“Why are you making such a big deal out of it?” asked a machine shop lead when I was incredulous that he paid his eight machinists 8 hours per day for only 7 hours of work (half hour for breaks and a half hour lunch).
As a Small Business Consultant, I work with many small businesses who are not actively aware of organizational performance metrics. In this case, it just took a week to identify key metrics to provide my machine shop lead friend with some interesting facts.
Here, the lady newly responsible for the pack/ship and distribution team had started measuring 1) the number of items shipped and 2) the total value. These are two pretty basic metrics and easily obtained. On this particular week, they had shipped 4,565 individual parts that equaled $393,000. And, a simple ratio shows each part had a value of $86.09.
We had also started measuring some very basic shop metrics (much to the displeasure of my lead friend) and found that the shop had produced 1,770 parts using 216.75 machine hours. Again, a simple ratio yields a production rate of 8.17 parts per machine hour.
We already knew there were 8 people getting paid and extra 30 minutes per day, so we calculated that cost as well.
.5 Hours X $20 (average rate of pay) = $10
$10 X 5 Days per week = $50 per week
$50 week X 50 weeks per year = $2,500
$2,500 X 8 machinists = $20,000 of over payment
Additionally, we are losing 30 minutes per day of work, so there is more productivity to be gained, so we did the math;
.5 hours X 5 days per week X 8 machinists X 50 weeks per year = 1,000 lost production hours.
Here is where we put this all together: If we can produce 1,000 more hours of product and the product makes $86.09 per part and we can produce 8.17 parts per hour the numbers get staggering.
$86.09 $/Part X 8.17 Parts/hour X 1,000 hours = $703,355.30 of additional revenue. At a modest 5% Net Profit that would yield $35,167.77 in profit. By the way, this would more than double what the business earned the prior year.
“What’s the big deal,” my friend asked. $703,355 in additional revenue (with the same resources) and potentially $35,168 in additional profit, THAT’S the big deal.
Do the math and count your money.
At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:
