Process Planning Episode 11 pptx

Solution Volume Sales s Fixed Variable Profit Profit: Contribution Cont.: 9.7 Manufacturing materials and costs As stated in Section 4.9, various factors will influence the selection

Economics of process planning 395

Example 9.12 The Kleenezee Vacuum Company decide to analyse further the Supa-kleen model as detailed in Example 9.11 The variable cost is

s the fixed costs are s per period and the selling price is

s Determine the profit and contribution for this model for a range of production volumes from 250 to 1000 in increments of 250

Solution

Volume Sales (s Fixed Variable Profit Profit: Contribution Cont.:

9.7 Manufacturing

materials and costs

As stated in Section 4.9, various factors will influence the selection of a suitable material for design and manufacture of a product However, it is of prime importance that the selected material has appropriate properties that not only allow it to perform satisfactorily during service, but also to allow it to respond appropriately during manufacture (Edwards and Endean, 1990) The level of performance required for the material will vary according to the appli- cation area For example, the level of performance expected of materials used

in aerospace applications will be far greater than that of those used in house- hold appliances In terms of cost, the higher the level of performance required, the greater the expense incurred Therefore, the materials selection decision will generally be a compromise between performance and cost (Dieter, 2000) The cost of a particular material will be subject to the usual market forces

of supply and demand This may also be compounded further by the avail- ability of the material, particularly for materials that are naturally occurring, rare and/or difficult to process from mineral form For example, a widely used material such as mild steel will have a low price compared with a rare mate- rial such as an industrial diamond In addition, the selection of a particular material will limit the manufacturing options available and thus influence the manufacturing cost This can also have an influence on the basic material cost

in terms of the cost and energy required processing the raw material into a useful material form for manufacture For example, steel in its basic form of pig iron is approximately a quarter of the cost of a cold-finished carbon steel bar (Dieter, 2000) Based on the relative costs of the two steel products

mentioned above, another factor in the cost of material becomes apparent, namely the shape or form of the material In solid form, most materials will

be available as bar, sheet and plate For example, consider the relative cost of brass (compared to mild steel = 1) in bar, sheet and plate form Considering the cost per kilogram, it is cheapest in sheet form with a relative cost of 13.67 and slightly more expensive in plate form at 3.89 (see Table 9.4) However, in bar form it has a relative cost of 6.63 (see Table 9.5) which is almost twice the cost of sheet The use of relative costs based on either cost per kilogram or cost per cubic metre allows the approximate relative cost increase or decrease

to be estimated when changing from one material, or material form, to another for a particular product, as illustrated in Example 9.13 It is also preferable, as although the actual costs of material will fluctuate due to supply and demand, availability and quality over time, the relative cost ratio will remain fairly con- stant (Parker, 1984) The values in Tables 9.4-9.6, although useful should only be considered as approximate They have been compiled from a number

of charts from the British Standard PD6470:1981

TABLE 9.4 Relative costs for bar stock

Plate (Over 3.50mm thick)

Economics of process planning 397

TABLE 9.6 Relative costs f o r castings

Solution

Relative cost of cast iron = 10 Relative cost of aluminium = 16.75 Cost increase = 16.75/10 = 1.675

The material cost of the component will increase by 1.675

9.8 M a n u f a c t u r i n g

processes and costs

Just as competing manufacturing materials are evaluated as outlined in Section 9.7, so too are competing manufacturing processes This can take the form of the type of relative evaluation outlined in Section 9.7 for materials However, it may be the case that a more detailed cost comparison is required between competing manufacturing processes A simple method for doing this is outlined below This is a combination of two approaches known as the Production cost formula and break-even analysis (Hawkes and Abinett, 1984), both of which are useful in their own right and are briefly introduced

