We Don’t Know What Our Margins Are – How Do We Take Decisions?

During my time in the Roll Forming Industry, I have been in dozens of companies across the United States and around the world.  Frequently, I have found myself in conference rooms with C-level groups trying to implement a new ERP system.  Since I worked for a company that made MRP scheduling software for manufacturers, we were a critical vendor and typically brought in early in the process to consult.

In these meetings, I have heard the same conversation over-and-over.  The first time I heard it, I was shocked, but since then I realize most companies must operate the same way.  It usually comes from someone in Accounting, and it goes something like this, “We don’t even look at the paperwork that comes off the floor anymore.  It’s usually meaningless.  Every time we’ve tried to reconcile what the Operators write down with what we measure coming off the line, it’s either wildly inaccurate, or there’s so much error it doesn’t matter.  We know what we spent last month to purchase things.  We know what we shipped out.  The rest must be waste.  We just have no idea where all the waste is coming from.”

If that doesn’t sound familiar to you, then you’re either doing things really well, or you haven’t had many frank discussions with your Accounting group.  Please do so right now.

When you have this situation, it’s very difficult to know what your true margins are.  Sure, you can get an average to try to figure out if you’re making money or losing money, overall, but it’s impossible to know if you have some products that are big winners and some that are big losers.  So, how do you take day-to-day decisions in terms of how much money you can spend on necessities, such as a broken shaft on a machine that’s causing you to run the line at half it’s maximum speed?

The usual answer to that question is that the company stops spending money on necessities until they completely shut down a production line.  The fear of spending money wastefully takes over at the top and middle management levels, and trickles down to the floor.  I was discussing a problem with a Maintenance Manager in front of a roll former one day, and I asked why they were running the product so slowly.  He responded, “We have a broken top shaft on one of the passes.  It’s $7,000 to replace, and we just can’t spend the money right now.”

A month later, the operator had to come down so hard with the tooling due to the broken top shaft, that they ended up breaking the bottom shaft.  The Plant Manager purchased a new bottom shaft, and they broke it again a month later.  Finally, they replaced both shafts.  A $7,000 problem turned into a $21,000 problem.  This is painfully common across the industry.

At the time this occurred, the company didn’t have a digital MRP system yet.  They were in the process of putting a new ERP in along with the MRP that would tie into the system and allow them to track their costs very accurately.  Until then, how could they take critical decisions based on real-world numbers?  By basing their decisions on revenue.

This company had a very good understanding of the product mix they ran on their various machines.  I helped them build a spreadsheet that listed every machine on their floor in terms of maximum line speed.  We talked to the Sales reps to figure out the average selling price per linear foot for every product run on each machine, and then weighted it by percentage of product mix for that machine.  We then knew, for instance, that some machines averaged $97 per run time minute, whereas others averaged $350 per run time minute.

Suddenly, management could take decisions based on actual data, as opposed to how a cost made their tummies feel.  If the two example machines above went down at the same time, the focus should be on the machine that produces $350 per runtime minute.  Its products and its orders are more valuable to the company.  If that machine needed a part that cost $7,000, it was simple to calculate that they would have made that money back in just 20 minutes of production! ($7,000/$350 prm = 20 minutes)

Is this a true measure of the costs and times?  Absolutely not.  Is it better than doing nothing until the machine completely shuts down and you can’t get orders to your customers?

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