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Marinus Sun 08 November 2009 12:25

Machine operational cost
I want to know, using a mechmate, how can one determine the macine operational cost. That is to be able to get a realistic price on a given project.

Anny advice will be great.

084 263 0244

Besser Sun 08 November 2009 14:47

OK let me put in some thoughts:
Cost of running MECHMATE in hourly rate (does not include client interaction, design, programming, setup, cleanup, packaging, administration)
Start With:
(Total build costs X cost of borrowing money)/hours you will run the machine a year
Total build costs/hours you will run the machine for 3 years (pays off machine in 3 years)
Cost of electricity X (spindle+ motors+ computer +vac etc power ratings)
Job Consumables ( boards, bits etc)
Labour Hourly rate

When you add all the elements, a one off becomes expensive and cutting only straight lines cant compete with a panel saw.

Besser Tue 10 November 2009 16:51

Cost of client interaction:
Many manufacturing people dont charge for quoting/discussion time with clients. Yet the same person acting as an accountant would charge a client by the hour for their tax work.
I would look at a work flow position and as you run out of time start charging, this will increase your ebit and engage the more serious clients. You could also make it clear to the clients, they can bring their cad files and avoid the cost. It means you will be targeting your competitors by utilizing their free pre cutting services.

As a basis the average wage in Australia is about $30/hr. You are now a cut above average as you are a specialist CNC house. Look professional and people will want you as professional, or, look cheap and people will always want it cheaper.

Oh and a last thing, while you are chatting with the potential customer, you are losing the hourly rate cost of your machine cutting! So charge or short chats (assumes a sole owner operator)

Besser Tue 10 November 2009 17:03

Another thought on discounting. Some times (all to often now) you need to reduce margins but the problem is always: once you drop the price to a client it's almost impossible to raise it again.
One company I came across always addressed this by discounting on the basis of "accessing cheap materials" the proposition was the client would receive a discount as the purchasing officer had found a "end of run" stock of material and can buy it for the clients job. This story while not always true had several benefits. The client could receive the cost pricing they needed to order, they knew they could not come back through the door a month later expecting the same price and they invariable placed the order quickly to secure the "cheap material" as theirs.

The company was subsequently purchased by an Auto company and 3 years later shut down! GFC is when incompetence hits critical mass.

Castone Tue 10 November 2009 17:24

I quote parts and other types of fabricating jobs everyday , that is what I do for a living. We seldom charge customers for drawing as if we did we would not sell many jobs as our compitetion does not charge for it,we also do not charge for talking to customers but all of this is figured in to our hourly machine and labor cost. Your hourly machine rate must include pay back of your machine up keep of your machine and your overhead for running your company. None of our customers pay us by the hour we give the customer a quote . And I am sure that is the same in most places , you would not pay someone to paint your house by the hour. So knowing your machine and what you can do with it and knowing your competitors is the first place to start. Software that gives estimated run times will be of very little help setup and handling will be one of the tougher thing to get a grip on and what you can sell a job for not how much it cost you to make it.

PEU Wed 11 November 2009 05:03

this post @ cnczone should give you some ideas:

Besser Thu 12 November 2009 00:16

Ask your paying clients how they feel paying for your inefficiencies, or even paying for other clients who took your time and didnt give you an order!
Your competitors who throw out quotes "Free" are lumping this labour cost onto parts they sell (It's only free if they never order). Tell the client to find the free quoters and send you their quotes and drawings. You need to target a lower price per part/job (as every company does) and to do this and fill up production capacity you cant afford to lump in inefficiencies. Do it the same as your competitors means you have all the same handicaps.
If you are smarter then the competition and turn your smarts into dollars for the client, give out free quotes. Otherwise why replicate a job someone else will do for free at a cost for you.

Marinus Thu 12 November 2009 01:56

Thanx to all who helped, I figured that the best will be to get out ans start determine the cost of operation myself. The only thing is I'm 2 months away from completing the CNC. :)

Besser Tue 17 November 2009 20:40

If you do one offs and specials you need to have a hourly rate you charge as the time specing, designing, quoting, assembly/finishing will be a lot more costly then the cutting. At the other end of the scale is a production run item that has already been made before. You can then cost the process on the machining cost per time rate (and abnormals like holding stock).