9.8.1 Relative surface finish costs

When costing products, the cost of a component will depend as much on the method of manufacture as the material it is made from Each process has an inherent ability to produce to within certain limits of dimensional and geometric accuracy and surface finish For example, if a surface finish of 0.4 Ixm is required for a component, then it can be seen from Fig 9.4 that there are a number of processes that can provide this However, in general the tighter the specifica- tion is for both accuracy and surface finish, the more expense is incurred in the processing This is illustrated in the chart in Fig 9.5, which clearly shows that the cost increases as the surface finish moves from rough machining through grinding to super finishing Using the charts in Figs 9.4 and 9.5, the most eco- nomic and suitable process can be selected as illustrated in Example 9.14

Figure 9.4 Surface finishes for some common manufacturing processes (adapted from Hawkes, B and Abinett, R., 9 1984, reprinted by permission

of Pearson Education Limited)

Example 9.14 Preman Ltd are a sub-contracting firm They have been instructed by a customer to improve the surface finish of a turned part, which they are producing with finish turning, from 1.6 to 0.4 txm Determine the relative increase in cost of changing the surface finish and determine if finish turning is still suitable If not, suggest an alternative

Solution

Relative cost of 1.6 p~m surface finish = 5.5*

Relative cost of 0.4 p~m surface finish = 8.5*

Cost increase = 8.5/5.5 = 1.5

* Values determined from Fig 9.5

Economics of process planning 399

~~ ~ j Semi-r :)ugh m/c

- -r 0.1 0.4 0.8 1.6 3.2 6.3 12.5 25

Surface finish (l~m) Figure 9.5 Surface finish and relative cost (adapted from Hawkes, B and Abinett, R., 9 1984, reprinted by permission of Pearson Education Limited)

Finish turning operates between 0.2 and 6.3 I~m and therefore is still suitable

to produce the part

From the above it is clear that care must be taken in selecting an appropriate manufacturing process for the given material and required surface finish Even more importantly, care must be taken when specifying surface finish require- ments as this has the biggest influence on manufacturing costs It is, therefore, important to consider both the correct manufacturing process and surface finish

In Section 9.8.1, we considered the relative costs of processes in terms of surface finish requirements and the effects of changing surface finish specifications and/or processes In the case where a more detailed cost com- parison is required between competing processes, the production cost for- mula provides a simple method of doing so As described in Section 9.5, the production cost is usually calculated as the sum of the prime cost and the production overheads However, this may also be expressed as the formula:

C

T= o+ U

where T is the total unit cost of manufacture of component, C the set-up cost,

Q the batch size and U the unit cost of manufacture (direct labour + direct material per unit)

In the above equation, the set-up cost is a fixed cost and the unit cost is the variable cost It is important to note that although the set-up cost is fixed in

this case it can be variable when large batch sizes demand multiple set-ups The cost per unit incurred may also change if the batch sizes vary Using these costs and the batch size, the total unit cost for a particular combination of materials and process can be assessed This is best illustrated through a worked example

Example 9.15 A large computer manufacturer requires 1200 printed circuit board (PCB) carriers every month for the production of the PCBs themselves Within their tool room, they have a variety of machining processes available and the carriers are produced on a conventional milling machine The following information relates to the PCB carrier manufacture: Set-up time I h 20 min

Machining time 39 min

Material cost~unit s

Machinist's hourly rate s

Solution

Set-up cost C = 1 h 2 0 m i n @ s = s Labour cost/unit = s x 3 9 / 6 0 - s Material cost/unit - s

Unit cost U = s Take the batch size Q = 1200

F i g u r e 9.6 Break-even chart

Economics of process planning 401

to demonstrate for a particular product, with associated fixed and variable costs, that a certain number of products must be sold before a profit is made The chart plots costs and expected income against quantity produced It can

be described, in relation to labelled lines and points, as follows:

AB - this represents the fixed costs which are unaffected by production volume

B F - this represents the variable costs associated with production volume

A E - this represents the variation in income against sales volume The assumption is that everything produced is sold

C - this is the point at which break-even is achieved, that is, sales income = total cost, and is known as the break-even point

D - extrapolating down from point C to the x-axis gives the quantity at which break-even is achieved, that is, the break-even quantity

