Step 7: Dealing with the nonrecurring onetime expenses
July 12, 2013
Lead-times for CNC preparation, tooling, and fixtures need to be included in the total lead-time quoted to the customer. How exactly? Gerald Davis dives into the details.
This edition of Precision Matters continues our detailed examination of estimating as a business process. The previous edition discussed the estimator’s material planning for each of the needed manufacturing steps. At this point the estimator has a clear idea of the product costs and lead-times for the inventory required for each fabrication step.
We now turn our attention to accessory items and activities that improve production efficiency. As we did with labor and material, we need to predict both the lead-time required to obtain the special jig as well as the expense of dealing with the special program or fixture. Ultimately, lead-times for CNC preparation, tooling, and fixtures need to be included in the total lead-time quoted to the customer.
For the sake of discussion, we’ve dissected the estimator’s job into a dozen tasks. In reality, these tasks may overlap or evolve in different sequences. As a review, here is a brief outline of how we’ve dissected an estimator’s job:
The estimator must predict costs of jigs, fixtures, tooling, CNC programming, and unique processing or handling needed to satisfy the terms of the customer’s request for quotation (RFQ). The creation of such jigs/tools/programs is a onetime event. Even though they will be used for producing every batch of the parts in the future, these get lumped together as nonrecurring expenses in the customer quote.
In situations where a customer RFQ includes a product that does not require expedited handling or a dedicated capital asset, the estimator completes the “special item review” task. This verifies that all required items are already on-hand.
The estimator cares about CNC programming because it represents something that takes time. The shop must communicate this to the customer in terms of calendar days and method of funding.CNC programming produces an intellectual property asset. It’s a machine program that allows the shop to produce a specific product
in a predictable way, and it’s dedicated to a specific product. Presumably, the CNC program is efficient and gives the shop a speed advantage, and overall it benefits both the shop and the customer. The part could be produced without a CNC, but presumably with a much higher labor expense and thus higher total cost.
Who should fund the creation and maintenance of CNC programming? The customer will provide the funding, of course. A better question would be: How does the shop present the fee to the customer?
In truth, it’s a matter of company policy and how the shop defines its CNC programming expenses. Direct expenses are dedicated to producing a specific product, like drilling a hole in a part. Indirect expenses are activities that keep the doors open, regardless of whether any parts are being produced. These could be maintenance activities like greasing and sweeping.
The customer generally will be billed for all of the expenses encountered while building its product, both the direct and indirect expenses, during the time its product was in the shop’s production line. Typically, the estimator will be given an hourly rate to use to cover the indirect expenses. This gives a quick and useful prediction of overhead expense, though like any prediction, it’s not exact.
It would take considerable time and effort for the estimator to review all of the overhead activities in the shop for each cost study. Using a burden rate is a better use of the estimator’s time. This frees up the estimator to expend considerable effort on identifying the dedicated expenses unique to the fabrication of a product.
So is CNC programming a direct expense? After all, it is dedicated to producing a specific product, and the program is not created unless the customer creates demand for it. The effort required to generate the program depends on the part’s design.
That sure makes it seem like a direct expense.
If programming is treated as a direct expense, it is predicted in the same way as for any work center. That is, the estimator multiplies the billing rate for the work center by the amount of time spent by the work center. If CNC prep takes two hours and costs $75 per hour, the customer sees a $150 fee, often cited as a nonrecurring expense (NRE) on the quote.
As a marketing strategy, billing for CNC prep as a onetime expense might have merit. For example, in the event that the shop has built the part before and has a good CNC program on-hand, the customer does not need to pay for the development of something that already exists. In this situation, the customer benefits from the onetime nature of the CNC programming expense. The customer doesn’t pay for CNC programming again unless it changes the product design.
When customers pay for something, they typically expect to own it. A CNC program will run on any machine with the same tooling and control commands—a pair of requirements that generally make it impractical to move a CNC program from one shop to another.
Nonetheless, the customer’s ownership allows it to designate your shop as the guardian of its property. This is nurturing to an ongoing business relationship.
But this method of charging the CNC fee will make some customers unhappy. It seems more like a tax than a service. Is there a better way?
Every job goes through the CNC programming stage—at least in the example shop that we’re using for sake of discussion. At a minimum, the project might be nested with other projects to gain better material utilization or to improve the scheduling. Some new jobs or revised designs might require some additional onetime programming. However, CNC programming is a routine activity that is not much different from operating the accounting software to keep the books. From this perspective, it is part of overhead.
