Quoting, Estimating and Scheduling For Manufacturers White Paper from MIE Solutions

Quoting, Estimating
and Scheduling For
Manufacturers

How To

MIE Solutions, Inc.

Quoting, Estimating and Scheduling For
Manufacturers
How To

MIE Solutions, Inc.

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Contents
Indirect Material Costs 1

Material Cost 2

Manufacturing Costs 4

Direct and Indirect Costs 5

Fixed and Variable Costs 7

Job Costing Software 8

Cost Estimate Techniques 10

Purpose of Cost Estimating 12

Estimating The Costs 14

Cost Estimate Types 16

Profit Improvement and Cost Reduction Part 1 19

Cost Estimating Versus Cost Accounting 21

Estimating is more than Setup and Run Time Part 2 23

Estimating is more than Setup and Run Time Part 1 26

Estimating Software Guide 28

Job Shop Quoting Labor Hours Accumulation 30

How To : Manufacturing Hourly Rate Calculation 33

What is Forward and Backward Scheduling 36

Introduction To Job Shop Scheduling 39

Exploded Bill Of Materials 41

What Are Bill Of Materials? 43

Cost Estimating Purchased Parts Or Materials 45

Manufacturing Efficiency in Estimating 47

Job Shop Hours Defined 49

Fabrication Workcenter Overhead Rates 51

Machine Shop Rates Part 2 52

Machine Shop Rates Part 1 57

Standard Shop Rate 60

Calculating Shop Rates Using The Income Statement 62

Introduction To Shop Rates 67

Calculating Cycle Time with Estimating Software 69

Price Quote Software Handles Inspection 71

How To Estimate Handling Time 76

Manufacturing Estimating Cycle Time 79

Quoting Dependencies Between Operations 81

What is Setup Time? 83

Estimating 85

Indirect Material Costs

Indirect material costs are those costs that are not directly added
into the product. There are many times materials required to
manufacturer a part but those materials are not put into the product.
Examples of this situation are oils, lubricants for machines,
sandpaper, molds and castings. There are some situations where
the molds and castings would be included into the direct material
costs because they specific for the product. When doing estimates
in this way you have the choice of amortizing the mold and casting
costs into the product or charge the customer separate as a one
time charge.

Other possible indirect material costs are nuts, bolts, screws or
inexpensive items. Usually this would be added into the product
causing those materials to be direct costs but there are situations
depending on the product being manufactured where these type of
items would be indirect costs.

1

Material Cost

Material cost is a big subject and will be handled in multiple blog
entries. Material costs are costs that directly go into producing the
desired product. Material costs can be divided into both direct and
indirect material costs. Direct costs are what we will be looking into
because those costs are directly in the product.

Material can also be broken between raw materials which are
commodities and other items which would include pre-manufactured
“things” including nuts, bolts, screws, hard drives, memory chips,
etc. Raw materials dealing with commodities where their price may
fluctuate daily is what we will deal with in the next few blogs entries.

Direct commodity material costs are those expenditures which can
be allocated directly to the cost of the specific product. Here is a
basic outline of estimating the material cost

1. Catalog all the raw materials required from all the drawings.

2. Calculate the amount of material required for each cataloged raw
material.

3. Total common materials, gauges and sizes to come up with total
requirements

4. Sum all the weights with the requirements

5. Obtain supplier pricing

6. Total costs

2

This is just a high level summary of calculating material costs. We
will investigate calculating volumes, lengths and other type of raw
material calculations.

MIE Solutions provides software resources to help you manage
your direct and indirect costs throughout the product lifecycle from
quoting and estimating, job costing to invoicing.

http://mie-solutions.com/mie/index.php/MI
E-QuoteIt-Quoting-and-Estimating-Softwar
e/mie-quoteit.html

3

Manufacturing Costs

Manufacturing costs consist of multiple elements which arrive at the
full cost. When estimating a product to be manufactured the entire
costs are distributed between the following elements.

Material Costs – This includes both raw material which is reshaped,
formed, etc to produce the item and purchased prefabricated items
like nuts, bolts, screws. Raw material would be considered
commodity items in which the costs may fluctuate widely.

Labor Costs – This includes the wages of the employee’s actually
manufacturing the product.

Labor Overhead – This includes the overhead of the employee’s
which include benefits.

Machine Costs – This includes the costs of running the equipment
and machines to product the product.

Engineering Costs – This includes the costs like prototyping, testing,
etc.

Burden – This includes all the other costs not included in the above.

An ERP software system should report all these costs in an easy to
read format so the manufacturer can operate profitable. Look for
an ERP package like MIE Trak from MIE Solutions which is a ERP
software for manufacturers.

Please visit us at

4

Direct and Indirect Costs

Fixed and Variable costs can now be broken down into two more
cost types. Direct and Indirect costs classify the costs of parts
being manufactured and are critical to calculating shop overhead
rates. Direct costs are those costs that are directly associated with
the production of the product. Indirect costs are those costs which
do not associate directly with the product being manufactured and
cannot be determined for specific products.

Direct costs are attributed directly with the manufacturing of the
product. For example, if a product is manufactured out of metal, the
metal of the product are direct costs. The material used in the
product being manufactured is specific for the given product and not
shared among other products. Examples would include all bill of
material used to make the product including items such as metal,
wood, plastic, nuts, bolts, screws, paint, etc. Direct costs not only
include the bill of material but also includes the direct labor of the
craftsman making the product. The direct labor costs and bill of
material can be attributed directly to the manufacturing of the
product.

Indirect costs on the other hand cannot be directly attributed to the
manufacturing of the specific product. Examples of indirect costs
are rent, electricity, office space. Employee’s not directly working
on manufacturing of products is also considered indirect because
those employee’s are not specifically involved with the production of
the specific product.

5

In order to acquire a good estimate both direct and indirect costs
should be added into the cost of producing and manufacturing the
product.

MIE Solutions provides software resources to help you manage
your direct and indirect costs throughout the product lifecycle from
quoting and estimating, job costing to invoicing.

e/mie-quoteit.html

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6

Fixed and Variable Costs

There are two main types of cost which are Fixed or Variable costs.
If something is being manufactured it consists of both fixed and
variable costs. Fixed costs are those cost that do not change based
on a quantity. That basically means the cost is fixed if you product
1 or 1000 pieces. Some of these costs would be security, taxes,
insurance and administration costs. These costs are called Fixed
because they do not vary with the quantity being manufactured or
the level of production. Variable costs do vary based on quantity
and level of production. Some examples of variable costs are direct
material and direct labor costs.

There is a third category of fixed and variable costs which is often
referred to as mixed costs. Mixed costs are simple costs that are
part variable and part fixed. Example would be a heating oil or gas,
there is a fixed amount that would be used regardless if the
machines are running just to keep the building warm. The variable
costs would be the amount of oil consumed by the machine.

MIE Solutions provides a great solution to manage and organize all
the costs required including both fixed and variable costs.

