has to be repeated with each of the raw materials entering the process.

Step three: adding the cost of the machining

At this point, we need to have the following data:

• Hourly cost of the machine or system, as calculated with the method illustrated in the second article. In this phase, we will not take into account the overhead costs.
• Productivity (cycle time) and Efficiency of the system, as calculated in my third article.

The formula to calculate the cost of the machining is the following:

For example, with a cycle time of 12 seconds, efficiency 80,5% and a Machine hourly cost of 77,3 Euro we obtain:

MACHINING COST = 77,3 * 12 / 0,805 / = 0,32 Euro

So the total direct cost of the production for one piece is:

And in our example:

TOTAL PRODUCT COST IN MACHINE 1 = 1,91 + 0,32 = 2,23 Euro

In this case, the cost of the machining represents just the 14% of the total cost of the product, where the raw material represent the remaining 86%. These percentages may vary, but it is clear that any saving in the raw material (with the optimization or elimination of the scrap) can be highly beneficial to the overall production cost.

In some productions, we may need to produce a specific tooling that cannot always be calculated as a part of the machine.

In this case I prefer to see it as a part of the investment to complete the production of N parts, and use this formula:

(Total production cost) = N*(Raw material cost) + N*(Hourly Cost)*(Cycle time per one piece) /(Efficiency) + Tooling costs

Note that this formula is slightly different from the one I suggested in the article about the hourly cost, since the setup time is already taken care of by the Efficiency.

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Step four: repeating the calculation for the different phases of the production cycle

Now that we have calculated the production cost from raw material to the output of machine 1, we can repeat the procedure for the other machines or phases that complete the production cycle.

The output of each machine carries on the costs attached to it by the previous processes, until the end of the line is reached and the product is ready for the delivery.

The 80/20 rule applied to the structure of the product cost

The simple methodology illustrated in this article can lead to significant insights about the structure of the product cost, as well as helping to identify where to act to improve the profitability of a product or product line.

In the above example, with the cost of the raw material being 86% of the total cost, it is clear that any % in saving in the raw material (for example by reducing the scrap rate) will lead to a proportional reduction of the total product cost.

In a production cycle that includes several phases, it will be possible to understand how each phase contributes to the total industrial cost making it possible, for the production manager, to prioritize the interventions for the improvement of the process.

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As deep connoisseur in sheet metal working processes, Dallan focused its development in highly efficient production systems and technologies. In-line, coil-fed philosophy ensures the highest optimization in raw material utilization, meaning less scraps and more revenue than traditional systems. Moreover innovative and sustainable technologies guarantee a reduction of operating and maintenance costs.

Important note

In the introduction of the article I pointed out that the output of this methodology is an estimation of the total product cost, since several of the parameters we use are the result of a decision or estimation of the production manager.

In addition to that, note that this method does not take into account the logistic costs due to storing and moving the products from one machine or process, to the next. If this process is manual, these costs can be an important part of the total cost and they should be estimated by the production manager. For this reason the production in line is always preferable.

Anyway if the logistic of the products between two machines is automatic and carried on, for example, by a machine or automatic storage, this phase could be considered as another phase of the process, where the automatic storage is another machine characterized by its Hourly Cost and by a Cycle time that is the highest of the cycle times of the machines that come upstream and downstream.

Conclusions

This article completes the series of articles dedicated to the calculation of the machine hourly cost, efficiency and scrap rate.

In the previous articles, I highlighted the factors that the entrepreneur and the production manager have to consider when deciding the machines hourly cost and rate, and the importance of the organization of the production in order to guarantee the high efficiency of machines and systems.

Modern production systems allow for fast, automatic and highly efficient production, where setup times for tool change are constantly reduced or &#; as in the case of laser cutting machines &#; eliminated.

Even with highly automated system, often the cost of the machining represents a smaller percentage of the raw material cost. For this reason, any saving in the raw material cost in terms of scrap reduction becomes highly beneficial in terms of reduction of the overall industrial cost.

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In an era of rising costs from labor shortages and supply chain challenges, timely access to data is essential. Static spreadsheets used for estimating and tracking costs need to be replaced by dynamic data management, such as enterprise resource planning systems that incorporate historical, tribal knowledge with the collection and analysis of current data. The goal is to generate consistent estimates and provide profitable, competitive pricing.

Estimating fundamentals matter, especially now. Numerous factors influence the cost to produce parts, and understanding the basics of shop rates and sell rates is critical to determine a sell price that is both competitive and profitable.