At one multinational I worked for, I implemented an asymptotically costing structure that simply cost the complete expense to make a part at 3 differing quantities. using this method you can then simply calculate the price for any quantity. What it shows is the true cost of "free quoting:, the accounts department, the dispatch dept and all those extras that were so small you didnt think they mattered. It would be easier with a one machine company. If your MM costs $5000 to build and has a business loan of 5% then just this represents a cost of $0.14/hr, plus you mobile phone say $600/year thats another $0.34 etc etc, if your machine isnt cutting then your free quote time is costing.

Gerald D Wed 18 November 2009 00:12

If you are talking of a one man and one machine company, then you can basically regard the cost of running the MM as near zero. . . . (except for the cost of cutters). Your big costs are your own salary, telephone/internet/comms, vehicle, space rental, advertising, insurance....the cost of running a MM is insignificant compared to all of that. Except again for cutters, but those you cost into each deliverable job.

Marinus Wed 18 November 2009 11:45

Realy, I would think that depretiation and wear and tear to the MM will cost signifficant, but what If I make a living out of it and it break down one day, If I did'nt saved up for that I'll be screwed.

Gerald D Wed 18 November 2009 11:57

If it breaks down one day, you are not going to call anyone to come and fix it - you built it yourself, so you fix it yourself. We have run for years without serious breakdowns and if you save R100 per month you should have enough for the potential problem.

Let's say that the MM's running cost is in the same category as other workshop equipment like table saws, planers, thicknessers . . . .

Jan de Ruyter Thu 19 November 2009 10:50

And the answer is?

Some Nuts Are Bad For Business
When Cecil the accountant came into the restaurant for his morning coffee, he saw a new rack of peanuts by the cash register. 'Sam,' he yelled at the proprietor. 'do you realise what that peanut rack is costing you?' Sam said, 'It's not gonna cost. The rack is only $50 and I get 20 cents for the peanuts that only cost me 12 cents. I think I will sell about 50 bags a week to start. In 12 weeks the rack is paid for and 1 make 8 cents a bag from then on.‘

Cecil shook his head sadly, 'Wrong Sam, those peanuts are part of your operation now and must carry a share of the overhead. You know Sam, the rent, heat, lights, salaries for your waitresses, cook...' Sam broke in: 'The cook? What's he got to do with it? He doesn't oven know I got peanuts.' Cecil began writing rapidly on a napkin. 'Sam, just quickly, your peanut operation is going to have to pay $2,556 a year toward general overhead costs. Well, maybe a little more like $2,626 when you consider window washing, soap for the washroom, etc.' Sam held. up his hand, 'The peanut salesman said all I got to do is put 'em on the counter and every bag I sell is 8 cents more profit.‘

Cecil sniffed with contempt. 'Sam, he is not an accountant. Do you know what that space on your counter is worth?' 'Hay, it ain't worth nothin,' Sam said., ' there's no stool there.' 'Sam, you have 60 square feet of counter and you gross $30,000 a year. That space is worth $500 per year.' 'Ya mean I gotta add $500 a year to the peanuts?' 'Right Sam, add that to your operating costs and that comes to $3,126 per year or $1.20 a bag if you sail 50 bags of peanuts per week. If you pay 12 cants per bag, that's $1.32 cost per bag. If you sell them for 20 cents, you will be losing $1.12 on every bag you sell.' 'OK Cecil, you're so smart. What do I do?‘

You have to cut operating expenses,' said Cecil, 'move where the rent is lower, cut salaries, take the soap out of the washroom. If you can cut operating expenses by 50% you can cut the cost of each bag of peanuts to 72 cents. In order to make 8 cents per bag, you then have to raise your price from 20 cents per bag to 80 cents.' Sam said, 'Forget it. I'll just throw the damn nuts out. All I lose is 50 bucks for the lousy rack and 6 bucks worth of peanuts.‘

Cecil shook his head. 'It's not that easy Sam, you are now in the peanut business. if you throw them away, you add $3,126 annual overhead on the rest of the operation that the peanuts were absorbing... you can't afford that.' Sam looked toward the ceiling, 'Last week I made money, now I am in trouble because I wanted to make a few extra bucks on peanuts.' Cecil smiled, 'That's right Sam, you can't avoid making these poor decisions unless you consult with a sharp accountant like me first.'
Cecil patted Sam's shoulder and assured him that survival in the business world was not easy. The modern science of management is very complex.

