What we learned about our manufacturing costs from building a deck

This year, in an effort to streamline our expenses and further perfect our ongoing process to identify our cost to manufacture, we completed an extensive evaluation of our cost categories and the individual items in each one. As we reviewed the results and the insights that came from them, we realized many of the lessons learned sounded very similar to a home DIY project, such as building a deck. So, we thought a quick summary and comparison of the two situations might be helpful to others who are evaluating their own costs to manufacture.
 
The following is a list of expense categories we evaluated and what we learned from our deck project. 
 
 
Project Materials
This expense category is pretty straight forward and easy to evaluate. You add up the cost of the materials needed on that job and you're done, right? The only bit of trickery comes when you start looking at planned material overage for remakes, and minimum or bundled order amounts. In the example of a deck, depending on the supplier, you may only be able to buy spindles for your stairs in bundles of 10. So what if you need 31? You have to order 40 and eat the other 9. Plus you might want to add 5% to all your materials in case some are defective or you damage them during construction. It’s the same in manufacturing. If you need 1045 feet of edge band but have to buy in rolls of 300 in the required color and thickness, 1200 is your real cost to estimate with, not 1045. Also, do you plan on remakes and order a couple extra sheets of laminate, core, edgeband and backer? Or do you get exactly what you need and hope there are no issues? Ordering the exact amount leaves you in danger of not getting the job done on time if there are any issues. Ordering too much extra leaves you holding material you don’t need when the jobs done right the first time.
 
Secondary materials
For the deck project, when you show up at the lumber yard to buy your materials, chances are you’re going to need screws to hold everything together. You may have thought it was a minor expense, until you realize how many you need. Glue is no different, it can add up fast. Don't forget to calculate those extras like glue, packaging and shipping materials.
 
Direct labor and overtime
This one is usually included in cost estimates but we’ve even seen it left out by our manufacturing partners on occasion. The thinking is that this cost is just baked into doing business, however this is a real cost that needs to be put against each job. The other factor to consider is, when does the clock start and stop? Are you including set up and clean up time? Also what about breaks, benefits, and overtime? All these add to the total cost of your labor. For your deck project, it's worth doing a quick calculation to see what your time is worth to do it yourself. You might change your mind when you find out you're only "paying" yourself $12/hr. On the manufacturing side, you might be surprised how much your spending on contract labor and want to convert those roles to full-time labor, we sure were.
 
Indirect labor
This is a big one that’s often left out. Chances are you have a small army of office and support staff who’s time is spent processing orders and running the facility. Their time is money too.
 
Team Perks
What do you do with the pizza, donuts and after work beers you bought the team for working so hard getting your last big order out? Those costs are real too. It's no different than including the case of beer you bought to thank your friends who showed up to help finish staining the deck the day before it needed to be done for your Labor Day cookout.
 
Remakes 
If you plan on never making a mistake either building your deck or manufacturing in the wood working industry, you’re going to be surprised and disappointed. Mistakes happen and whether you plan ahead or not they will cost you money. It’s recommended to plan for them and include them in your costs. Even a 3% remake rate can add up when you include materials and labor.
 
Facilities
Rent/mortgage, utilities, taxes, trash, fork lifts… they all add up and it makes sense to figure out how to include them. We'd recommend rolling them all together in your calculation. We’re not exactly sure how this works for the deck, you're probably just going to save the extra material and toss the scraps in your regular trash.
 
Tooling
Well you’re back at the hardware store now and you decide you need a new tool belt to make you more efficient during the deck project. You're reminded of all the bits and blades that are categorized under general expenses. Not everyone at home and the office agrees 100% with your assessment of how to categorize these two items, but they’re both a real cost.
 
Maintenance
You can’t make a quality product if your tools are broken and malfunctioning. What’s more frustrating than having everything ready to go and the cordless drill craps out at home, or the router goes down with a bad bearing. You know both are going to cost you, and belong it in your analysis.
 
Machine Depreciation
In addition to planning to maintain your equipment you need to plan to replace it when it’s outdated. If you know how much each machine will cost to buy and sell over the period of time you keep it this is a straight forward calculation you can include in your numbers. 
 
Summary
So, how to you move forward with all this to create a new estimate of your true costs for a job?
 
We'd recommend doing the math and coming to a number that reflects your overhead costs for expenses that aren't easily tracked per order or part. That percentage can then be added to your known costs for materials, machine time and labor. Once you find that number you can better estimate your true costs and make an informed decision around how to manufacture the job.
 
In addition to all these the hard costs, there are some intangibles that are less easily calculated. They are mainly driven by the scarce resource of time. There’s only so much of it and you have to decide how to use it. If your shop is fully booked and you have to turn down a job or lose it because you can’t meet the deadline, that’s a real cost too. There’s also peace of mind knowing you have a backup plan to manage overflow capacity or augment your team when work backs up. This can happen when a machine goes down, or you get a customer who requests a capability you currently don’t have and won’t give you the rest of the business unless you can offer a solution. 

 

 

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Travis McElhany

Written by Travis McElhany

VP of Marketing