How to Calculate the Shop Rate

Shop rates are the costs incurred for the production of parts on an hourly basis. To determine shop rates, first identify your direct hourly labor rates, your fixed overhead costs, and your variable overhead costs.

Direct hourly labor rates are the easiest to establish. They&#;re simply based on the actual hourly wage paid to employees. To determine the direct hourly labor rate for each production department, add the hourly wage rate for each department employee and then divide that by the total number of employees. This gives you the average hourly rate.

Most companies will then round that up. If your average rate were $18.33 per hour, you might round that to $18.50 or $19.00. Be sure to calculate the direct hourly labor rate for each production department, each of which has varying degrees of expertise among trained employees.

You also might consider identifying a rate for setup. Some machines may require more experienced employees for setup, but once they produce the first article, a less experienced employee can run the parts.

You could even establish direct hourly labor rates based on job type, such as prototype versus production or standard run versus expedited. Typically, a more experienced employee will produce prototypes, and a shop will charge higher rates for expedited production.

Overhead rates are more difficult to establish. Some just establish a single overhead rate for the facility, while others develop rates for each production department. After all, the costs behind every process&#;cutting, bending, deburring, machining, welding, or other anything else&#;can vary. Some machines may be fully depreciated while other machines are brand new and are just starting to be depreciated or have a lease payment each month. Power consumption can vary as well, and some equipment may require more maintenance.

Developing overhead rates for each production department lets you see the true cost of running the operation and allows you to be more competitive in your pricing. To develop overhead rates by production department, you need to look at both fixed and variable overhead expenses.

Fixed overhead costs are incurred whether the facility is up and running or shut down. Examples would be rent, equipment leases, utilities, and depreciation. Calculating these for the entire facility is straightforward; determining fixed overhead costs for each production department is a little more complex.

Using the most recent 12 months of data, you may allocate costs to each production department based on square footage (rent, utilities) or equipment costs (equipment leases and/or depreciation). Once you have the total costs allocated to each production department, determine the hourly cost by dividing the total by the estimated productive hours for the next 12 months. This will give you the fixed overhead costs by hour for each production department.

Variable overhead costs are directly related to the production of revenue-generating parts. Examples would be consumables such as welding gases, welding wire or rod, safety equipment, and indirect labor. These expenses vary with increases or decreases in production.

Again, using data from the past 12 months, you can allocate costs to the corresponding production department. Because we&#;re in an inflationary period, you&#;ll want to increase these total costs based on expected increases over the next 12 months. You then divide a department&#;s total costs by the estimated productive hours for the next 12 months, giving you the variable overhead costs by hour for each production department.

Estimated productive hours is the time equipment is expected to produce revenue-generating parts. A one-shift operation, eight hours per day, five days per week, has 2,080 hours worked in a year. Of course, employees don&#;t work for 2,080 hours. They take breaks, as required by law, they go on vacation and sick leave, and they have company holidays. And sometimes an employee is out, leaving no one available to operate a machine. Additionally, some departments may not be fully utilized over the course of 12 months.

Once you determine the percentage of time a department will be productive, multiply that percentage by the 2,080 hours (or more, if you&#;re running multiple shifts) to determine the estimated productive hours for that department. So, a department that works 80% of the time would have 1,664 estimated productive hours a year (2,080 × 0.80).

For production departments with multiple machines, estimated productive hours would incorporate the sum of all of them. Say you have three lasers in your cutting department, and the estimated productive hours for each is 1,664. So, the total productive hours per year for the department would be 1,664 × 3, or 4,992 hours.

Now that you have determined your direct hourly labor rate, fixed overhead hourly costs, and variable overhead hourly costs, you can add those together to calculate your hourly shop rate for each production department.

Sell Rate and Sell Price

The sell rate for each production department helps determine the price for the production time of parts. In reality, the sell rate is a function of what the market will bear. Based on the market sell rate for each production department, you can determine the profit using the shop rates that you calculated previously.

For each production area, the estimated profit would be the market sell rate less the shop rate. The sell price is the price at which the company is willing to produce and deliver parts. It includes the sell rate plus the cost of materials and outside processing (see Figure 1).

Some operations want all costs to be fully absorbed for estimating purposes. In these cases, they give estimates that incorporate operational overhead costs. These non-inventoriable costs include non-revenue-generating expenses likes sales, marketing, administration, and accounting.

To determine the hourly operational overhead cost, you again would utilize the most recent 12 months of cost data for these areas and divide the total by the total estimated productive hours for all production departments. Add the hourly operational overhead cost to the sell price and you get the fully burdened sell price.