Try this estimating software.

e/mie-quoteit.html

7

Job Costing Software

Job Costing has been around for many years to determine the cost
of manufacturing a given product. The process by which the
expenses are record is costing. Job costing software should make
the process of recording the transaction simpler and not more
difficult and time consuming. Job costing software is not like cost
accounting because it does not incur the situation of debit-credit
transactions. Job costing does use the same data to determine
profitability and to evaluate all the cost of manufacturing the
product. Here are a few purposes which may help you determine
the need for a proper job costing software package.

1. To determine the actual costs of the manufactured item.

2. To determine the total costs of all the components of a
manufactured item.

3. To determine the standard price of the product

4. To determine the selling price of a the product which would
include profit above the actual costs.

5. To determine feasibility of manufacturing the product at a profit

6. To evaluate the accuracy of estimates. This is after the fact and
the goal is to match or better the estimate cost.

7. To determine which components should be purchased versus
those to be manufactured. In the day and age of outsourcing it may

8

be more cost effective to purchase some parts.

8. To compare the costs of manufacturing the item with different
processes.

Costing is an essential component to the manufacturing processes
because without it you would be waiting until the end of the month
to see if you were profitable. Also, you would not know what jobs
were profitable versus the losers.


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9

Cost Estimate Techniques

The basic cost estimate techniques involve analyzing the pieces
that make up a cost estimate. The first technique I would follow is
to systematically go through the following steps and cost each one
out in detail. Once you have gone through the basic steps you will
have all the cost information required for the estimate.

1. Design Cost – This is step is skipped if you are manufacturing
something for a customer and its already designed. Still the
customer may want some help in the design area.

2. Engineering – This step is to engineer how the product will be
made. This could be exploding out the model into its component
pieces, programming the CNC machines including turret, mill, laser
and waterjets. Costs hear may include the drafting costs.

3. Research and Development Costs – This step would entail items
such as research and development work, prototypes for the
customer which is very much required when doing new products.

4. Material Costs – This step would be to create an entire exploded
bill of material list with items, quantities and supplier costs. This
step can be automated using certain CAD systems which create
exploded bills of materials. This information can be imported as an
electronic bill of material file into estimating systems.

5. Labor Costs – This step would include both direct and indirect
labor. A thorough knowledge of the required manufacturing steps
and operations to be performed is necessary. Also,

10

a knowledgeable person on the machines used and time required at
each step is critical.

6. Quality Costs – This step would include all the quality items
required to manufacturer the item. This would include things such
as SPC Inspection, regular inspection, scrap rate, first articles, etc.

7. Tooling Costs – This step goes well with the labor step where the
labor operation may require specific tools which need to be
purchased or made to manufacture or build the item.

8. Outsourced Services – This step is where you place the costs
which are outsourced to other suppliers. One example would be
painting if the paint process is not done in-house.

9. Overhead Costs – This is the last step but very critical. Overhead
costs include all costs which cannot be charged to the specific
product but still is incurred.

MIE Solutions provides a great solution to manage and organize all
the costs required in this setup of cost estimating techniques.


e/mie-quoteit.html

11

Purpose of Cost Estimating

There are numerous purposes behind cost estimating which include
those below and others

1. A manufacturer can determine if the project or product is cost
effective to manufacturer prior to the manufacturing process.

2. There are various alternatives to manufacturing and cost
estimating can determine the economical feasibility of
manufacturing the project or product by different methods

3. A manufacturer can determine the selling price before
manufacturing begins. This may or may not be a good idea
because the product still needs to be priced at a value the
consumer will purchase the item.

4. In software estimating packages like MIE QuoteIt you have the
ability to create different quotes based on different manufacturing
procedures. This also carries through when you decide to purchase
the item because its cheaper to purchase the item then to
manufacturer it in-house.

5. Production cost estimator can set standards for production. In
ERP software, once a job is received it can be scheduled. The
scheduling standards start at the estimating stage of production.
The more accurate these estimates are the less effort has to be
done during production scheduling.

12

6. In a production line the estimate can be used to plan the
equipment required to manufacture and the what the capital
requirements are.

7. Personal are a key factor and an estimate can determine the
personal required to manufacture the item.

If the estimate is not accurate the above items as to the purpose of
the cost estimate are not accurate. If all your estimate bill of
materials, labor, outsourcing and resource requirements are wrong
you will not be successful. Losing work to competitors is one thing
but losing money on the job is another issue which costs more than
you would losing the job to a competitor.


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13

Estimating The Costs

An interesting situation when doing estimates is which estimates do
you spend time on and which estimates are too costly to put the
effort into. In a tough economy its almost always the case you try to
make something your company is not really able to make at a
reasonable profit, but you still want to get the job just to keep your
machines busy. This is a valid assumption in some cases but it
should be looked at as a business direction and/or a case by case
basis.

Estimating the costs of estimates is critical because you do not want
90% of your effort to quote the machining, sheet metal, tubing or
any other type of job and only get 10% of those jobs. The other
factor that is really important is your ROI (return on investment).
Estimating is a “best” guess and you are competing against others
who do their best to guess a reasonable price.

The more accurate the cost estimate, the higher the costs will be.
The reason is the more accurate the job cost estimate is the longer
it takes to produce, increased upfront design work, and details to
prepare the estimate increase. Now when you are estimating in a
job shop environment where parts are made to order and engineer
to order the cost of the estimate is also based on the “value” of the
product. If the product is a panel, cutting a small tube or small
machined part the costs are not that high to estimate. One of the
reasons is the engineering time to estimate is low, most of the job is
done by machines and not manual labor, and its small. On the
other if the job was a vehicle, machine, house, addition to a house,
etc the cost to estimate is much higher. The reasons would include

14

the bill of material requirements would be much greater and
therefore require more effort to accumulate those costs. Assembly
costs are the largest unknown portion because of unknown factors,
employee performance which makes it very difficult to quote
accurately.

I leave you with the thought that you should try to do a rough cut
look at the part before expending a lot of wasteful hours trying to
come up with a good estimate.

Download the MIE QuoteIt software, its free to try and MIE
Solutions will help you get up and running to improve your quoting
and estimating process. MIE Solutions has thousands of users of
their flagship estimating software which helps companies everyday
estimate quicker and more accurate.


e/mie-quoteit.html

15

Cost Estimate Types

There are different types of cost estimates including “Rough
Approximation” of cost which can be a conceptual design,
preliminary design and then a detailed estimate or quote.

Rough Approximation

The rough approximation is really prepared for informational
purposes only. This type of estimate may not have geometry or
even materials but just a rough idea of the product. This type of
estimate would be used if someone is asking for a price to make a
building of a certain square size or a box, etc. A lot of times this
would result in prices like $200 per square foot or $20 per pound.
Some examples of rough cost estimating would be highway costs
per mile, weight of the object for shipping or linear foot cost to build
cabinets. This type of estimate and quoting can be good for a
software system designed with CRM and quick estimating features
where you would just type in costs.

http://mie-solutions.com/mie/index.php/cr
m_quoting_estimating_software.html

Preliminary Design

The preliminary design approach is similar to the rough cut estimate
but you will know the materials. This is basically a function where
you would cost out the materials and multiply it by some factor. The
factor you would use would be based on some variable of labor.
For example, to make a casting you would have a material and

16

approximate weight. You would take (Material * Weight * Price Per
Unit Weight)*(Labor Factor). The labor factor would adjust the price
based on passed experience or similar jobs. A CRM package with
a good quoting system would be an ideal candidate for this type of
cost estimate.

