FEATURED PROJECT

ENGINEERING

The problem…...  the company used a conventional overhead allocation costing system to set prices. This resulted in a very low success rate in quotations especially in the larger markets. Many products showed a negative net margin% loss at the market price

The project...… MBA examined the profitability of all products, processes and customers. We created a model of the business by combining all the products, customers, routes, capacities and costs into one database. This was analysed using BMAP-OPT and the most profitable course of action was identified . A new simplified system was introduced to provide pricing for quotations

The solution….. the project identified 2 main bottleneck areas. These were labour and welding. Labour added value per hour varied from 5 to 300, depending on the products being made. The profitability range at welding was also wide. All the other company processes and plant were only working between 30% and 50% of the available capacity. The new costing concentrated on utilisation of labour and welding.

 

Rules were set to generate 45 per labour hour on average.

In order to maximise total profitability the company needed to maximise total added value in any period of time. Because overheads and fixed costs do not change as the mix of work changes, they are not included in product profitability.  To maximise added value, the company now maximises the throughput of added value through labour and welding. The rate of throughput of other processes does not matter because they are not  bottlenecks.

The mix started to change towards low labour/ high machine content products, resulting in optimum use of the scarce labour and a dramatic increase in profits.  

The company is a 40 million manufacturer of complex assemblies in Europe with one plant in the UK.  The manufacturing process includes forming, welding, brazing, soldering, and assembly of metallic components.  The company is just profitable but is struggling to compete with imports.  There is a considerable choice of machines in each of the manufacturing departments.  The company sells over 15,000 bespoke products to 300 main customers.