The production of parts before point C results in a loss, that is, the shaded area Any parts produced after point C results in a profit, that is, the differ- ence between AF and AE The use of break even is best illustrated by a worked example The break-even quantity can also be calculated using the fixed costs, variable costs and selling price as follows:

Fixed costs Break-even quantity = Selling price - Variable costs

The use of the formula is illustrated in Example 9.16

Example 9.16 Using the data from Example 9.12, determine the break-even quantity for the Supa-kleen model

Solution

Fixed costs Break-even quantity = Selling price - Variable costs

32 000 Break-even quantity = 155 - 47

Break-even quantity = 297

9.8.4 Detailed cost comparison

The 'profitability' of a product is particularly affected by the amount manu- factured and can be investigated by comparing costs incurred against income expected as was shown in Section 9.8.3 using a break-even chart However, the break-even chart can also be used to compare the cost of two or more production methods for a given product Consider the bush shown in Fig 9.7 below This could be produced on either a centre lathe or a CNC lathe

Figure 9.8 Break-even chart

for cost comparison

Figure 9.7 Brass bush

This could be represented on a break-even chart as illustrated in Fig 9.8

As would be expected, the fixed costs for the centre lathe will be less than that of the CNC lathe These will be based on the machine set-up costs CA and Ca However, the variable costs are less for the CNC machine than for the centre lathe and this is indicated by the gradient of the lines UA and UB These are typically based on the direct labour and materials These can be stated in the format of the production cost formula

For the centre lathe:

Example 9.17 The PCB carrier from Example 9.15 is usually made on a conventional milling machine However, it has been decided to investigate if there is any significant cost advantage of producing these on a CNC milling machine Determine which machine is the most suitable for producing the PCB carriers at the current rate of 1200 per month

Economics of process planning 403

Solution

Method (a): Conventional milling machine

Set-up time I h 20 min

Machining time 39 min

Material cost/unit s

Machinist's hourly rate s

Set-up cost C = I h 20 min @ s = s 13.13

Method (b): CNC milling machine

Set-up time 2 h 55 min

Machining time 28 min

Material cost/unit s

Machinist's hourly rate s

Set-up cost Ca = 2 h 55 min @ s = s

as a break-even Chart as shown in Fig 9.9, although it is not to scale

Figure 9.9 Cost comparison represented on a break-even chart

9.9 The 'make or buy?'

decision

9.9.1 What is a 'make or buy?' decision?

Any manufactured product will normally consist of a combination of a number of parts, sub-assemblies and assemblies All of these can either be made by the organization or bought in as completed items Thus, the choice

is basically to use an internal or external supplier Therefore, in its broadest sense, make or buy decisions are about the sourcing of materials or parts In manufacturing, if the decision is to buy in the parts this is referred to as sub- contracting This tends to fall into one of four categories of subcontracting

work (Bailey et al., 1994):

9 processing of material provided by the buyer (often referred to as free issue material) which is returned once processing is complete;

9 manufacture of a part, sub-assembly or assembly designed by the buyer;

9 provision of a complete manufacturing solution where the buyer does not have local facilities;

9 provision of a manufacturing service outside the normal scope of the buyer's activities

Although not strictly classified as subcontracting, many manufacturing com- panies also purchase many standard parts, for example, nuts, bolts, screws, etc In fact, purchased parts, materials and subcontracted items can represent

up to 70 per cent of a product cost (Tanner, 1996)

9.9.2 Why do companies buy?

There are any number of reasons why a company will buy in a part, sub-assembly or assembly The reasons for doing so will differ depending on

E c o n o m i c s o f process planning 405

the level within the company where the decision is made For example, a strategic decision may be to buy out a supplier in order to have an internal supplier of a part On the other hand, such a strategic decision could involve the closure of facilities in order to buy instead of making in-house In some instances, the make or buy decision could be made on the basis of whether

or not to acquire additional equipment or other resources that is, buy equipment and make it yourself or simply sub-contract? This type of decision would be a tactical decision Finally, make or buy decisions that are made considering only existing equipment, resources, skills and capacity are operational decisions The vast majority of make or buy decisions made at the process planing stage will fall into the operational decision category, although there may occasionally be involvement at the tactical level