-with deepest respect to all accountants

Besser Thu 19 November 2009 19:26

Thats Great! Love it

Ever noticed when you go to buy fuel the counter is loaded with product and you have to deal with the attendant through a hole they have left between the choc bars! I feel so valued as a customer when that happens. It's almost to the stage where they will employ a pick pocket to skim those coins in your left pocket when you walk out. I'd prefer if the proprietor sold me a years worth of fuel credit then I could have it at a flat rate, he could hedge his purchases. Then we all win on pricing.

Sam has the one affliction we all have, limited time. Opportunity Cost is what Cecil would discuss with Sam (then charge him by the hour for the advice) Maybe Sam could have a vending machine that is coin operated, it's all a matter of time and money.

Marinus, to start with you are going to be making a lot of guesses on pricing, after a while you'll get a feel for it and sharpen your accuracy of your pricing then (like most successful businesses) you will start looking at the real costs/processes and clients of your business and make changes to suit your need (which is usually saving time to make profit) If you can start out with a target in mind you may be able to avoid severe mid stream changes. I like Gerald banging on about curves! MM's are more valuable when cutting curves. Starting with straight cuts puts you in competition with saws.

Gerald D Thu 19 November 2009 20:01

With some franchise stores, the stuff on the counter is outside the franchise agreement. ie. the store owner pockets that income without a share going to the franchisor.

servant74 Mon 04 January 2010 14:45

What is a 'normal rate' of wear for bits when cutting, say plywood or MDF? If that is one of the largest consumables getting a handle on it would be good. I know it will depend on how much is cut, but I don't have a feel for # of linear feet of cut or what metric to use.

smreish Mon 04 January 2010 21:10

...on .25 bits I usually get about 8-10 sheets of plywood out of it.

gixi Tue 05 January 2010 04:42

Everybody should consider a price per hour or minute. Take ArtCam for example.
This software gives you a detailed report with every operation and finally everything is converted in minutes or hours. This kind of report cold be presented to a customer. Ok if you are slow or incompetent it's your problem but "Machining time" it's a fact.
The company who cut my parts for MM calculate the finall price considering an amount of 10-12euro/min. And I did not pay extra money for the CAD part because all the drawings are ready to cut.

Besser Sun 10 January 2010 17:15

Thanks Sean, good intel!
-building a consumables database will help costing.

What part of a MM will wear out first? In a production enviroment/ one shift / MDF

Gerald D Sun 10 January 2010 19:49

1. The cutters (2 days?)

2. If using routers, the router bearings (6 months?)

3. If using routers, the router brushes (6 months?)

4. The spoilboard (6 months?)

5. If using a spindle, the spindle bearings (2 years?)

6. The brush/skirt around the dust foot (2 years?)

7. Pinion gears (3 years?)

Jan de Ruyter Mon 11 January 2010 01:01

I apologise in advance to any cost accountant who might read this by accident.

The discussion on this thread is about determining a hourly tariff for the MechMate but I would like to encourage entrepreneurs to take a different view rather than the simplistic Price = Cost + Mark up % viewpoint.

The first thing one has to understand is that the reason why you are in business is to make money. Profit = Revenue - Expenses.

So how does a business make money?

1. By increasing Throughput (Selling price - Material cost over a given period of time)
2. By reducing the Inventory (All the things you've bought with the intention to sell)
3. By reducing the Operating Expenses (All the money spent to turn inventory into throughput)

What is waste?
1. If I buy inventory and don't sell it.
2. If I incur Operating Expense and it does not result in increased Throughput or a reduction in Inventory.

Now most companies fall into the trap of trying to reduce cost, which may endanger the future existence of the company. It has become a siren song in industry to reduce cost, but if you ask a manager how he want to reduce cost, he just mumbles: "Just go and do as I tell you, smartass."

