The Business of Molding, #13:

Editor's note: This series of articles on business relationships of custom molders (in this case, with employees) is from Bill Tobin, of WJT Assoc., a consultant in injection molding who believes in looking at the molding business in the most practical way. This article and the two to follow are excerpted from a new book by Tobin entitled Cost Estimating Injection Molded Parts: A Spread Sheet Approach to Tool Sizes, Part Cost, and Assembly, which is available through the IMM Book Club for $50 by calling Filippa Leedham at (303) 321-2322, or by dialing FaxBack (800) 234-0279 and selecting item #5013.

There are lots of different ways that molders set machine rates. Rates are set based on the size of the machine: either clamp tonnage or shot capacity. Larger machines will bill for more than smaller machines. Your machine rate must also include the cost of an operator. The common practice is to have the machine rate quoted at full automatic with only a fraction of an operator's cost as part of the hourly rate. This will pay for the operator doing whatever work is required to get the parts into the box, separate the sprues, and so forth. If the job demands a full-time operator, such as a semiautomatic operation with hand assembly, you must both adjust your scrap rate (semiautomatic creates more scrap than full automatic operation) and increase your machine rate to compensate for the presence of the operator.

A Mathematical Model

Machine rates vary by geographic location. Some locations of the country can charge more for the same size machine than other areas. Bill Frizelle, an industry expert in injection molding, developed an equation which seems to work. The model is as follows:

M$/hour = X + .2A + .02B where M$/hour = the machine hourly rateX = the local fully burdened hourly wage (base wage + taxes + benefits)A = the machine rated shot size in ouncesB = the machine rated clamp tonnage in tons

A quick look at small machines will show that the machine rate is controlled by the cost of labor. However, large machines tend to cost about the same regardless of the labor rate.

The Accounting Approach

This is usually the most confusing method because accountants have a difficult time assigning all the costs to a machine. While this approach may give you the amount it actually costs you to run the operation, you'll still have to use your judgment on how much to mark up this cost to develop the rate you'll bill your customers. The problem with this approach is the difficulty many accountants have with the concept of uptime. This is the amount of time the machine will actually be running so you can bill the customer. Factors like idle time, maintenance, and setups must also be considered. Thus, with three different accountants, you'll usually get at least four different answers.

The Public Information Approach

Sometimes you may see an average rate based on survey information. If you are looking for a machine rate to start with, use the published average rate.

Getting Your Own Information

Each time you bid a job, see if you can set up a dialog with your customer so that each person who bids the job is told what bid ultimately got the job. Since all bids should include "We are pleased to bid $XXX.00 per thousand pieces based on X-thousands of pieces per shipment made of Y-material at Z-dollars per pound," everyone should be entitled to see what the competition bid. Ask your customer to put together a comparison sheet without the company names and send it to all the bidders with the successful vendor circled. It can be assumed that everyone bought the material at the same price, marked it up the same amount, anticipated the same scrap, and estimated the same cycle time. With a little algebra you can calculate how your hourly machine rate compares with the others you compete with for jobs.

Depending on your geographic location and economic conditions you will occasionally find some bidders are so hungry that they low ball the job just to get the business. Others are so busy they overprice their machine rates in the hopes they won't get the job. This information will help you analyze how you should modify your machine rates.

The Scientific Wild Guess Approach

This is a lot like playing darts with a blindfold on after having been spun around for a full minute. Many molders simply guess at a $/1000 piece cost to get the job, then back out what they think the material cost will be. What is left over is hoped to be a profitable machine rate. On its face this approach sounds goofy. However, it is more common than many of us would like to believe.

Material Markups

If you think you have to sell your material to your customer for the price you buy it for, you're losing money. Many companies mark up the material 10 percent in anticipation that it will cover the storage costs. However, you should look at the volume. Small amounts of material for one customer might be marked up as high as 30 to 50 percent simply because it might take a year to consume a few hundred pounds. If you buy material by the truckload and quickly sell it as finished product to your customer, then you probably will get by with a 10 percent or less markup.

The important point to remember in material markups is to charge for all the material you use. Have you included in your material price the amount of material lost in purgings and material changeovers? What if the print calls out a maximum of 10 percent regrind but your scrap is 1 percent and the runner is 15 percent? Doing a quick calculation with an electronic spreadsheet will show you'll be throwing out more material than your markup can cover. How did you absorb the loss? In your machine rate.

Machine vs. Material

It is important to determine the ratio between material and machine. This will tell you the overriding factor in your costing structure. Let's assume you have a part whose cost nets out to 70 percent material and 30 percent machine rate. Profit improvement here will be most effective in finding ways to reduce the amount of material and leaving the cycle time alone. If this ratio were reversed, a serious study of cycle time improvement or scrap reduction would bring you more profit than making the runner size smaller.

Conclusion

All of this used to be extremely complex to calculate manually. With the advent of electronic spreadsheets these calculations become easy to do. With this information you can invest your efforts where they'll best improve your company's profits. - Bill Tobin