Cost Justification

Tom Clark INDEX CorporationPresident and CEO

September 12, 2018

Who I Am

Tom Clark

President & CEO, INDEX37 years of experience in the machine tool industry for both a Japanese Milling/EDM company and a German Precision Turning Company

My experience is in helping companies implement new, innovative production solutions to meet aggressive cost, quality and throughput goals

Three Common Oversights

As machine tools have evolved, the purchasing process hasn’t kept up

There are three areas frequently overlooked with the traditional approach to machine cost justification:

1. The power of done-in-one

2. Productivity’s impact on profitability

3. The impact of advanced technology

The Power of Done in One

A Complete Part in a Single Setup

Advanced machines incorporate diverse processes to fully produce parts in a single setup, streamlining workflow and improving accuracy

Many manufacturers overlook the full benefits when performing a cost analysis during their purchasing process

A Complete Part in a Single Setup

Can a significantly more expensive machine, with advanced capability provide a lower part cost and a better return on investment?

A Simple Case Study

Part: Connector housing

Material: 6061 aluminum

Dimensions: Ø2.00" x 0.75"

Qty: 10,000 pieces

Two Options for Production

• Option #1

• One 2-axis lathe with manual loading (Operation 10 and 20)

• One 4-axis mill with manual loading (Operation 30)

• Option #2

• One bar fed 9-axis lathe with 3 turrets & 2 Y axes

• All speeds, feeds and tooling are the same on both options

• Both options require a single operator

Some Assumptions

• Shop machine rate is $50/hour

• Employee rate is $30/hour

• Shop runs 1 shift/day (7 hours run time after breaks & lunch)

• Shop runs 52 weeks/year (260 days)

• Scrap rate is 3%/setup

• Programs are completed offline and are good

• Setup times are 5 minutes per tool per machine

• All machines are bought with cash must be paid off in one year

Option #1

• Operation 10 (2-axis lathe)• Finish turn OD features with 9 tools

• Load/unload time of 10 seconds each

• Approximate cycle time of 120 seconds

• Operation 20 (2-axis lathe)• Finish turn ID features with 9 tools

• Load/unload time of 10 seconds each

• Approximate cycle time of 130 seconds

• Operation 30 (4-axis mill)• Mill remaining features with 6 tools

• Load/unload time of 10 seconds each

• Approximate cycle time of 150 seconds

Option #1

2-axis lathe: $80,000

4-axis mill: $100,000

Total machine cost: $180,000

$180,000/52 weeks/40 hours per week = $86.50 hourly machine cost

Time to run 10,900 parts: 72,667 minutes

Time to setup 3 machines: 120 minutes

Total time required: 72,787 minutes (1,214 hours)

1,214 hours/7 hours per day = 174 days of run time to produce 10,900 parts

Option #1

174 days x 8 hours = 1,392 hours total run time

Machine cost – 1,392 hours x $86.50/hour: $120,408

Labor cost – 1,392 hours x $30/hour: $41,760

Shop rate cost – 1,392 hours x $50/hour: $69,600

Total cost $231,768

Cost per piece = $23.18

Option #2

• Operation 10 (9-axis lathe with 3 turrets & 2 Y axes)• Finish turn and mill all features

• 24 tools required

• Approximate cycle time of 125 seconds

Option #2

Machine cost: $600,000

$600,000/52 weeks/40 hours per week = $288.50 hourly machine cost

Time to run 10,900 parts: 21,458 minutes

Time to setup machine: 120 minutes

Total time required: 21,578 minutes (360 hours)

360 hours/7 hours per day = 52 days of run time to produce 10,300 parts

Option #2

52 days x 8 hours = 416 hours total run time

Machine cost – 416 hours x $288.50/hour: $120,016

Labor cost – 416 hours x $30/hour: $12,480

Shop rate cost – 416 hours x $50/hour: $20,800

Total cost $153,296

Cost per piece = $15.33

The Results

2-Machine Option 1-Machine Option

Run Time 174 days 52 days

Cost per part $23.18 $15.33

Amount of year required 56% 20%

And That’s Not Even Touching On…

• Improved part accuracy by eliminating transfer between operations

• Eliminated work in process through your facility

• Simplicity of scheduling one machine instead of multiple machines

In short, you’re making better parts faster and for less money

Video 1

Productivity’s Impact on Profitability

Throughput is Key

Increasing throughput on a machine will do more to impact your profitability than:

