Unit Cost Comparison for 5, 6 or 7 Day Work Week

Costing is a big subject for discussion since every company has its own way for pricing out their products.  Whichever method you use is a matter of personal choice.  What’s important is that your end price leaves you profitable and competitive. 

I strongly feel that maximizing equipment utilization is key to competitiveness and being profitable.  If volume and product requirements permit, run 3 full shifts, including the weekends.  Spread the workforce evenly so that no individual works overtime.

If your equipment is utilized 6 to 7 days per week without incurring overtime costs, you WILL maintain global competitiveness and be profitable. 

For example;

We have a 3,000 ton stamping press or injection molding machine with all the auxiliary equipment next to the machine that is needed for it to produce.  Total cost $1.5M.  Assume we have enough orders to utilize this equipment for 5 days, 3 shifts at 90% efficiency.  This will give us the following:

5 days x 24 hours x 48 weeks @ 90% uptime = 5,184 hours per year

6 days x 24 hours x 48 weeks @ 90% uptime = 6,221 hours per year

7 days x 24 hours x 48 weeks @ 90% uptime = 7,258 hours per year

I will try to simplify how to calculate equipment cost for this exercise as much as possible.  The important element here is to show you the relevance of the number of hours and days the equipment is being used.

Equipment cost is $1.5M and the operating cost for this equipment is as follows:

Calculating Hourly Rates for 1 Machine

Add line 1 to (18 to 26) = 13.015K/year ÷ 20 Machines = 650.750K/year

5 Days	650.750 ÷5184 hours/year	= $125.50/hour
6 Days	650.750 ÷6220 hours/year	= $104.60/hour
7 Days	650.750 ÷7257 hours/year	= $  89.70/hour

        

The above shows a drop in machine cost when working 6 or 7 days versus 5 days.

Keep in mind the 4 weeks of holidays per year and an additional loss of 33 days.  (This number of days is based on the equipment being utilized at 90%).

The graph below demonstrates total yearly hours when working 5, 6 and 7 days per week at 90% utilization versus total hours available per year.

Conclusion:

·      5 days = 59.34% equipment utilization

·      6 days = 71.20% equipment utilization

·      7 days = 83.07% equipment utilization

Below is an example of the impact of other costs that are greater than direct labour.  In each business case, the ratio between equipment costs, direct labour, variables, overhead, SG&A (sales and general administration) will change. 

Injection Molding Plant

Product:  Front & Rear Fascia (Front & Rear Bumper in TPO)

                                                                                                                                              Cost/Year

1	100K square foot plant @ $8/square foot		800K
2	20 injection molding machines @ 3000 tons   1500 K each ($30M investment)
3	3 Shifts operation, 5 days
4	33 Machine operators @ $15/hour	Direct Labor	950K
5	3 Supervisors @ 40K/year	Indirect	150K
6	3 Quality Inspectors @ 45K/year	Indirect	165K
7	6 Material Handlers @ 30K/year	Indirect	210K
8	3 Set-Up Operators @ 40K/year	Indirect	150K
9	4 Shipper/Receivers @ 30K/year	Indirect	160K
10	1 Quality Manager @ 65K/year	Over Head	75K
11	1 Production Manager @ 65K/year	Over Head	75K
12	2 Mold Makers for Tool Repair & Maintenance	Indirect	140K
13	6 Maintenance Technicians for all Equipment	Indirect	390K
14	1 Tool & Maintenance Manager	Over Head	75K
15	4 Engineers	Over Head	280K
16	12 Office Personnel  (HR, Finance, Logistics, Purchasing, Sales, etc.)	Over Head	720K
17	1 General Manager	Over Head	120K
TOTAL	80 Employees  Rent, Direct & Indirect Labour Cost		4460K
18	Spare Parts for Maintenance & Tools		2000K
19	All other SG&A		1500K
20	Property Taxes, Business Taxes		600K
21	Interest on $20M @ 6%		1800K
22	Principal Repayment		3000K
23	Energy		2000K
24	Fringe Benefits Insurance		915K
25	Insurance – Commercial		200K
26	Legal and Accounting		200K
TOTAL	Operating Cost		12215K
TOTAL	Total Cost		16675K

                                   

Summary of Direct Labour, Indirect, Overhead and Other Operating Costs

1	Direct Labour = $15 x 33(operators) = 950	950K/year
2	Indirect Labour  (Add lines 5 to 9 above) = 835	1365K/year
3	3 Overhead (Add lines 10 to 17 above) = 1875	1345K/year
4	Other costs (Add line 1 + 18 to 26)	13015K/year
	Total Operational Cost per year	16.675K/year

Calculating Hourly Rates for Above (Indirect & Overhead)

5 Days	Number 1 + 2 of the above = 3.387.5 ÷ 20 ÷ 5184 h/year	= $32.67/hour
6 Days	Number 1 + 2 of the above = 3.387.5 ÷ 20 ÷ 6220 h/year	= $27.23/hour
7 Days	Number 1 + 2 of the above = 3.387.5 ÷ 20 ÷ 7257 h/year	= $23.34/hour

Production Assumptions for Quoting Purposes

Raw Material TPO = $12/pc

Cycle Time = 3 minutes

Uptime = 90% or 21.6 hours/day

Efficiency = 90%

18pc / hour molded

Calculating Part Cost

		5 Days	6 Days	7 Days
1	Raw Material $12/pc                        =	12                        55%	12                 58.9%	12                       62%
2	Machine Rate 125.5 ÷ 18                =	6.9722                32%	5.8111         28.5%	4.9833            25.8%
3	Direct Labour 18.75 ÷ 18                =	1.0466               4.8%	1.0466            5.1%	1.0466              5.4%
4	Scrap	0	0	0
5	Indirect & Overhead 32.67 ÷18=	1.8150               8.3%	1.5127            7.5%	1.2966              6.8%
TOTAL		$21.8338	$20.3704 -6.8%	$19.3265 -11.5%

It’s clear to see the pattern of allocating the total costs over a larger volume hence increasing unit margins when operating 6 or 7 days versus 5 days.  As shown above, direct labour is one of the lowest costs.  I will go into further detail regarding this matter in a later post, once I’ve completed my recollections, as it will better correlate with present competitiveness and continuous improvements.