So rather than focusing on reducing cost, we should focus on increasing Throughput and reducing waste.

How about if I can buy the same raw material from a different supplier at 15% less?

Let's look on the Revenue side.

Pricing one's product is a complex issue. For this purpose one has to figure out one's competitive advantage. These can be any one of the following or a combination of them:

1. A unique product design
2. High quality product
3. A low cost product
4. Short delivery lead times
5. Delivery reliability
6. Ability to make changes to product design/process
7. Value added services

In my opinion, with full credit to Gerald, a person with a MechMate can deliver all of these and this is exactly what makes the MechMate such a great product. An almost infinite number of products from a huge variety of materials can be made economically on the MechMate within a reasonable time. Just browse through the forums and see all the interesting things people are up to.

The key point is to deliver Value to the customer.

Value = Performance / Price.

The higher the performance, the more you can charge.

A warning on using cost as a competitive advantage. You can only undercut your competition for so long before you go out of business. In the process you will bankrupt yourself as well as drag your competitors down with you.

The right thing to do is to segment your market, as each segment has a different opinion of the value of a product. A client who needs something for a DIY project (low budget) should pay a different price that say some high-end customer that needs an architectural masterpiece. Someone who needs it ASAP should pay a premium as opposed to someone who is prepared to wait a bit. A repeat customer will get a better price than a once-off customer.

The point is that one size fits none. (Ever tried on a free-size T-shirt?)

In any business there is a break-even point. This is the point where revenue exceeds costs and the point where the business starts making a profit. If you are below break-even point, an aggressive price strategy should be followed with an emphasis on getting the marketing right to get as much work in as possible at the highest possible price. Above the break-even point, things change, for if I charge $1 more than my variable cost (material, consumables, non-permanent labour, overtime payments, electricity), the $1 goes straight to the bottom line, taking into consideration your capacity constraints.

If you have 2 hours machine time available I can sell it to a customer. If I have no capacity available and I take on an additional job, I will only disappoint my customer.

This is not a rhetorical question: Who is responsible for the capacity utilisation of the factory?

Next is to distinguish between fixed and variable cost. Now without going into an academic discussion, all costs are fixed except material cost and unless you make changes to the business, they will remain fixed. For example, rent is fixed unless you move premises, in which case you pay more (or less) rent.

The price you charge must at least cover the variable cost.

The tricky one is labour, as you won't hire or fire as demand fluctuates, but you might cut overtime, which makes labour fixed but overtime variable. The problem is to make labour as flexible as possible, by multi-skilling and the use of what I call permanent part-timers, who come in on say two days a week when customer demand is high.

So how about a hourly tariff? It depends on what your customer is prepared to pay (based on the value you are going to deliver and what your competitors are doing), whether you are above or below your break-even point and how much capacity you have available. To therefore calculate the exact amount of wear on a tool is a bit of a wasteful exercise, rather make an assumption that you can cut two sheets with one cutter and cost that into your price.

The rather blunt approach of cost recovery will make you lose potential profitable business and scare your customers away except the ones who can afford your rates.

It is better to be approximately right than precisely wrong.

Recommended reading: Goldratt: The Goal, The Haystack Syndrome.

Gerald D Mon 11 January 2010 01:38

My father taught me to: Charge a man as much as what he is willing to pay.

Thanks for that post Jan, I support every word of it.

Besser Mon 11 January 2010 07:51

Yes! read The Goal and loved it, now with transport as it is, dumping product off shore can quickly see it sold back into your prime market. I always thought that was a "easy out" in The Goal.

Capacity utilisation is a key. Fill your books with work then weed out low return jobs by filling them with high return.

qroger Mon 18 October 2010 19:15

Profit as cost
I don't know how my eye fell on this old thread, but I remember one year's economic Nobel prize winner's idea was that profit should be calculated as part of the cost of doing business. Just for what it's worth. In the US corporate world, it sometimes seems profit is the part you couldn't hide somewhere.

mrghm Tue 19 October 2010 04:13

Originally Posted by Gerald D View Post
My father taught me to: Charge a man as much as what he is willing to pay.

Thanks for that post Jan, I support every word of it.
i was taught to look at the man then look at the job,

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