This approach to the make or buy decision can lead to parts falling into one of three categories (Tanner, 1996):

Must-buy items - based on current capabilities, the make decision is impossible

M u s t - m a k e i t e m s - these involve processes and operations that are critical to ensure product integrity and quality

Items that can be either make or buy - these are items that require thorough analysis to arrive at a decision The decisions for these types of items are very often made on the basis of cost

9.9.3 The 'make or buy?' decision process

There are four basic questions to be asked in the make or buy decision as illustrated in Fig 9.10 (adapted from Tompkins et al., 1996) The initial question focuses on whether the item can be bought If it can, the next ques- tion is 'Can we make the item?' Obviously, if the answer is 'no' the part will

be bought unless, of course, the decision is being made at the tactical or strategic level If the item can be made in-house, the next stage is to compare the costs of making or buying If it is cheaper to make then the next question focuses on the capital available to make the item This considers if the capital could be used elsewhere, the future investment implications and the cost of using external funding if required

9.9.4 Cost comparison for 'make or buy?' decisions

At the operational level many make or buy decisions will be made purely on cost, although factors such as availability, quality and delivery will be con- sidered However, assumptions will be required on other factors such as expected volume, demand pattern, waste, inventory levels and variations in material prices (Bailey et al., 1994) The most common approach is simply comparing the cost of manufacturing the part, using existing labour and equipment, with the cost of buying it This could be achieved in a similar manner to that used in Example 9.17

Figure 9 1 0 Flow chart for 'make or buy?" decision process (adapted from Tompkins, J.A., White, J.A., Bozer, YA., Frazelle, E.H., Tanchoco, J.M.A and Trevino, J Facilities P l a n n i n g , 2nd edn, 9 1996 Reprinted by permission of John Wiley & Sons, Inc.)

Example 9 1 8 After having decided to make the PCB carrier discussed in Example 9.17, a sub-contractor offers to supply them to the company for

s per unit The production overhead uses machine hours as the absorp- tion basis and this has been set at s per machine hour The other over- heads have an OAR of 15 per cent based on the production cost Based on the data provided below, state whether the company should make or buy the carriers Base the prime cost on the total unit cost of manufacture

Economics of process planning 407

Production cost = s 852.00 + s = s 852.00

All other overheads = s 852.00 • 0.15 = s

Total cost = Production cost + All other overheads

Example 9.19 It is decided to review the make or buy decision detailed in

Example 9.18 This is because someone from the purchasing department has pointed out that it would have been more appropriate to compare the selling price with the marginal cost of making the PCB carrier What will be the decision using the marginal costing approach?

9.9.5 Reviewing the 'make or buy?' decision

Once the initial make or buy decision has been made, appropriate action will

be taken to implement the decision However, it is not a static process and is considered dynamic in that any number of changes in circumstances will trigger a review of the decision Bailey et al (1994) identify a number of possible reasons for reviewing the make or buy decision and these include:

9 poor quality performance;

9 poor delivery performance;

9 substantial increase in price;

9 changes in demand and therefore changes in volume requirements;

9 pressure to reduce costs

These should form part of the criteria used in researching the supply mar- ket for identifying alternative sources as a safeguard against any of the above problems Considering all of the above, if the company has the necessary equipment and appropriately skilled labour and the production capacity available, it would probably be better to make the part on site

9.10 Summary It has been shown that there are various costs associated with the design and

manufacture of a product A crucial part in compiling an accurate cost estimate is the identification and classification of the costs that contribute to the total cost of a product Once the costs have been clearly identified and classified, they can then be used to estimate the cost for the design and manufacture of a product taking into consideration the volume being manu- factured and sold Two basic approaches are employed to do this The first is the traditional approach to product cost estimating and this is known as job

or batch costing This considers all direct and indirect costs associated with

a product The indirect costs are allocated on the basis of an overhead absorption rate, for which a number of absorption bases are employed Most commonly these are time-based and include direct labour hours, machine hours and direct wages An alternative approach is that of marginal costing, where only the direct and variable costs are considered as relevant The idea behind this is that many of the other indirect costs are incurred regardless of production and should therefore not be included in the costing This means that a product's cost-effectiveness is considered from the perspective of its contribution to writing off the overheads However, as illustrated from Example 9.11, using this approach a product can be satisfactory in terms of contribution but in reality actually be non-profitable

