Doing More with Less
I have been at Index for more than 4 years now, and in that time I have seen many changes in this company and in others. Like many other machine tool builders during the late downturn, we had to learn how to do more with fewer people, including improving customer support and service. We believed that the companies that would survive and prosper during these times had to step up their customer support. Not only the machine tool builders, but also manufacturers of all products seemed to be doing more, with less.
As I visit manufacturers from many different industries, I see that in most cases, the efficiencies achieved during the tough times have continued in place to the present. And still many companies are looking for more ways to increase their output, although not necessarily by adding employees, as was typical in the past.
Plants of all sizes are looking at their current processes and asking themselves questions such as: Can I improve this process without adding more people? Can I get better part quality without adding additional part cost or additional labor? Can I save floor space and get more output from each machine?
Improvements along these lines have the effect of reducing overhead costs, a bundle of costs that have not, perhaps, been unwrapped and rigorously examined—until recently. The incentive to do so is that when overhead is reduced, profit can improve.
Manufacturers are starting to see that it is better to make their part or product in as few operations as possible. So they are purchasing equipment with more capabilities, like multifunction machines that can make a part complete or almost complete in one operation. When this philosophy is adopted, part quality improves, overall cost per piece produced is reduced, and of course, profit increases.
When a plant’s management considers its operation’s true, complete overhead cost as it applies to each piece of equipment in the plant, they will find that overhead has about twice the impact on production costs as does the cost of a new machine. Another way to say this is that overhead in many cases can be 60 percent or more of the true cost of producing a part on any given machine.
Let’s compare two machines, a less productive machine, ‘A’ at a cost of $50,000 and a more productive machine ‘B’ at a cost of $100,000. Both machines use the same floor space, about the same power, same labor, and so on, to operate.
The overhead costs (floor space costs, labor, utilities, and all other costs of the plant) will generally come to 2 times the price of the less productive machine and about equal to that of the more productive machine. In this example, let’s say that the overhead costs are spread evenly across the term of the machine purchase. Now, we have two total cost packages of:
Machine A $50,000 + $100,000 = $150,000 total
Machine B $100,000 + $100,000 = $200,000 total
By doing a little math, we can determine that with all other factors the same, the more expensive machine B only needs to be one third more productive than machine A to be a justifiable, profitable solution for this process. Even though machine B cost 2 times as much (100 percent more) than machine A, the additional productivity needs only to be about 33 percent more for the cost per part to be the same. If machine B cost only 50 percent more, then the productivity would need only to be 16.7 percent higher to justify the spending.
So the impact of machine tool productivity on effective machine cost is 2 times that of simply the acquisition cost of the machine.
Take the example a little further, and it is not hard to see that increased productivity also reduces labor cost per part produced, and since this directly lowers cost per piece produced, it also directly increases the profit for each part sold. Less labor implies less overhead, less cost. Since both of these factors increase profits, we have come full circle: more productivity allows manufacturers to accomplish more with less input cost, and therefore become more profitable, even in a tough, globally competitive market.