Detailed Estimate or Quote

A detailed cost estimate is one that fully details out the exploded bill
of materials and labor. Each component of the bill of materials is
cost individually in order to arrive and a very accurate cost. The
labor is still a best guess in most situations but there are standards
which may be followed to make the quote more accurate. Example
would be quoting jobs which require multiple labor steps to
complete. Even with automation, the labor step with is critical to
quote accurately. The end result of a detailed estimate or quote is a
fully exploded bill of materials with labor which can be evaluated.
The larger and more complex the work is the more critical it is to
have accurate quotes. The goal is to create accurate, timely and
consistent quotes. Using a software package like MIE QuoteIt will
improve accuracy, time and effort and consistency.

e/product-mie-quoteit-pro.html

MIE QuoteIt from MIE Solutions offers free quoting software for step
by step quoting. The quoting software is very user friendly and
offers customization of operations, materials, formulas and even
table lookups. Please visit our website and take a tour of the free

17

quoting software instead of the old method of quoting in excel.

http://www.mie-solutions.com

18

Profit Improvement and Cost Reduction Part 1

Talking about profit improvement and cost reduction we cannot
leave out the importance of estimating accurately. There are a few
ways to reach the goal of both profit improvement and cost
reduction.

• Increase your prices which improves profit, but only if that does
not drive away customers.

• Increase sales if your fixed costs stay the same

• Improve your product mix to manufacturer more efficiently

• Reduce your costs including overhead, labor and raw material
costs

Increasing your prices without your costs going higher is a great
way to increase your profit. This is the best way to improve your
prices except for the fact that there is something called
“competition” which will not exactly work with you to increase your
prices. Increasing prices has another great benefit which is you do
not need to work on cost reduction.

Increasing sales if your fixed costs remain the same is another great
way to increase profits. The difficult part is how to increase sales
because if it was easy to increase sales everyone would be doing it.
One method of increasing sales and improve profitability is to
estimate accurately and quickly in order to provide a better service.
When a price is given to a customer the customer does not want

19

the supplier to come back towards the end of the job and ask for
more money because the estimate was too low. This type of
situation happens but should not happen if a good estimating
process is implemented in the business.

Improving the product mix is another way to create profit
improvements. The motivation here is you have covered some of
your fixed overhead costs already and adding some new products
which fit your area of expertise can increase sales without
increasing overhead costs too much.

Reducing costs is sometimes the easiest way to improve your
profitability. There are many business processes which can be
improved in most organizations to reduce costs. For example, if
estimating is being done manually through paper and pencil or even
a spreadsheet, moving to a software estimating and quoting
package designed specifically for your situation can reduce your
costs considerably. One example is when you can actually have
one person do between 3000 and 5000 a year. This is a lot of
estimates that are done accurately and done by a single person. If
this was done by 5 persons you could see the cost savings
immediately.



20

Cost Estimating Versus Cost Accounting

What is the difference between cost estimating and cost
accounting?

Cost estimating is a precursor to cost accounting because it done at
the beginning of the process. Lets define cost estimating as the
estimation of the cost of a goods or services prior to the actual
production of the goods or services. Cost estimating is used in both
the production of goods and services to perform a specified action.

Cost accounting or costing is different then cost estimating because
its an analysis of the costs to actually product the goods or services.
Cost accounting is done after the production while the cost
estimating is done prior to the costing of the goods and services.

I like to think of cost estimating as being an educated guess.
Unless there are simulations which can be run to determine the
exact cost estimate, the estimator is performing a best guess based
on previous knowledge. Cost estimating is a prediction while cost
accounting is actually what expenses where where incurred during
the production process.

Cost estimating is a complex process and requires a person who
understands the domain in which the cost estimating is taking place.
Some of the items that are considered

Product Design

Materials and how they are used in the product or services

21

Operational steps required to produce the product or services

Machine and Labor costs involved

Visually be able to understand all the areas of manufacturing from
the requirements


22

Estimating is more than Setup and Run Time Part 2

In the not to distant past many manufacturing processes were very
labor intensive. In countries such as China and India there is still a
great deal of manual labor intensive manufacturing. I remember as
a child I worked in my Father’s sheet metal shop and the machine of
choice was a Strippit 30/30. I have seen many of these machines
and they are still in use today and very reliable. One day the
company purchased a Diacro VT-19 and it was a dream. This
machine was able to be loaded with multiple tools unlike the 30/30
where it was a one tool machine. The Diacro VT-19 was still a
manual process machine but the great thing about the machine you
can create the entire part without removing the material. The 30/30
was setup to punch 1 or more holes only if they were lined up and
used the same tooling. Todays NC machines hold vastly more
tools and also are automated where there is no manual intervention
during the run cycle.

Why should I mention this?

Estimating has changed and each of the three machines which
make the ”same” part have different setup times. Needless to say
you should use the best machine for the job.

Strippit 30/30

The Strippit 30/30 was setup by putting in a single punch, setting
the x and y stops. For each hole different hole these three steps
had to take place. The formula to estimate the setup time would be

23

(Number Of Tool Changes)*(Time Per Tool Change) + (Number Of
X Stop Changes) * (Time Per X Stop Change) + (Number of Y Stop
Changes)*(Time Per Y Stop Change)

This is a lot of effort and can be improved by automating the
machine but these machines are still in use. The above formula
work and give you a reasonable accurate estimate. I’m currently
ignoring the other factors like gathering the tools, etc.

Diacro VT-19

The Diacro VT-19 was setup by placing all the tools in the Turret.
The last part of the setup would be to put in the template which
would be used to guide the material to the correct location so the
punch could put the whole in the correct spot. The formula to
estimate the setup time would be

(Number Of Tools)*(Time Per Tool)+(Time To Setup Template)

This is a lot of effort and can be improved by automating the
machine to eliminate setting up the template.

I’ll Continue next time on the Automated CNC Machine and Laser,
Waterjet or Plasma machines


24


25

Estimating is more than Setup and Run Time Part 1

Many estimators put a lot of time into figuring out how to estimate
setup time. Setup time is a key component when doing estimates
for basic operations like shearing, forming, laser, punch presss or
any other operation which requires a setup process before a
production run. Many estimators still think in $’s versus time which
was the simple way to quote prior to computers becoming wide
spread. Setup time should be calculated as a time component and
not a dollar component. One of the biggest reasons for this is time
would only change if a machine became more automated versus $’s
could change based on labor rate changing, overhead rate
changing, electricity prices rising, etc. Setup time can be as simple
as the following ideas from the simple to complex.

