5 Common and Costly Manufacturing Mistakes Made by Job Shops

Topics: shop management software, cost of doing business

Posted On Feb 5, 2013 3:44:00 PM by Dave Lechleitner

oops2 resized 600As a job shop owner, you face a unique set of challenges in today’s business world. Owning and managing a job shop may never have been particularly easy, but the modern manufacturing situation in the U.S. has only worsened. This has many job shop owners questioning whether they can even remain in business, much less thrive.

Since the early 2000s, North American manufacturing has taken a huge hit as more and more manufacturing moves offshore. This has left many job shops with reduced business, if it has not put them out of business completely. The Great Recession of 2009 only worsened the situation. The combination of these events resulted in a loss of over 5 million manufacturing jobs in the U.S. from May 1999 through May 2009.

As challenging as the situation may be, it is possible to survive, and even thrive, in today’s manufacturing environment. However, for many job shop owners, it will require a shift in thinking. No longer is it enough to be a skilled machinist or a good fabricator - you must become a smart business person as well.

To succeed in today’s manufacturing climate, you have to run your business like a business. This means thinking strategically. To do so, you must move beyond the tactical thinking that you use to solve day-to-day issues, and begin to see the bigger picture.

For shop owners who are planning a transition event, such as selling the business or handing it over to someone, this shift in thinking is a must. Only by thinking strategically can you hope to build a business that will be worth selling, or handing on to someone else.

What follows are five common manufacturing mistakes made by many job shop owners, as well as some potential solutions. It is not always possible to avoid mistakes, but running a successful job shop requires that you address the mistakes you do encounter in the best way possible.

Mistake #1: Failing to understand the real cost of doing business - which jobs are truly profitable and which are not

Many job shop owners assume they know how much it costs to run a job or manufacture a part, but this is often not the case. Looking at an income statement at the end of the month to measure the success of your business is not enough. You need to know all the specifics of the work that earned you money, and the work that didn’t. You can only do this by understanding the true cost per hour by individual department or work center, and appropriately costing the work that goes through those areas of your shop.

Generating a truly accurate picture of all the variables that go into the true cost of a part or job can be difficult and time consuming. This is where a shop floor management system becomes so useful, as you can automate almost all of the process, and translate the cost down to the work center or department level quickly and easily.

Consider all the factors that must be calculated to see the true cost of a job:

  • Labor costed to the job based on the actual employee hourly rate

  • Labor overhead (fringe benefits, vacation, other employer paid benefits and taxes) applied to the job based on direct labor hours

  • Manufacturing overhead applied (by work center) based on the cost of running machines in that work center

  • Selling, General, and Administrative overhead (all the other costs of doing business) applied proportionally to each job, either based on direct labor hour or another appropriate allocation method

  • Material and outside service costs such as heat treating, plating, anodizing, etc. applied to the job based on actual cost (rather than standard or average) to correctly analyze the effect of the rising cost of material or the actual cost of the service performed

For a shop owner to ensure efficiency, the cost structure of the business must be analyzed regularly, and the overhead rates adjusted accordingly by work center. This allows for the correct absorption of the costs for the jobs run during each period.

There is incredible value in understanding true job cost. With this understanding, you can easily eliminate jobs that consistently lose you money. If eliminating them is not an option, you will still at least understand the opportunity cost of running these unprofitable parts.

Mistake #2: Underestimating the importance of your customers

Good customers are the lifeblood of a business. Relationships with customers become even more important during a weak economy. Too often, shop owners become complacent towards their customers, and miss out on important opportunities to form quality relationships.

It is not enough to assume that no complaints from a customer means the customer is happy. Good customer relations require that you be proactive, contacting your customers frequently to understand what is happening in their business.

Regular contact will allow you to gain information on issues key to your own shop, questions like:

  • Are they experiencing any significant business issues?

  • Is there an opportunity to gain more business or a new project?

  • Are they planning on downsizing or expanding their supply chain?

  • Do they have a preferred supplier program that you should be a part of?

Keeping track of this information in a way that everyone in your company can reference is far easier than it once was. Through the use of integrated customer relationship and contact management systems, you can ensure that all interactions with your customers, and all pertinent information, is readily available.

Another key to maintaining good customer relationships is to address problems as quickly as possible, hopefully before they even happen. Using effective shop floor management systems, you can often see issues coming before they get out of hand.

Real time information can also help you prevent problems from persisting. With insight into bottlenecks and overloaded work centers, as well as employee efficiency issues, shop management software allows you to focus on the specifics of what is going wrong. This way, issues with on-time performance can be reduced or completely eliminated.

