The Problems of Profits, Costs and Delivery
There are probably no worse problems, other than human capital, than the problems of profits, costs and delivery of products to the customer on time.
Problem – Our profits stank and we were chronically late with delivery.
The profits never seemed to get to where I thought they would be and always seemed to come up against an unpleasant surprise. I realized that we were underpricing our machines and not getting the level of profitability I expected or we needed. Plus, we were always late in delivery.
Solution – Cost Sheets
I asked that we create cost sheets including all the variables that made a specific order. That way we could build a price based on real costs in a timely fashion. It was not enough for us for us to know our variable costs though. We needed to know our labor costs. That meant we needed to track our engineers’ time on each project. That had ramifications because the engineers thought it would be used to measure their productivity. It did teach me that engineers are lousy at estimating how long it takes them to do something. But we got our numbers on their time. We did the same thing with our assembly staff. That came in closer to expected because they were used to keeping method sheets that told them how long it should take to do a specific task. In both cases though, we needed to assign a dollar labor rate to the work. Calculating that rate is subject to a number of variables. Should we use individual rates based on each person’s cost? A blended rate? What other costs are included? Taxes and benefits for sure, but what about other direct costs or overhead? Do you base it on history or this year’s forecast? What volume are you spreading your overhead over? Do you include people’s whose labor affects the outcomes of the people doing the work, like purchasing? Cost accountants? Shipping and receiving? Figuring out your costs, your burden rate, etc is unique to your business but it can be done and it can help you figure out how to be more profitable. Delivery is a complex issue. Is it the last process in the line or is it the first. In our case, engineering could not estimate with any accuracy how long it took them to design and detail the machine, unless they had done the identical machine in the past. That meant that assembly was always up against the wall to make up for the delay in engineering. Even when we made extra allowance for engineering time, engineering would not be able to meet the goals. I still haven’t figured out a solution to that one, other than to double whatever I am told. Sometimes it simply takes deadlines not to be exceeded.