Setup Time In Hours

Setup Time In Minutes

Setup Time In Seconds

Setup time can be defined as the time it takes a machine to be
setup prior to the running of the job. The formula actually gets a bit
more complex if you are quoting based on multiple machines being
run.

For example

10 identical machines. Each machine by itself takes 30 minutes to
setup and each machine could produce 10 parts per hour.

26

If you are quoting 10 parts to be fabricated you would only want to
setup a single machine because a single machine can handle all the
parts most efficiently. If you are quoting 25 parts, you can either run
all the parts on 1 machine and therefore 1 setup time. This is ok but
you must also think of how long the parts will take to run. In this
situation the total time would be 3 hours and 30 minutes. You can
also setup 3 machines concurrently and the 25 parts would be
completed in 1 Hour and 30 minutes. There are trade-offs to the
decisions and no exact answer is right in all situations.

As you do your estimates make sure you think of the number of
machines a job may be manufactured on simultaneously or you may
be leaving a lot of dollars on the table.



27

Estimating Software Guide

There are many different type of software estimating package for
made to order manufacturing Made to order manufacturing includes
any custom job shop type work including sheet metal, machining,
wood working, stamping, press work, printing which all require
customized quotes. Quotes include both operation and bill of
material. Below you will find a checklist of items to look for while
you are reviewing estimating software packages. ERP solution
providers should provide as a minimum the items shown below in
order estimate most efficiently with the most accurate costing
results.

For more information please visit http://www.mie-solutions.com

MIE Solutions provides a set of products from quoting and
estimating through full ERP solutions with document managent.

RFQ’s
Manage Request For Quotes (RFQ’s)
Request For Quote History
Request For Quote Workflow
PDF, Email Quote Letters To Buyer
Approval Workflow Process For Request For
Quotes

Quotes Multiple Quotes Per Item Master
Exploded Bill Tree On Screen
Multi-User
Handles Millions Of Quotes

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Handles Assemblies with 100000 Items
Compare Quotes
Compare Quotes
Combine Quotes To Create An Assembly
Merging Of Common Setups During Assembly
Calculations
Multiple Quantity Quotes Handling Optimized
Build Quantity
Document Attachments
Multiple Reports

Operations Customized Operations
Operation Formulas
Operation Lookup Tables
Unique Rates Per Operation
Speed and Feed Tables

Bill Of Material Raw Materials Handling Dimensional
characteristics
Blank Size Calculator
Scrap Calculator
Multiple Breakout Prices
Hardware Items
Outside Processing Items

Miscellaneous Vendor Quotes
Part Numbers and Descriptions > 64
Characters
Unlimited Length Comments

29

Job Shop Quoting Labor Hours Accumulation

Labor time is very difficult to measure accurately when determining
manufacturing time for a custom item. If you ask 10 people to
estimate how long it will take to cut a piece of wood, pipe, etc you
would most likely find 10 different answers. It even gets more
extreme between the answers when there are large quantities
involved or a large number of cuts involved. Another factor which
ways heavily on the estimate is the experience of the person doing
the estimate. The person doing the estimate usually bases how
they calculate labor hours on how fast they think they could do the
job. The problem is different people perform the same tasks at
different speeds and this is very likely that no two people will do it at
the same speed.

One of the principles of effective labor estimating is the ability to use
past knowledge and standards such as averaging past job
performance. Some think an opinion of a skilled technician is
preferred over complex methods but if there are detailed standards
available these metrics should produce more accurate results.
Estimating labor hours for a job is a chore and can be very tedious.
Estimators are some of the better employees with knowledge of
manufacturing process and engineering skills. We must have
accurate estimates of labor hours to support scheduling and
promote productivity.

One of the ways to have a quality labor estimate is using labor hour
cost performance trending where a job is run through the
manufacturing steps, reviewed and continually improved based on
the actual costs to perform the work. The nature of job shop work

30

is complex and estimators can’t say with certainty how long a job
might take. Maintenance work isn’t assembly line work. Job time
depends on the actual condition of the equipment and the actual
technician assigned. A estimator doesn’t always know exactly what
needs to be done. The estimator doesn’t have perfect vision
knowing exactly how many bolts need to be burned off. The
estimators doesn’t know the actual condition of the equipment
before dis-assembly. In addition, the person assigned to the job
may or may not be a top technician. He or she might be the
least-skilled technician on the crew. Experience shows that the best
estimates are routinely off as much as 100 percent. A job estimated
to take five labor hours might take as many as 10 hours or as few
as two.

Some job shops instruct estimators to use industrial engineering
standards for each tiny portion of a job. For example, estimators
figure how long each bolt should take to be removed times the
number of bolts and then add how fast a typical person walks times
the distance the job is from the shop. They add the job elements
together for a total plan estimate. Not only does this type of estimate
take a long time, it’s not always very accurate or 100 percent
correct. This method is more appropriate for estimating an
assembly line task. The execution of an assembly line task
thousands of times in a week (or day) justifies the time spent on the
estimate. Specific maintenance tasks are usually unique in their
actual conditions. There is free labor estimating software which
assists in estimating these labor costs.

Some estimators take strict averages of hours for previous
executions of similar work. Some CMMS programs even average

31

past work automatically. The problem with this approach is two-fold.
First, execution of the work is, at best, an average. If technicians
took too long on past work, their performance carries into the future
estimate. The past performance also can include activities such as
time associated with interrupting the work. Second, we want a
standard, even if not an engineered one. We want to know how long
the job should take a qualified tech to perform, but we don’t want an
estimate to include lesser-skilled technician efforts or unusual past
problems.



32

How To : Manufacturing Hourly Rate Calculation

Sheet metal, CNC shops, machine shops and many other job shops
provide a valuable service to their customers. For a job shop to be
a profitable business, the service rate should cover the cost of doing
business plus have a certain amount of margin or profit built into the
price customers pay. If this is too low, you will be gaining new work
but this will only last as long as you have money in the bank. You
business will fail because the owner needs to earn an income. If the
price is too high, customers will choose a competitor. Some high
level ways to calculate your hourly shop rate is shown below.
Hourly rate calculations are not that complicated but should be
looked at carefully in order to be a profitable company.

Equipment

1. Calculate the cost per hour of operation and include a markup
for maintenance hours in your calculation to determine a fully
burdened cost per machine hour. The formula is: (machine
purchase cost + expected lifetime maintenance cost) / expected
hours of operating life. You can choose to do this per machine or
an average of all machines.

Labor

2. Develop an hourly shop rate: (total annual labor costs + taxes +
benefits + paid time off) / (total annual hours worked – breaks
and training time). This is your direct labor cost per hour.

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Overhead

3. Any costs not directly involved in machining a part is overhead.
These include costs for administrative staff salary, equipment,
furniture, building lease, maintenance and office supplies.
Calculate the annual costs of these, then divide by total labor or
machine hours for the year. This will be your overhead cost per
hour.

Markup

4. Here’s where the shop earns its keep. The owner’s income and
future growth for the shop depends on this calculation working
well. Simple calculation is markup = 1 + (owner’s salary +
benefits + annual earnings goal) / annual service hours) /
(machine + labor + overhead cost per hour). Converted to a
percentage, for example, this will come to something like 120
percent, basically adding 20 percent profit to the cost of doing
business.