The major costs for many products are the materials and processing costs incurred Therefore, when evaluating materials and identifying suitable processes, the use of relative cost data is useful for evaluating the effect of pursuing a particular material/process combination In conjunction with the relative cost data, approaches such as the production cost formula and the break-even analysis can prove particularly useful for comparing specific process/material combinations for which there is data available The use of such cost data helps the process planner make not only sound technical decisions with regards to the manufacture of a component, but also sound financial decisions These can also be used to help with 'make or buy?' deci- sions with the basic question to be considered, 'Is the part to be produced internally or externally?'

Therefore, the cost analysis carried out by the process planner will influence whether the product will be made as it will play a major role in predicting the selling price and the profitability of any component part or product If the product is considered financially viable, the cost analysis will help shape the selection of processes and help in deciding if parts will be sub-contracted or purchased

Chapter review questions 1 What types of decisions for product design and manufacture can be

made based on costs?

Economics of process planning 409

2 Describe the main costs associated with manufacturing

3 Which of these is most appropriate to process planning and why?

3 What are the main categories of cost and how are they related?

4 What is the prime cost and how does it relate to the cost categories identified in question 3?

5 What is job and batch costing?

6 What costs contribute to the production cost?

7 How are the additional costs identified in question 6 allocated to specific products?

8 What are the main bases for overhead absorption commonly employed and why are they used as opposed to the others identified in the chapter?

9 What other costs are used with the production costs to estimate the total cost?

10 What other cost is of interest in cost estimating in manufacturing?

11 What is marginal costing and how does it differ from job/batch costing?

12 What is meant by the term 'contribution'?

13 What are the major influences on the cost of materials for manufacture?

14 What are the advantages of using relative cost data?

15 How does surface finish relate to manufacturing cost?

16 How does the production cost formula relate to cost categories identified in question 3?

17 Why are the set-up costs divided by the batch size in the production cost formula?

18 How does the break-even analysis work and what is the aim of using it?

19 Why is it important to carry out detailed cost comparisons?

20 What is a 'make or buy' decision?

21 What are the four major categories of sub-contracting?

22 Why would a company decide to buy-in a component as opposed to make it?

23 What are the three classifications of part that are used in a make or buy scenario?

24 What are the four basic questions asked in the make or buy decision?

25 What additional factors must be considered if the decision is to make?

26 What additional factors must be considered if the decision is to buy?

27 What factors are considered when carrying out a cost comparison for make or buy decisions?

28

29

What cost is compared with the buying price and why?

What possible reasons might be cited for reviewing the make or buy decision?

Chapter review problems For all the problems below identify all costs as eitherfixed (F) or variable (V),

where possible, before attempting them

1 A component is milled from aluminium and takes 24 min to machine The machinist is paid s per hour and the order is for 500 compo- nents What is the direct labour cost?

2 For the component in problem 1, the material cost per unit is s There are also additional direct expenses of s for fixtures Determine:

(a) the direct material cost;

(b) the prime cost

3 Turner Precision Engineering Co manufactures driveshafts for small machinery applications The following data applies to a stepped shaft that is 050 • 250 mm in length:

050 mild steel bar (bright) s Machinist's hourly rate s Machining time per unit 12 min

Determine:

(a) the direct labour cost;

(b) the direct material cost;

(c) the prime cost

4 A small sub-contracting company produces PCB carriers for a large computer manufacturer These are produced on a CNC milling machine and the following data applies:

Machining time per unit 18 min Machinist's hourly rate s Material cost per unit s Special jigs/fixtures s Determine:

(a) the direct labour cost;

(b) the direct material cost;

