Ideas for Understanding Your Manufacturing Costs

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Ideas for Understanding Your Manufacturing Costs
A Real World Application of a Costing Method Mr.
Scott Arquilla
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Best Homes, Inc. History

• Founded in 1957 as a part of Burnside
  Construction Company, a Home Builder

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Increasing Sales Lower Profits

• Chicagos weather and climate
• Union labor
• Inability to forecast actual lead time/backlog
  due to unknown capacity
• Ineffective second shift
• Symptom High Level of Overtime

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Before Ratio ofRegular to OT Hours

• 1995 89.1/10.0
• 1996 91.8/ 8.2
• 1997 87.1/12.9
• 1998 (5/98 Installation) 95.3/14.7
• Pre-Installation OT Average was 11.7 of Total
  Man Hours

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The Houlihan Short TermScheduling System

• John Houlihan began in August 1967 at
• Imperial Components

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What is Short Term Scheduling?

• Supervisors plan the work
• Realistic Expectations for work performance
• Everyone is accountable for their time
• Necessary and balanced manpower, material
• flow and equipment
• Production and time is always monitored
• Corrective action is planned/reviewed for
• problem areas

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How do You Keep Track of Performance?

• Hourly review of work performed or completed
• Daily review of methods, procedures, problems and
  performance reviewed by supervision
• Daily, weekly, monthly and annual performance is
  measured and reviewed by management

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Six Weeks of Worker Observations

• Time each process a number of times not an
  industry average
• Observations are averaged - 90 of observations
  are Realistic Expectancies(R.E.s)
• Goal Plant to work at 90 of R.E.s every day

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Current Numbers to Calculate R.E.s
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Establishment of Plant Capacity Based on
Personnel

• After completion of R.E.s, sales dollars canbe
  converted to production hours/personnel
  requirements to establish plant capacity
• and backlog/lead time

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How Design TimeInfluences Build Time

• Simple garage vs. the Hermaphrodite
• Do you field measure or accept prints?
• How do you price?
• Software for garage
• Square foot for Hermaphrodite
• Truss technician time Is it adequate?
• Did you cover all your costs in quote?

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Information Plant System Flow Goals

• When was order received and when is it required?
• Lead time - repeat or new order?
• Truss technician time
• 5 days if new job
• 2 days if repeat job
• Shop cutting and R.E. calculations

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Information Plant System Flow Goals

• Proper assignment and balance of manpower
  -cutting, floors roofs
• Shop manager sets the daily plan and flow
• Cutting time 1 day
• Assembly time Minimum 2 days
• Trailer loading 1 day
• Delivery 1 day

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Sample Small Job Paperwork
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Pick List R.E.s by Job

• Pick List R.E.s

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Daily Work Assigned Control Sheets

• Hourly List of Work Completed

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Indirect Hours Schedule Miss Report
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Daily Operating Summary
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Monthly Forecast Master

• Forecasted Plan vs. Actual ResultsForecast
  Completed at Beginning and Actual at End of each
  Week
• Monthly Sales Produced with RawActual Labor
  Expense

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Forecast Master Report
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After Ratio of Regular to OT Hours

• 1999 96.4/ 3.6
• 2000 90.3/ 9.7
• 2001 88.5/11.5
• 2002 94.8/ 5.2
• 2003 98.8/ 1.2
• 2004 93.2/ 6.8
• 2005-8 Mo. 92.1/ 7.9

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Is the HoulihanMethod Perfect?

• Yes Why?
• No Why?

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Open Forum Discussion

• Questions on A Real World Application of a
  Costing Method