Service Rate Calculation – Average Rate

5. Use this formula when your machine costs are fairly similar from
one piece of equipment to another: Average overall shop rate =
(average machine cost per hour + labor and overhead cost per
hour) x markup x total hours for the job.

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Service Rate Calculation – Machine-Specific
Rate

6. Use this formula when cost of equipment varies greatly from
piece to piece and not all machines are used in each service.
Rate = (specific machine(s) cost per hour + labor & overhead
cost per hour) x markup x total hours for the job.

MIE Solutions offers a made to order job shop ERP system
designed for the manufacturer of goods and products. Most
accounting systems are designed for the basic AR, AP and GL side
of financials where a manufacturing software product deals with the
actual production of the goods and services. MIE Trak is a full
featured ERP system for the made to order and engineer to order
manufacturer.


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What is Forward and Backward Scheduling

MIE Solutions offers a made to order job shop ERP system
designed for the manufacturer of goods and products. Most
accounting systems are designed for the basic AR, AP and GL side
of financials where a manufacturing software product deals with the
actual production of the goods and services. MIE Trak is a full
featured ERP system for the made to order and engineer to order
manufacturer.

If your estimating system is inaccurate your production scheduling
software or manufacturing scheduling software will give you very
poor results. If the quality of your estimates are good then the
standard scheduling for a production scheduling software will be
more precise.

What is scheduling?

Scheduling is a method where there is a set of x tasks which need
to be completed on a set of y resources in an efficient manner.
Wikipedia gives us a good definition of scheduling “Companies use
backward and forward scheduling to allocate plant and machinery
resources, plan human resources, plan production processes and
purchase materials.”

http://en.wikipedia.org/wiki/Scheduling_(p
roduction_processes)

What is forward scheduling?

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Forward scheduling is taking a job with a number of tasks and
allocates those tasks to resources as early as possible when
resources the resources allow. The first available time that the
resource is available to be used the task should make use of it. As
with all scheduling methods there are pros and cons on how they
work. Forward scheduling may result in jobs being completed
earlier then the requested due date because forward scheduling
schedules the tasks as early as possible. Forward scheduling tells
you when a job could be completed vs completing the job when
required.

What is backwards scheduling?

Backwards scheduling is taking a job with a number of tasks and
allocates those tasks to resources in reverse orders and schedules
the task on the resource. Backwards scheduling requires a
delivery date from the customer because the system schedules
backwards from the delivery date to arrive at a start date.
Backward scheduling tells the manufacturer if this date could be hit
based on the allocation of resources. Unlike forward scheduling
which schedules into the future, backward scheduling could
potentially schedule into the past because the resources where not
available to complete the job. Backwards scheduling then may turn
around and actually forward schedule the job to tell the customer
the earliest delivery time.
Scheduling is very complex and this blog will try to go over many
aspects of scheduling from types of scheduling, np complete
problems, how to allocate resources, defining resources, etc.
Some of the benefits of scheduling include :

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• Process change-over reduction

• Inventory reduction, leveling

• Reduced scheduling effort

• Increased production efficiency

• Labor load leveling

• Accurate delivery date quotes

• Real time information

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Introduction To Job Shop Scheduling

Welcome to the MIE Solutions Job Shop Scheduling blog. MIE
Solutions ERP system provides a comprehensive job shop
scheduling software to deal with the many problems scheduling a
job shop encounters.

Scheduling has become a critical factor in many job shops in order
to determine their capacity for more work and be able to schedule
their work more efficiently. Job shop scheduling becomes more and
more difficult when you deal with assemblies and/or multiple
components which need to be made in an efficient manner.

Job Shop Scheduling is an optimization problem in which ideal jobs
are assigned to resources at particular times. The most basic
version is as follows: We are given n jobs J1, J2, … Jn of varying
sizes, which need to be scheduled on m identical machines, while
trying to minimize the total length of the schedule (that is, when all
the jobs have finished processing). Scheduling job shops is much
more complex then the basic version above because there are
many more constraints involved. In the above method the machines
are identical which is not going to happen in an actual job shop.
Online problem vs offline problem In an online scheduling system
the scheduling application looks at a single piece of information at a
time and does not know whats coming down the pipeline. In this
situation the entire input is not known from the start. Because it
does not know the whole input, an online algorithm is forced to
schedule the job without knowledge of the entire input available at
the start. The online algorithm needs to make a decision about that
job before the next job is presented. In an offline scheduling system

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the scheduling application the system is given the whole problem
data from the beginning and is required to answer scheduling
problem given in an optimal way. Because an online scheduling
system does not know the whole input, an online algorithm is forced
to make decisions that may later turn out not to be optimal, and the
study of online algorithms has focused on the quality of
decision-making that is possible in this setting.

References : http://en.wikipedia.org/wiki/Job_Shop_Scheduling
Advanced ERP Scheduling Software

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

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Exploded Bill Of Materials

Estimating large projects requires an exploded bill of materials in
order to get a good understanding of the requirements. The larger
the project you have to estimate the more in depth the bill of
materials will be. If you are estimating you want to make sure all
the bills of materials are entered correctly into the estimate but also
you want to enter the bill of materials efficiently. Your estimating
system should allow you to enter a proper bill of materials in order
to allow creation of the requirements in order to calculate
minimums, setups and quantity discounts properly.

If a bill of material list is available as shown below you can merge
items together

Part Number Name Quantity

Widget A 16 GAGE CRS 48×120 10

Widget B 16 GAGE CRS 48X120 3

Widget C 14 GAGE CRS 48X36 5

When you are estimating you generally would price each of these
components separately and then roll the costs up for a grand total.
By creating an exploded bill of material which merges these items
together you can actually get a more accurate cost because buying
13 if an item may be less expensive then purchasing 10 and 3.
The other advantage is if you are using raw materials like sheet
stock, tubing, wood, etc. you may have the opportunity to nest the

41

bill of material together to arrive at a quantity required which was 13
and would now be 9 through nesting. Setup and minimums can
also be reduced by aggregating the bills of material together.

You can see how beneficial an exploded bom is for quoting and
estimating. Job costing starts at the estimating and quoting area
and extends throughout the ERP package. Job cost estimating
software can save you a lot of time, money and energy and help
you to win new work.

Next we will be talking about an indented or exploded bill of material
which includes labor. Most bills of materials do not include a roll up
of labor which can be very good for seeing an aggregated view of
the labor required to manufacture the job.

MIE Solutions provides software products to make your business
process more efficient so please take a look at our product line
below. MIE Trak and QuoteIt are two products which provide an
efficient way to do job shop cost estimating.


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

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What Are Bill Of Materials?

A good definition of Bill of materials comes from wikipedia

Bill of materials (BOM) is a list of the raw materials,
sub-assemblies, intermediate assemblies, sub-components,
components, parts and the quantities of each needed to
manufacture an end item or final product.