Developing Estimated Times

Identifying and calculating the sell rate for a production department is just one component of providing an estimate. A more critical piece is the estimated time it will take to actually produce the part. Variables include the type of material, material thickness, part size, internal geometry, hardware, number and type of bends, part finish, and any other processing variable that affects the time needed to complete a job. Just as you developed hourly rates for each production department, you can also develop standard formulas that incorporate these variables to estimate the time required. Using standard formulas in conjunction with your sell rate will produce consistent estimates regardless of the estimator. For example, a bending formula might incorporate not only the number of bends of a particular part, but also the number of part flips, factoring in part size and the need for helpers.

When using a standard formula for a laser, an estimator would only be required to enter material thickness, type of material, total inches of cut, and number of pierces. The formula will then provide the estimated run time.

Exact formulas can vary depending on the operation, and they can evolve over time. For instance, a formula for laser cutting might start with (Linear inches of cut/speed of cut in IPM) + (Number of pierces × Pierce time/60). Estimators would then multiply the result with the department&#;s hourly shop rates for direct labor and overhead. As quoting evolves, other variables might be added to the formula, such as part removal time, whether the operation is automated or involves a helper hammering a thick part out of a skeleton. A cut sheet on an offload table might not tie up machine resources, but there are still labor costs associated with removing and organizing those parts, and, depending on the operation, an estimator might want to account for them.

Setup times typically are standardized by production department, and most rely on default times unless there is an overly complex or simple part. Estimators usually divide setup time by quantity and multiply that by the department&#;s hourly rate (though the direct labor shop rate might be higher, depending on the setup personnel involved). The shorter the setup, the more competitive a shop can be on low-quantity runs.

The idea is to get the estimated time as close to the actual time as you possibly can&#;a feat that (as we&#;ll discuss soon) makes an entire operation more flexible and competitive (see Figure 2). And when you use an ERP system, instead of traditional spreadsheets, you can maintain all of the labor and overhead rates as well as the standard formulas in one place, facilitating easy updates and access by all estimators.

Actual Versus Estimated

Being able to compare the actual time and costs during production to the original estimate allows you to evaluate employee performance, the validity of standard formulas, material utilization, and overhead absorption. When you see a variance, you can adjust pricing as needed for future orders.

By tracking and comparing the actual versus estimated direct labor time for each operation, you evaluate estimating accuracy and employee efficiency. Longer-than-estimated labor time could indicate a problem, such as excessive scrap parts and rework. Work instructions might be vague, employees might need more training, or the estimate (including the standard formula it relies on) might simply be inaccurate. If employees performed efficiently and the operation went smoothly, you might need to reevaluate the standard formula and adjust it as needed.

Next comes material utilization. Was the actual yield greater or less than estimated? Evaluate the variance, determine the cause, and adjust as necessary for future quotes.

Actual versus estimated comparisons also affect overhead absorption. If a job takes less time than estimated, it absorbs less overhead and realizes greater profit. Conversely, if it took more time than expected, it absorbs more overhead and puts profit at risk.

Evaluate overhead rates quarterly, and make sure they incorporate changes in equipment utilization, actual hours utilized, and actual expenses incurred. By continually monitoring and adjusting overhead rates, you help make sure you don&#;t under- or over-absorb these costs.

The actual-versus-estimated comparison allows you to continuously refine the rates, times, and formulas estimators use. Put simply, accurate quoting helps you maintain consistent profits.

In highly competitive environments or during times of economic downturn, knowing precise costs allows you to understand how far you can reduce pricing to keep the lights on without losing money. This can mean the difference between keeping trained employees or being faced with difficult workforce reductions.

Say your company has reached its productive capacity. If you know the precise costs and the profits produced by a job, you can reevaluate pricing on lower-margin items and increase sell prices accordingly.

The ability to estimate the cost of production accurately may make the difference between success and failure in today&#;s competitive manufacturing landscape. Estimating the cost of a job or service requires a firm understanding of the part, its production history, the time required to produce it, and the associated costs of labor and materials.

Accurately identifying the associated costs ensures that each production order adheres to the company&#;s business model and desired margin. For decades, manufacturing has survived using tribal knowledge, pen and paper, spreadsheets, and printed documents to quote business. These slow, archaic methods may have worked in the past, but they won&#;t in the future. Here, modern software platforms are playing an increasingly critical role, helping shops streamline the calculation of job costing and estimating. This helps keep profits consistent and, ultimately, makes a fabricator more competitive as it navigates the ever-changing economic landscape.

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