(c) the prime cost

Economics of process planning 411

5 For a medium-sized manufacturing organization, the following costs have been incurred for a period of 1 month:

Direct materials s 000

Production overheads s

Determine:

(a) the prime costs;

(b) the production costs;

(c) the production cost per unit if 19 000 units are produced

6 The Shearing Bolt Co manufactures high-quality bolts for the construc- tion industry For a 0 5 • 100 mm bolt, the following data applies:

12 mm high-carbon steel hex bar s

Machinist's hourly rate s

Determine:

(a) material cost per unit;

(b) the total direct material cost;

(c) the direct labour cost;

(d) the prime cost;

(e) the production cost

7 The Gladiator Boiler Co manufactures small boilers for domestic heat- ing systems The boilers are made from mild steel and manufactured on two manual presses in two halves The following data applies to one of the presses:

Material cost per unit s

Machine operator hourly rate s

Production overheads s

Determine:

(a) the direct labour cost;

(b) the direct material cost;

(c) any other direct cost;

(d) the prime cost;

(e) the production cost

8 The component in problem 2 is machined in the machine shop During the period in which the 500 components are produced the following data applies:

Total budgeted overhead s 000 Total machine hours 2000 Determine:

(a) the machine hour OAR for the machine shop;

(b) the production overheads;

(c) the production cost

9 A sub-contracting specialist offers precision machining services to the aerospace industry There are three major costs centres:

125 h of finishing @ s

80 h of inspection @ s 11.98/h The total machining time required is 200 h Determine:

(a) the prime cost;

(b) the production overheads;

(c) the production cost

For the components in problem 9, all other overheads are calculated on the basis of 15 per cent of the production cost Determine the total cost and the unit cost

A sub-contracting manufacturer produces components for the automo- tive industry One of these is a small brass bush (see Fig Q9.11), for which the following data applies:

Costs: 035 brass bar s

Machinist's hourly rate s Storeman's hourly rate s Production overheads s Marketing/admin s

Other: Cut and prepare material per batch (storeman) 198 h

Economics of process planning 413

(a) the direct material cost;

(b) the direct labour cost;

(c) the prime cost;

(d) the total cost;

(e) the cost per unit;

(f) the selling price if the profit has to be 15 per cent

12 For the component detailed in problem 11, the company have decided

to use mild steel instead of brass to make the bush in a bid to reduce costs The following data applies:

Costs: 035 mild steel bar s

Machinist's hourly rate s

Storeman's hourly rate s

Production overheads s

Marketing/admin s

Other: Cut and prepare material per batch 256 h

Machining time per unit 3 min 30 s

Using the above information, determine:

(a) if this is a viable design change based on the calculation of the total cost;

(b) the effect on the profit, both financially and as a percentage, if the unit price remains the same

13 Fabricatious Ltd manufactures steel benches for industrial and medical applications The following data applies to one of their products: Material requirements Bench top 1250 • 625 x 6 mm plate (1 off)

Strut 1250 x 25 x 25 x 3 mm angle

(2 off) Strut 625 x 25 x 25 x 3 mm angle

(2 off) Legs 750 x 25 X 25 X 3 mm angle

(4 off)

Costs: 2500 x 1250 x 6 mm plate s

25 • 25 X 3 mm angle iron s Welder's hourly rate s Stores/finishing hourly rate s

Other: Cut prepare material per unit (stores) 35 min

Fabrication time (welder) 30 min Finishing time (finishing) 45 min

The company has the following costs centres and their associated overheads:

14

15

The overheads for sales, marketing, administration and R&D are cal- culated based on 20 per cent of the production cost Using the above data, determine:

(a) the direct labour cost;

(b) the direct material cost;

(c) the prime cost;

(d) the production cost;

(e) the total cost

Using the information from the previous problem, determine:

(a) the material cost per unit;

(b) the unit cost;

(c) the unit selling price if the profit required is 20 per cent

PCM Ltd manufactures three basic desktop computers and the following data applies:

Direct labour 102.00 110.00 120.00 Direct material 124.00 144.00 192.00

Selling price 770.00 850.00 950.00