All products have bill of material from engineering bill of materials,
manufacturing bill of materials and service bill of materials. When
you are required to estimate the time to manufacture a finished
product you must take into account the bill of material of the finished
product.

Bills of materials for quoting and cost estimating can be broken
down into 3 categories. The first category is raw material. Raw
material are those bill of material items that are the building blocks
to create a finished or final product. This would include items such
as wood, sheets of metal, coils, wire, plastic, rubber, etc. These
type off bills of materials are usually some sort of commodity,
especially when you get into sheet metal, wood, etc. The second
category is hardware. Hardware are those bill of material items
which can be purchased and added to a finished product or it could
be consumable which is used in the production of the finished
product. Examples would be nuts, bolts, screws, etc. Examples of
consumables would be paint and gas. The third category of bills of
material would be outside services. Outside services would be
purchased 3rd party processes like machining, painting, silk
screening which are added to a finished product.

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All three of these types of bill of material, raw material, hardware
and outside processing make up your bill of material list. Estimating
software makes it much easier to manage bills of material then
spreadsheets and paper.



p/MIE-QuoteIt/

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Cost Estimating Purchased Parts Or Materials

Bill of material items are those items which are purchased as raw
materials and used to combine with other products and services to
produce a new product. Job costing bill of materials is a critical
step in the estimating and quoting process. Classic ERP and MRP
software provides tools to help estimating the bill of materials.

When you are performing cost estimates for purchased parts or
materials there is a need to determine if these purchased parts can
be manufactured internally or are they economically better to be
purchased. When larger quantities of materials are used it is often
better to purchase these parts from suppliers who are experts in
producing these materials. The specialization of companies to
produce goods and services is critical to producing a finished
product within costs. There are two ways to get a cost estimate on
purchased parts. The first way is to actually get specific bids from
one or more suppliers and have the supplier respond back with their
bid. The second method requires looking up in some sort of catalog
and using the cost from the suppliers catalog as the cost. The first
method is a more desired approach because the catalog could be
out of date or the possibility that a relationship could occur between
you and the supplier giving you a potential discounted price.



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p/MIE-QuoteIt/

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Manufacturing Efficiency in Estimating

How many of you have estimated a job and wonder how anyone
could do it any cheaper and make money? Well your not alone in
your thinking. There are manufacturers that are using reverse
auctions in order to try to get more work and pick up new
customers. The problem is when you have a buyer that is 100%
fixated on the price and ignoring the many other many factors
presents a difficult problem.

Manufacturing efficiency is one of the areas where you can compete
for jobs. One example I heard of this past week is a large
government contract was one by a supplier because of price. This
machine shop could have produced this widget by manually
punching the part, but they decided to spend some extra money up
front and create a die for the job. This machine shop had the
technical expertise to create the die when two other machine tool
makers would not make for them. This machine shop is now able to
make these parts very efficiently and one the job because all the
other shops that competed with him did not base their quote on a
die.

This tells us that manufacturing parts efficiently can overcome many
other issues of price during the bidding stage. Some ways that
manufacturing can be more efficient is automatic loaders, robotic
welders, automated punch presses, lasers, business software, cad
software, estimating software and many other areas.

In this economy I would suggest looking at all your machines and
capabilities to try to determine where they can be made more

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efficient.

below.


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Job Shop Hours Defined

In job shop estimating where does efficiency play a role? When you
are estimating generally ask yourself how many “Man Hours” are
required to producing the part or performing a specific operation.

Lets define some terms first

Man Hours

Man hours is the total time to accomplish a given task. This does
not mean that if a task if 40 man hours it will take five 8 hour days.
You could potentially accomplish the task using more then 1
resource and therefore you can finish the task with 5 people working
8 hours in 1 day.

Direct Hours

Amount of time that an employee is performing a task specific to a
work order.

Indirect Hours

Amount of time that an employee is performing a task that is not
being applied to a specific work order. This includes sweeping,
cleaning, accounting, etc.

Estimated Hours

Amount of time an estimator puts towards a specific task or job that
is an educated guess.

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Actual Work Hours

The actual hours an employee spends performing a specific task

Efficiency

Efficiency is the ability to accomplish a given task with the minimum
expenditure of time or effort.

Worker Productivity or Effectiveness

Worker productivity is the time spent on a task versus the time they
are actually getting paid for.

Worker productivity will never be 100% because of the time
interferences a worker keeps from doing their assigned
assignments. These include things like using the restroom,
meetings, e-mails, chatting, break time, etc. The time between
direct hours and indirect house is the effectiveness rate. This is not
the the same as efficiency where its calculated as the measure of
ones performances performing a given task.

The next blog post will go into more detail and examples of job shop
efficiency and effectiveness.


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50

Fabrication Workcenter Overhead Rates

When you quote a job and its operations you need to make sure
you quote it accurately. Its very important to know that when you
quote a job that your rates are high enough to actually turn a profit.

View This Poll
online survey

Welcome to the MIE Solutions Job Shop Estimating blog.
Fabrication software as in sheet metal software and manufacturing
software deals with shop rates extensively for costing. Please
comment and continue following as I continue investigating
production control and job shop software.


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Machine Shop Rates Part 2

Welcome to the MIE Solutions Job Shop Estimating blog.
Fabrication software as in sheet metal software and manufacturing
software deals with shop rates extensively for costing.

There are basically 3 ways to calculate overhead absorption rates
which is used to provide your shop sell rate during quoting and
estimating.

1. Company Overhead Absorption Rate

2. Percentage Overhead Absorption Rate

3. Work Center Overhead Absorption Rate

Each of these three ways of calculating your overhead absorption
has both positive’s and negatives.

Percentage Overhead Absorption Rate
What does an overhead percentage mean? An example would be
a 150% overhead percentage which means that for every $1.00 of
direct labor billed to the customer, the business must collect an
additional $1.50 ($1.00 x 150%) for that custom just to cover costs.
There are potentially large variations between total direct labor
wage and direct labor cost. The question is how do we figure the
overhead absorption rate.

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Definitions

Business Expenses

All expenses found on the company’s income statement (also
known as the
profit and loss statement).

All expenses found on the company’s income statement (also
known as the profit and loss statement).

Overhead Expenses

All costs found on the income statement except for direct labor,
direct materials, and costs attributable to outside subcontractors
that can be billed directly to a customer’s account. Overhead
expenses are absorbed by the business and factored into the selling
price as a percentage of the direct labor cost. They include
indirect costs such as accounting, advertising, depreciation, indirect
labor, insurance, interest, legal fees, rent, repairs, supplies, taxes,
telephone, travel, and utilities.

Direct Labor

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

Indirect Labor

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Labor used to provide supporting services to the business such
as accounting, clerical, custodial, customer services, management,
purchasing, sales, and warehousing. These man-hours support
business functions that are not directly chargeable to the customer.

Direct Materials

Materials used in the final product or service purchased by
customers. These materials are charged directly to the customer’s
account.

Overhead Percentage

Ratio between direct labor and overhead expenses. This
percentage is used to allocate overhead expenses proportionately
to direct labor dollars billed to customers.