Customer relationships can also be improved by increasing the information you make available to them. The customer portal capabilities found in some shop management software allow you to give your customers 24/7 access to the status of their orders. This saves you and your employees the hassle of answering phone calls and emails about order status, and gives your customers peace of mind. That way, when there is an issue, you have the time and resources to provide human interaction to address the problem. Thus, you can “systemize the routine” so that you can “humanize the exception”.

With the right systems, technologies and people in place to manage your current customers, you can then expand your business to new customers. Your energy will be freed up to investigate new market opportunities and new industries that are experiencing growth. By networking with shops that are already in those markets, you can learn about new opportunities available to you. You can also invest in your most “growable” customers through nurturing campaigns.

Mistake #3: Relying on quality as a differentiator

It is not uncommon for most small and mid-sized shop owners to believe that quality is what sets them apart, that it’s their key differentiator. Unfortunately, this is rarely the case. Many shops recognized early on that quality was a key differentiator. They implemented quality management systems to monitor quality, including non-conformances and corrective actions. This allows many other shops to claim the same level of quality that you have.

To stay competitive, you must have a formal quality management system in place that is integrated with your shop floor management solution. This is the best way to ensure quality control throughout everything that happens in your shop. And even then, you cannot assume that this will set you apart. Factors such as efficiency in your business, and relationships with your customers, are far more likely to differentiate your shop than quality.

Mistake #4: Undervaluing your greatest asset - your employees

Highly skilled and qualified shop employees are hard to find, and even harder to keep. The current shortage of skilled machinists and fabricators is evidence of this. Often, when you go to find an employee in your local labor market, you find no one with the qualifications that you want. This reality demonstrates how important it is for shop owners to become involved in their community to find future employees, and to invest and develop the employees they do have from within the company.

These goals can be accomplished in a variety of ways, including:

  • Developing apprenticeship programs within the company, thus improving the skills of the employees you do have and keeping them engaged in the business

  • Working in cooperation with local technical colleges and universities, including developing appropriate school-work programs

  • Consider participating in a mentoring or internship program

  • Visit your local high school vocational department or technical school regularly and participate in their available boards

To keep a relationship with your employees, it is important to participate in regularly scheduled employee reviews. This allows you to understand your employees from direct experience, including their future goals and aspirations, as well as any issue they may be having with their jobs. Regular reviews also provide you the opportunity to develop and deploy individual employee training plans, so you can keep the best of the best.

The company culture you build will also have a large impact on the retainment of your employees. High pay does not necessarily mean someone will stick around. The quality of the work environment and management style are often just as important as the salary. Employees want to feel like they are part of something, and as the job shop owner, you can do a lot to create such an environment.

Mistake #5: Relying on disjointed systems to run your business

There is no longer any excuse for relying on outdated floor management systems. Even the smallest job shop or custom manufacturer today can afford an integrated shop floor management system. Such a system allows for the management of every business transaction, from quote to cash, and is an invaluable tool for ensuring efficiency.

Relying only on accounting systems and spreadsheets, with no connection to what is actually going on out on the floor, is a recipe for disaster. When such systems are not integrated, leaving you to wonder if the data is timely or if data entry is being duplicated, you cannot operate with optimum efficiency. This slows you down and leaves you tailing behind your competitors.

A disjointed system only allows for so much growth before you either must hire more people to manage it, or you must stop growing. Otherwise it all falls apart. With an integrated shop floor management system, you can:

  • Integrate all business information from quote to cash

  • Avoid hiring additional staff to manage an unruly and disjointed system

  • Allow your current staff to become more efficient so they can focus on the business issues most important to running your shop

  • Give you the time and information you need to accurately analyze your business and make decisions accordingly

There are several scalable business solutions on the market right now that you can adopt, even if your shop is very small. Being scalable, they will grow with your business, and they often integrate seamlessly with common accounting solutions such as QuickBooks. Some even come bundled with their own accounting solution.

Conclusion

Running a profitable job shop always presents certain challenges, but if you focus on avoiding these five costly mistakes, you will go a long way towards establishing a business that will last.

Remember, to make the best business decision, you must understand the true cost of what you are doing. You also need to keep a clear understanding of the value of both your customers and your employees. Never assume that quality will differentiate you from the competitors. Lastly, do not rely on disjointed systems to run your business.

Your shop will have a much better chance of succeeding if you utilize the proper systems, technologies and people at your disposal. In the end, that is all any of these mistakes come down to - a lack of awareness of what is really important. Adopt a quality shop management software system to understand the realities of your business as accurately and timely as possible, and foster relationships with your employees and customers. These steps will ensure you avoid any of these major mistakes.

 

Topics: shop management software, cost of doing business

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