• A reduced purchase price

• Lower labor requirements

• Improved tool life

• Savings on power

• Reduced maintenance expenses

A Year in the Life of a Machine

Revenue $280,000 40,000 parts @ $7/part

Machine Payments $104,321 $600,000 machine financed at 5.75%

Labor $65,000 $65/hour labor rate, 50% labor requirement

Perishable Tooling $60,000 $1.50/part

Maintenance $20,000

Utilities $3,000

Profit $27,679

At a 50% Lower Purchase Price

Revenue $280,000 40,000 parts @ $7/part

Machine Payments $52,160 $300,000 machine financed at 5.75%

Labor $65,000 $65/hour labor rate, 50% labor requirement

Perishable Tooling $60,000 $1.50/part

Maintenance $20,000

Utilities $3,000

Profit $79,840

With 50% Less Labor

Revenue $280,000 40,000 parts @ $7/part

Machine Payments $104,321 $600,000 machine financed at 5.75%

Labor $32,500 $65/hour labor rate, 25% labor requirement

Perishable Tooling $60,000 $1.50/part

Maintenance $20,000

Utilities $3,000

Profit $60,179

With 50% Lower Tool Cost

Revenue $280,000 40,000 parts @ $7/part

Machine Payments $104,321 $600,000 machine financed at 5.75%

Labor $65,000 $65/hour labor rate, 50% labor requirement

Perishable Tooling $30,000 $0.75/part

Maintenance $20,000

Utilities $3,000

Profit $57,679

With 50% Higher Throughput

Revenue $420,000 60,000 parts @ $7/part

Machine Payments $104,321 $600,000 machine financed at 5.75%

Labor $65,000 $65/hour labor rate, 50% labor requirement

Perishable Tooling $60,000 $1.50/part

Maintenance $20,000

Utilities $3,000

Profit $137,679

Comparing the Effects

Action Resulting Revenue

Default $27,679

50% lower machine price $79,840

50% less labor $60,179

50% lower tooling cost $57,679

50% less maintenance cost $37,679

50% lower power cost $29,179

50% throughput increase $137,679

Paying More for Higher Throughput

Revenue $420,000 60,000 parts @ $7/part

Machine Payments $208,642 $1,200,000 machine financed at 5.75%

Labor $65,000 $65/hour labor rate, 50% labor requirement

Perishable Tooling $60,000 $1.50/part

Maintenance $20,000

Utilities $3,000

Profit $33,358 +21% compared to original scenario

The Value of Productivity

If paying twice as much for a machine for a 50% increase to throughput increases net profit by 21%, what does this say about the premium you should be willing to pay for:

• A machine with faster cutting speeds

• A machine with higher utilization rates

• A machine able to run when your shop is closed

Video 2

The Impact of Advanced Technology

Evaluating Your Growth Strategy

When you win new business that requires an investment, how do you proceed?

• Purchase just enough technology to effectively complete the work

• Invest in a solution that completes the work in the most efficient manner and provides capacity and capability for future growth

The Pitfall of Incremental Investment

Shops avoid investing in advanced machine because they prefer a larger number of small expenditures to fewer large ones.

• We want to match growth in expenditures to growth in sales

• It would be a waste to pay for the extra capacity before we need it

• What if we lose work?

First of All…

If you’re making investment decisions based on the assumption you’re going to lose work, you probably need to question your business model.

Develop a growth plan you’re confident in and take the steps needed to make it a reality.