How To Calculate Overhead Percentage

Step 1 Determine the “average” hourly wage paid to direct labor
employees.

Step 2 Estimate direct labor workdays available in the calendar
year.

Step 3 Estimate billable direct labor hours for work year.

Step 4 Estimate billable direct labor dollars for work year.

Step 5 Estimate non-billable direct labor dollars for work year.

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Step 6 Estimate all overhead expenses for work year to include
non-billable direct labor.

Step 7 Calculate the annual overhead percentage.

Example

Would your shop rate be Avg Direct Labor Rate +Overhead
Rate (Average Direct Labor Rate x Overhead %)

is Direct Labor Costs

Is this your sell rate? No

Referencing h t t p : / / w w w . m i s s o u r i b u s i n e s s . n e t
/docs/calculate_overhead.pdf

A machine shop rate for a job shop manufacturer is not that difficult
to compute once you have your income sheet calculations available.
Its important to calculate your shop rate for estimating accurately
because if you are off by much you will be losing
money continuously. A sheet metal software package needs to be
able to handle calculating overhead rates based on percentage if its
applicable to the specific industry.


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

55

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.

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Machine Shop Rates Part 1

Welcome to the MIE Solutions Job Shop Estimating blog. MIE
Solutions ERP system provides a comprehensive job shop software
to deal with the many problems issues a job shop encounters.
Estimating has become a critical factor in many job shops in order
to determine the best price for custom and made to order
manufactured parts.

There are basically 3 ways to calculate overhead absorption rates
which is used to provide your shop sell rate during quoting and
estimating.

1. Company Overhead Absorption Rate

2. Work Center Overhead Absorption Rate

3. Percentage Overhead Absorption Rate

Each of these three ways of calculating your overhead absorption
has both positive’s and negatives.

Company Overhead Absorption Rate
A machine shop rate for a job shop manufacturer is not that difficult
to compute once you have your income sheet calculations available.
Its important to calculate your shop rate for estimating accurately
because if you are off by much you will be losing
money continuously.

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Budgeted Costs

Below you will find an example of a ficticious company and its
associated budgeted costs.

Direct Materials…………………………………..$1,500,000

Direct Labor………………………………………….$400,000

Indirect Costs

Rent (Factory uses 80% of floorspace)……….$620,000

Utilities………………………………………………….$75,000

Salary For Production Supers………………….$300,000

Indirect Materials…………………………………..$45,000

Total Indirect Costs………………………..$1,040,000

Sales Commissions……………………………….$200,000

Advertising…………………………………………..$20,000

Machine Hours

Assuming an 8 hour day, 5 days a week with working 52 weeks a
year you would get

Hours per Day………………………………………..8

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Hours per Week………………………………………40

Hours per Year……………………………………….2080

Hours Per Year for 10 Machines…………………20,800

There are a lot of assumptions that are being made here which will
be discussed in much more detail in future blogs but this is the
simple case.

What is your budgeted overhead rate? $1,040,000/20800 = $50

Is this what you want to use for your quoting hourly shop rate? The
answer is No


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Standard Shop Rate

Do you remember when it was time to quote and you sat down with
your specifications, pencil and paper and started to write down how
long each processes would take to manufacture the given
specifications. You would add up all the setup time, then go
through and add up all the cycle time per process by hand, and if
not by hand, an expensive calculator. Once you finished adding up
the estimated time you then did one last calculation like this

Labor Dollars = ((Setup Time)/(Pieces Being Quoted)) + Cycle
Time)*(Shop Rate)

Shop labor rates a fews years ago usually consisted of a single
shop rate for every machine and operation in your shop including
machine shops, sheet metal shops to wood working and plastic job
shops. To calculate a quote the shop rate was much simpler when
there was only a single rate. Now with the advent of computers
you can have shop rates that are specific to each machine because
the actual calculation is done by a computer now. A single shop
rate had some advantages at that time but those advantages are
not applicable in todays advanced manufacturing facilities.

Plant-wide versus departmental versus individual machine
burden rates

If overhead does not vary between departments you can use a
plant-wide shop rate. This is the least desired approach because
lower cost departments would be absorbing costs from other more
expensive departments. If overhead varies from department to

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department (rates or drivers) and overhead is significant,
departmental burden rates may result in a more accurate allocation
of overhead. If burden rates between machines in a department
vary significantly a more accurate approach would be specific
overhead absorption rates.

QuoteIt from MIE Solutions offers the ability to have the most
accurate estimating process because you are able to have specific
overhead absorption rates per machine.

Once you being quoting and estimating using machine specific
overhead you will be more capable of competing in this highly
competitive job shop environment.

The next discussion will give examples of how to calculate machine
specific shop rates.


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Calculating Shop Rates Using The Income Statement

We are going to spend the next few posts reviewing what an income
sheet is and how the income sheet will help you determine you shop
rates.

From Wikipedia the definition of income statement is

Income statement, also called profit and loss statement (P&L)
and Statement of Operations, is a company’s financial statement
that indicates how the revenue (money received from the sale of
products and services before expenses are taken out, also known
as the “top line”) is transformed into the net income (the result after
all revenues and expenses have been accounted for, also known as
the “bottom line”). The purpose of the income statement is to
show managers and investors whether the company made or lost
money during the period being reported.

An income statement is the primary source of information which
enables you to calculate your overhead absorption rates.
Overheads are the total cost of all indirect materials, indirect labour
and indirect expenses. All expenses that you cannot attribute
directly to the manufacturing of a product or service are included in
overheads.

Here are some common items and definitions of those items on the
income statement.

These items would not be used in the overhead absorption
calculation

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• Net Sales: amount of money made from the goods or the
services that you sold. This is what you were physically paid. It is
the price of the sale minus any discounts that you gave out and
minus the value of any goods returned or services that were not
needed.

• Cost of Goods Sold or Cost of Sales: amount of money it took
you to be able to have the goods or services ready. Includes
things such as materials and labor costs incurred to make the
product or labor that supplied the service. You may have a cost
related to a service as well as a good. Overhead is also included
in here.

• Gross Margin: a calculation area on the income statement. The
value is Net sales – Cost of sales. This shows how much money
you receive compared to what it cost to made the good or
service. The gross margin shows you how much money you
have available to pay your expenses and still make a profit.

• Selling and Administrative Expenses: costs involved in getting
the product or service ready to sell that are not directly related to
the product itself. It includes salaries for people not directly
involved with the making of the product or performance of the
service, advertising, office expenses, etc. Research and
development costs are usually included in this section.

• Selling and Administrative Expenses: costs involved in getting
the product or service ready to sell that are not directly related to
the product itself. It includes salaries for people not directly

63

involved with the making of the product or performance of the
service, advertising, office expenses, etc. Research and
development costs are usually included in this section.

• Operating Income: income from selling your product or service
minus the cost to make the good or service directly, and minus
costs associated with running the particular type of business. It
can also be thought of as gross margin – expenses incurred to
operate your business. This reveals the amount your company
has left over after paying it’s own costs to function as a business
entity.

