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Keep all Your Machines Busy with Activity Based Estimating

November 8, 2021

By: Paul Van Metre

In October 2021, it seems like most shops are pretty busy which is awesome! Although I still hear from multiple shops that they are slammed on some of their machines (5 axis mills) and not nearly as busy on others (their 2 axis lathes for example). If this is sometimes or often true in your shop, there are some things you can do to help ensure all your work cells are equally busy. 

A lot of shop owners I talk with tell me that they quote all their jobs with a single shop rate. Could be $60, $80, $120, or more per hour. (They do job costing this way too...oh heavens!) Whatever the rate is, they use it and apply that same hourly rate to any job they quote and any machine it will take to make the part. While this seems easy and simple at first glance, it will result in an unfavorable mix of work that isn't very profitable at the end of the day. Let’s look at why.

Most shops have a mix of different types of machines that have different capabilities and different costs. Some are pretty basic and relatively inexpensive, while others are much newer, fancier, and more expensive. Consider a G550 Grob that costs $700,000 vs a Haas ST-10 for $50k. Those are very different machines and should be quoted at very different rates. Do you know what’ll happen if you quote all your jobs at $100/hr?

  1. Your high-end machines, which should command a premium rate, will be stuck being 100% overloaded with low margin (or negative margin) work.
  2. Your low-end machines will get a few jobs but will generally be pretty underutilized because you’re bidding a higher rate than the market will bear for that type of work.

If your competitors are bidding high-end milling work at $180/hr and you are bidding $100/hr you’ll be the winning bid most of the time, you will be leaving a lot of money on the table that could be in your bank account! Conversely, if you bid lathe work at $100/hr and your competitors are bidding $60/hr then you’ll rarely win those jobs and your lathes will sit idle much of the time. This is not what you want in either case!

The ideal pricing model in a job shop is one where you can fill up all your machines with work that is a good fit for your shop and at the highest prices that the market will bear for that type of work and work center. Part of understanding the maximum price you can sell a part for will include understanding what your costs are, and the difference will be your profit margin.

Of course, every shop has its unique niche which will determine what the market rate is e.g. 2 axis turned mild steel parts for the heavy equipment industry will generally command a much lower rate than 5 axis milled titanium parts for the space industry, so please keep all that in mind. The market price is also heavily influenced by lead times, material costs, and many other factors which are all important to factor in.

Let’s look at a generic job shop that has a combination of lathes and mills that also does value-added assembly work (and keep in mind these example rates are used for illustrative purposes relative to one another, not absolute! Your rates may vary widely.)

  • Your older 2 or 3 axis lathes could be estimated at $70/hr.
  • Your newer horizontal or 5 axis machines could be estimated at $200/hr
  • Assembly benchwork could be estimated at $40/hr

Consider a combo part that starts with turning, gets some complex milling features, and then has 20 helicoils installed. To get the most accurate cost to factor into the price that the market will bear, you should be bidding each category of machine time at different rates. I’d even argue that you should be charging more for your labor for programming and setup time than you do for your machine operators, independent of which machines they’re using. This type of pricing is called Activity Based Estimating which is very closely related to Activity Based Costing or ABC.

At the end of the day, if you have enough staff to run your machines (not a given at all in 2021) then you want to make sure that all your work centers (machines and otherwise) are being estimated at rates and prices that will win the right amount of work at the highest prices. You must then be able to estimate the costs accurately and apply the right amount of margin to just win the work without being too high priced. So do some research, some lost bid analysis, ask your friendly competitors, inquire in machining forums, and crunch the numbers yourself as to what you should be bidding for different types of machines and different types of work. By being more data-driven, you can help ensure all your work cells and people are equally busy by winning work that is producing good margins and contributing to your overall growth and revenue targets.

 

How can ProShop Help?

ProShop’s estimating module is exceedingly fast at creating very accurate activity-based estimates. You can pull pricing levers for nearly anything you can think of: Different work cells, different types of labor activities (such as programming, planning, setup, running, inspection, fixture creation) differing markups on materials, BOM items, overhead rates, sales commissions, and more. So you can be as precise as you want to be, and with our Rapid Templates, you can generate these precise estimates in just a few minutes. Clients have told us that estimating with ProShop is up to 3x faster than their old methods of using Excel or old ERP systems. Reach out to book a discovery call to see if ProShop can help your shop. 

 

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