USING MANUFACTURING ECONOMICS TO NAVIGATE A HAZARDOUS ENVIRONMENT

As 2008 drew to a close, an economic slump turned into a full-blown recession. American manufacturing was hit hard. Sharp cutbacks in the automotive sector led a drop in planned production across the industry as a whole.

Currently, the U.S. ISM is falling and order backlogs are at their lowest levels ever as manufacturers race to reduce inventories and shut down any unutilized capacity.
While this situation is certainly cause for concern, American manufacturing will survive and recover, as it always has. The companies that make it through to the other side will be those that use this crisis as an opportunity to evolve and refine their operations.

Taking a step back, as we entered this economic crisis a variety of factors were affecting manufacturing worldwide. There are skilled labor shortages in some regions and vast unskilled surpluses in others. As has been the case for many years, low skill jobs are being outsourced to those countries with large populations willing to work for low wages. Many companies are consolidating and outsourcing manufacturing to Tier 1 and Tier 2 suppliers. While these factors seem detrimental to advanced nations, there are positive things to note as well.

For the foreseeable future, North America, Western Europe and Japan will remain home to the world?s technological innovation, driving productivity across the globe. Breakthroughs in manufacturing processes have created situations where parts can be machined in one set-up and heavily automated, allowing manufacturers in advanced nations to offset the advantage of countries with low wages. While simple, high volume components continue to be outsourced, the production of complex components tends to be completed domestically.

Within the U.S. specifically, we are in a period of very low inflation even though gas prices are starting to rise for the summer season. The majority of U.S. production is still being done by domestically-owned companies. There has been a geographic migration of manufacturing within North America, spreading it out over a larger area. We remain a strong consuming market and, with automation leveling the field in terms of labor costs, companies are realizing they can save on transportation costs by producing items closer to their point of sale. Additionally, manufacturing of advanced components has stayed strong within the U.S. and industries such as aerospace, medical and energy continue to show positive signs despite the state of the overall economy.

There are multiple steps that American manufacturers can take to protect their businesses. Specializing in complex components requiring high levels of precision and technology is obviously a strong strategy. To stay ahead of the competition, investing in innovation is required. Companies also need to focus on knowledge-based manufacturing, working smart to harness their experience, as well as the expertise of their business partners, to get the most out of their efforts and investment. Taking a smart approach to production requires thinking beyond initial costs and seeing how productivity influences the total cost of a component.

At our company, we routinely speak of the principle of Manufacturing Economics. In short, this refers to getting the most out of an investment. For a typical manufacturer, equipment is only operated for 60 percent of a day (Chart 1). Of that, half of a machine?s time is spent machining, while the other half is reserved for activities such as tool changes, set-ups and maintenance. Of the time that is spent machining, only 80 percent is actually spent cutting, with 20 percent being consumed by tool-change time and other machine processes. When all of this is added together, the average machine only operates 24 percent of a given day. Seeing as how a machine is only generating income when it is cutting metal, this represents significant lost potential (Chart 2).

When the cost structure of a component is analyzed, it can easily be seen that the vast majority of costs allocated to a part are fixed in nature. On average, 80 percent of costs are fixed, whereas only 20 percent are variable. Additionally, the proportion of fixed costs assigned per part is wholly dependent on the quantity produced. Because of this, the greatest potential for cost savings lies in items that dramatically increase productivity, thus spreading the fixed costs in the most effective way.

Unfortunately, many manufacturers still focus most or all of their attention on variable costs, such as tooling or coolant, that have little impact on the final cost of a part. In reality, pursuing the lowest possible variable costs will actually often result in a higher cost per part, due to the loss in productivity that results from using inferior inputs.

Productivity increases can come from a variety of sources, ranging from automation to new processes to cutting tool optimization. American manufacturers should analyze each of these avenues for potential benefit. Increasingly, suppliers of equipment and tools are focusing on providing more than just products and sharing truly valuable expertise with their customers. By working together with a variety of knowledgeable suppliers, American manufacturers can optimize their operations to achieve minimum cost per part.

The greatest success will be found by those who use the current economic uncertainty as motivation to evaluate their operations and implement new technology where it provides quantifiable benefit.

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John Israelsson is the president of Sandvik Coromant USA, 1702 Nevins Road, P.O. Box 428, Fair Lawn, NJ 07410-0428, 201-794-5000, Fax: 201-794-5257, www.coromant.sandvik.com/us.