• Dividend and Interest Income: additional money that you receive
from ownership and investments externally. Dividends are your
portion of another company’s earnings. Interest income is money
that you make as a result of allowing someone else to borrow
money from you. It is safety money in the event that your
business is not profitable in one year. It allows a business to rely
on sources outside of its self.

• Operating expenses: additional expenses incurred in carrying
out the firm’s day to day activities, but not directly associated
with production. Examples including payroll, sales
commissions, employee benefits, taxes.

These items would be used in the overhead absorption
calculation

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• Depreciation and Amortization: subtraction from the value of
asset because of wear over time. These are figured out based
on the life of an asset or how much it is used.

• Employee benefits: those benefits directly associated with the
employee’s performing activities out directly associated with
production.

• Indirect Labor: employee’s performing maintenance, repairs,
cleanup around the production area in order to create products.

• Utilities: would include gas, electrical, water associated with the
production activities.

• Manufacturing Consumables: gases, rods, sandpaper and other
materials directly related to production activities.

• Building Expenses: expenses including rent, lease payments,
mortgage and other expenses.

• Insurance: insurance that is not included in direct employee
expenses, i.e. insurance on machines.

The next post will deal with how to break these expenses specific
machines.

Reference: Merrill Lynch. (2003). How to Read a Financial Report.


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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

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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


p/MIE-QuoteIt/

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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)

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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.

p/MIE-QuoteIt/


MIE products.

70

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

71

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

72

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.


(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.

73

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/



74

MIE products.

75

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


(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.

76

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


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

77

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.

p/MIE-QuoteIt/


78

Manufacturing Estimating Cycle Time

One of the most difficult aspects of estimating is figuring out what
the cycle time may be for a process. There are many factors which
affect the cycle time which are not fixed including skill level of the
person running the machine, reliability of the machine, maintenance
of the machine, inspection of the parts being run, the quality of the
material and others. In future discussions we will go over these
different aspects of estimating but right now we are discussing at
the high level, what is cycle time?

Cycle time is defined as the handling time + run time.

Handling time is the time spent as the operator loads and unloads
the part being manufactured from the machine.

Run time is the time the operator spends at the machine running the
part or the time the machine is running by itself, i.e. a cnc machine.
Some operations require the operator to be present during the
running of the part and others do not.

The basic formula for estimating an operations cost is


(Handling Time + Run Time)

Total Estimating Operation Time

Setup Time + Cycle Time

79

or

(Staging Time + Setup Time + Transit Time + Tear Down Time) +
(Handling Time * Run Time) * Quantity To Be Produced

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/ERP systems quoting package.

p/MIE-QuoteIt/


80

Quoting Dependencies Between Operations

I talked previously about job cost estimating setup time. The four
areas that were spoken about where staging time, setup time,
transit time and tear down time. Each one of these 4 processes
actually would add costs to an estimate. Lag time does not add
costs to an actual estimate under most circumstances.

When there are dependencies between operations, delays in
handling, transportation, transmission or thinking time, etc. between
operation steps we refer to this as lag time. Lag time does not
usually add costs to a operation step because there is no activity
actually being performed except for taking up space on the
manufacturing shop floor. If there were large lag times you may
consider putting a dollar value on the floor space but this may be
overkill during the quoting and estimating process.

On the other hand lag time is a critical factor during scheduling of a
job shop. This lag time is critical in ERP/MRP systems in order to
properly handle dependencies between operation steps. The
objective is to minimize the time a job is sitting idle with no work
being performed. Reducing cycle time by decreasing the queue
time between manufacturing steps is a basic principle of lean
manufacturing to reduce work in process inventory.

Quoting and Estimating is not an area where lag time is usually
considered because there are direct costs that could be attributed.
As prepare your estimate keep in mind lag time because it will be
used in scheduling the job shop.

81

MIE Solutions products including MIE QuoteIt and MIE Trak both
can help a job shops quoting and estimating process more
accurate.

p/MIE-QuoteIt/


82

What is Setup Time?

In order to begin a detailed look into quoting and estimating I’m
going to start by giving some definitions.

Setup Time

Setup time is the time it takes to make the first accepted piece
which includes bringing all the tools, jigs and fixtures, setup those
jigs and fixtures for a particular batch quantity. Operation run time
or cycle time, is the time spent to complete each unit through the
machine.

Setup time can be simple or complex and it really depends on the
process being performed. Setup time is usually independent of the
actual run time because once a machine is setup it can be
continually run without setting the machine up a second time. Setup
time can actually be broken down into a few categories.

Staging Time

The time required to gather materials, dies or any other equipment
required to get the machine running. Staging can potentially be
performed during the running of another job through the machine
because it may not actually require the machine to be available. A
simple definition is time spent on a machine or process prior to a
manufacturing run.

Setup Time

83

The time required to bring this production batch quantity to an
actionable state.

Transit Time

Transit time is the time to move a particular batch quantity to
another step in the process.

Tear Down Time

The time required to remove all the equipment that was required to
be setup on the machine making it ready for the next process. A
job may continue to the next operation during the tear down time
because this time does not affect the actual job, only the machine.
A simple definition is the time to take down a machine or process
after a manufacturing run.

Quoting and ERP packages should provide the capability for these
setup time variations in order to allow your estimating , costing and
even scheduling to be as accurate as possible.

p/MIE-QuoteIt/


84

Estimating

Welcome to the MIE Solutions blog about Job Shop Quoting and
Estimating

This is the beginning of a blog for all job shop estimators to provide
information and feedback about how to estimate job shop jobs in the
made to order job shop environments.

A little background of myself.

As a child in Junior High School I found a passion for the early
computer systems, which would drive much of his future work. I
created and sold his first computer program, Arrow Data Systems,
which was an early CAD/CAM system for the Apple 2e Computer. In
the late 1980′s after seeing my father (a sheet metal manufacturer)
come home many nights estimating, I saw an opportunity to
optimize his effort through computer technology. Shortly thereafter
the FabriTRAK Production Control package was developed. The
Quote It! estimating package was developed out of the FabriTRAK
system to become one of the leading sheet metal estimating
packages in the world.

I have been to and consulted 100′s of companies in the best way to
use computer software technology to streamline and make the
process of quoting more accurate.

I’m looking for feedback as we discuss the estimation process in
order for all readers to improve their estimating, which in turn,
improves your win rate and profitability.

85

When an RFQ or RFP is received you begin the process of
estimating. You can estimate and quote the job using paper and
pencil, a spreadsheet or estimating software. In this very
competitive market I suggest using estimating software in order to
be most competitive and I will discuss and hopefully get feedback
on ways the software should work to best satisfy the made to order
manufacturer.

p/MIE-QuoteIt/


86

Quoting, Estimating and Scheduling For Manufacturers White Paper from MIE Solutions

Quoting, Estimating and Scheduling For Manufacturers White Paper from MIE Solutions

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Quoting, Estimating and Scheduling For Manufacturers White Paper from MIE Solutions