A shop at full capacity received an order for 200k parts annually. There were two investment options to complete the work:

A Real World Example

• Purchase 4 Swiss-type machines and produce 50k on each - $1.2 million ($300k/machine)

• Purchase a multi-spindle machine that could produce 300k - $1.8 million

A Real World Example

Additional details:

• Both types of machine require 1 operator per 2 machines at $60k/year per operator

• Assume tooling costs are similar

• $2/part revenue after tooling & material

• All machine purchases are financed over 7 years at 5.75%

The Swiss Option at 5% GrowthYear Revenue Machines M-Cost Operators O-Cost Profit

1 $400,000 4 $208,800 2 $120,000 $71,200

2 $420,000 5 $261,000 3 $180,000 ($21,000)

3 $441,000 5 $261,000 3 $180,000 $0

4 $463,050 5 $261,000 3 $180,000 $22,050

5 $486,203 5 $261,000 3 $180,000 $45,203

6 $510,513 6 $313,200 3 $180,000 $17,313

7 $536,038 6 $313,200 3 $180,000 $42,838

8 $562,840 6 $104,400 3 $180,000 $278,440

9 $590,982 6 $52,200 3 $180,000 $358,782

10 $620,531 7 $104,400 4 $240,000 $276,131

TOTALS $5,031,157 $2,140,200 $1,800,000 $1,090,957

Year Revenue Machines M-Cost Operators O-Cost Profit

1 $400,000 1 $312,000 1 $60,000 $28,000

2 $420,000 1 $312,000 1 $60,000 $48,000

3 $441,000 1 $312,000 1 $60,000 $69,000

4 $463,050 1 $312,000 1 $60,000 $91,050

5 $486,203 1 $312,000 1 $60,000 $114,203

6 $510,513 1 $312,000 1 $60,000 $138,513

7 $536,038 1 $312,000 1 $60,000 $164,038

8 $562,840 1 $0 1 $60,000 $502,840

9 $590,982 1 $0 1 $60,000 $530,982

10 $620,531 2 $312,000 1 $60,000 $248,531

TOTALS $5,031,157 $2,496,000 $600,000 $1,935,157

The Multi Option at 5% Growth

Swiss vs Multi at 5% GrowthYear Swiss Profits Multi Profits

1 $71,200 $28,000

2 ($21,000) $48,000

3 $0 $69,000

4 $22,050 $91,050

5 $45,203 $114,203

6 $17,313 $138,513

7 $42,838 $164,038

8 $278,440 $502,840

9 $358,782 $530,982

10 $276,131 $248,531

TOTALS $1,090,957 $1,935,157 77% Higher!

Year Swiss Profits Multi Profits

1 $71,200 $28,000

2 ($1,000) $68,000

3 $43,000 $112,000

4 $39,200 $160,400

5 $92,440 $213,640

6 $38,804 ($39,796)

7 $51,024 $24,624

8 $330,687 $407,487

9 $348,636 $485,436

10 $382,179 $571,179

TOTALS $1,396,170 $2,030,970

Swiss vs Multi at 10% Growth

56% Higher!

Year Swiss Profits Multi Profits

1 $71,200 $28,000

2 $39,000 $108,000

3 $82,800 $204,000

4 $85,800 $7,200

5 $59,640 $145,440

6 $173,328 $311,328

7 $207,994 $510,394

8 $379,072 $689,272

9 $501,327 $975,927

10 $620,912 $1,007,912

TOTALS $2,221,073 $3,987,473

Swiss vs Multi at 20% Growth

80% Higher!

Accounting for Unpredictability

Realistically it is not possible to maintain a steady growth rate for 10 straight years, so what if we:

• Randomly assigned a growth rate of -10% to 20% for each year

• Automatically reduced labor costs if a worker becomes redundant due to reduced demand

• Iterated the model with 100 sets of randomized growth rates

Simulation Results

• $3,912,928 – lowest simulated revenue

• $7,514,468 – highest simulated revenue

• $1,011,113 – average simulated profit with Swiss

• $1,713,668 – highest simulated profit with Swiss

• $1,641,047 – average simulated profit with Multi’s

• $2,858,468 – highest simulated profit with Multi’s

Simulation Results

Multi-spindles provided higher profitability than Swiss machines in 96% of the simulated cases.

On average, simulated profitability was 66% higher with multi-spindles than with Swiss.

Multi-spindles more than doubled profitability in 18% of simulated cases.

In Conclusion

As you spend time here at IMTS evaluating the future of your operations, be sure to take into account:

• The power of done-in-one

• Productivity’s impact on profitability

• The impact of advanced technology

Questions?

Visit us in booth 338136!