If a shop treats the CNC programming as overhead, the customer never sees an NRE charge for programming as a separate line item. This could give the shop a competitive advantage when soliciting customers who prefer smaller batch sizes. Even though the CNC programming fee is built into the price quote as an indirect expense, it is amortized over nearly all of the parts that go through the shop, rather than just on the 10 or 20 parts in the current quote.
From a practical standpoint, treating CNC prep as an indirect expense allows the cost of the computer, the software, and the CNC technician to be amortized over all of the parts that the shop manufactures. The expense is still covered, but it shows up as a tiny amount built into each part’s price.
If the CNC programming is quoted as a direct expense, the estimator may be expected to approximate how much time it will take. That’s a nuisance to the estimator. The customer also has to include the CNC fee as part cost. That’s a nuisance to the buyer.
It is in the shop’s best interest strategically to focus on what kind of customer it wants when deciding how to charge for CNC programming. Large batch sizes and repeat orders have low risk, are wonderful for high sales volume, and thus typically have to be priced very competitively. Smaller batches and frequent revisions are typical of prototype and development work. This is low-volume work, but these customers typically are willing to pay for speed and convenience. That might translate into healthy profits.
Ultimately, the choice comes down to what works best for both the customer and the shop. For the discerning buyer who cares greatly about the CNC programming expense, the shop might offer a discount for repeat orders of identical parts. Other customers may prefer the simplicity of not having to understand lot charges, NRE fees, or the custody of intellectual property that they cannot use for anything.
As the estimator translates the customer’s design into a sequence of manufacturing processes, the need for tooling will emerge. A shop’s standard tool list represents an indirect cost. The tools are maintained regardless of the customer mix of parts going through the shop, so the estimator does not treat these as a special expense.
Some tooling inventory, however, is dedicated to a specific product. This tooling is typically customer-owned and, as such, unavailable for any fabrication without the customer’s permission.
Here, defining what constitutes a “standard” tool plays an important role. When I made my first marketing brochure for my shop, I included a list of tool sizes that we had on-hand for the CNC machines. The buyers were not impressed, but their engineers liked to know what our standard tooling was.
Our standard tooling list started out with a few common sizes that were delivered when the machines were new. As orders moved through the shop, we added to what continued to evolve as our “standard” tooling list.
So how does a dedicated, customer-owned tool migrate into the shop’s standard tooling list? This again is a matter of company policy, but generally is driven by obsolescence and abandonment. This is where the odd shapes and weird bits in the so-called “standard” tooling list come from. Maintenance of this obsolete tooling inventory can be prohibitively expensive, so a company policy against pack-ratting might be in order.
The estimator looks out for tooling that requires procurement and fabrication. As with CNC prep, this must be communicated to the customer in terms of calendar days and method of funding.
The estimator should be attentive to all tooling requirements. Even though the job may require standard tooling, it is not always available; tooling wears out. Frequently used tooling ideally is maintained and at the ready. Less frequently used tools, on the other hand, seem to vanish or be damaged only when needed for production.
Terminology usage can change depending on the shop, but for many there is not much difference between a jig and a fixture. Both clamp or hold the part during fabrication, but while a fixture affixes the part to a specific location, the jig also helps guide the manufacturing process. This means that, unlike fixtures, jigs often are designed for a specific job.
Regardless of terminology, though, for a workholding device to get the estimator’s attention it needs to be dedicated to a specific product—and it has to be available in order to start the job. This again must be communicated to the customer in terms of calendar days and method of ownership.
The estimator must quote a price for the cost of producing the fixture or jig, and then embed it into the quote for the product. In addition to its lead-time and expense, the fixture or jig is a tangible asset that is somewhat more transportable than a CNC program.
It is common for the jig or fixture expense to be shown as a separate line item from the part price. This makes it easier to track and audit over time. Good recordkeeping is beneficial, and it starts with the estimator’s planning for onetime expenses.
What does it take to deliver a project ahead of time? If it normally takes three weeks to build a part, what amount of money would make it possible to deliver the part in one week?
For estimators, such nonsense is hard to resolve. They must first predict the expense of running the job through an “empty” production line and then predict the impact of breaking promises already made to other projects that were to be on that production line. It is a what-if conundrum.
Expedited delivery is a matter of company policy. If it is permitted, the estimator must identify scheduling opportunities as well as bottlenecks, like procuring inventory, tooling, or any subcontracted operations. Workers can put in overtime to get the job done. Often these jobs also have smaller quantities. Considering all this, one can seldom charge enough for expedited delivery.
Gerald would love to have you send him your comments and questions. You are not alone, and the problems you face often are shared by others. Share the grief, and perhaps we will all share in the joy of finding answers. Please send your questions and comments to firstname.lastname@example.org.