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Competing with Offshore Manufacturers


Investment in automation and highutilization rates can trump cheap labor

By John Lenz, President
CMS Research Inc.
Oshkosh, WI

While visiting a contract manufacturer on a trip to Monterrey, Mexico, a few years ago, I observed a machining cell with six Mandelli machines. Each machining center represented an investment of more than $1 million. The machines were configured in two, three-machine rail systems to machine a family of parts that were being exported to the Midwest.

During the time that I spent there, I never saw more than four of the six machines making chips at the same time. This observation suggests an answer to the question of how US manufacturers can compete with global competitors who have the same access to advanced technology, but who enjoy significantly lower labor costs.

First, we must lower capital-investment requirements. Second, we must utilize these machines at a higher rate than our competitors. Third, we must find a measure that reflects cost differences at various levels of performance. This last point is especially important because today’s advanced technologies, multitasking machines, and five-axis machines for example, are far more productive than their predecessor technologies, and more difficult to evaluate using standard costing.

An investment in the Midwest in just four of these same Mandelli machining centers, could return that machining business to the US.

Here’s how: The four machines would have to operate 24 hr/day, six days per week at a utilization level above 75%—with the same machine cycle time to compensate for the lower cost of labor in Mexico.

Let’s do some reverse engineering. Let’s assume that the average wage and benefits paid to a North American skilled operator are $25 per hour. This results in an annual cost of $50,000 per year (2000 hours). Suppose his counterpart in the low-cost labor country has an annual cost of $5000 per year. This is a difference of $45,000 per year for each operator.

Suppose that the customer is willing to pay $100 for each machine hour. Two approaches are available to recover the additional cost of $445,000 per year. One approach is to attempt to pass this cost onto the customer. That is, the North American worker produces about 1800 machine hours in a one man, two machine configuration. This requires an extra charge of $45,000/1800 hr or $25 per machine hour.

The choice is pretty straightforward. Either you accept the $100 price the customer is willing to pay and have a $25 lower margin than your low-cost labor competitor, or you attempt to pass this additional cost to the customer by charging at the rate of $125 per machine hour.

Both of these alternatives are short-term solutions. In one case, you slowly lose money. In the other, you force your customer to be less competitive in the market.

The long-term solution is to plan and implement a manufacturing solution that recovers the $45,000 higher cost. Offsetting this higher cost is accomplished by combining two types of cost: capital investment and increased efficiency.

Capital investment has a level playing field. Regardless of where the machine capacity is installed, the capital cost is the same. This worldwide characteristic can be used as leverage to offset our higher cost labor.

Using the example described above, a US installation would have only four machines, lowering capital investment requirement by $2 million. This lower capital investment of $2 million would purchase 44,000 hr of the higher cost labor. This is enough labor to operate the system fully for more than 3 ½ years.

A second opportunity is recovering the labor difference of $45,000 per year through improved performance. If the customer is willing to pay $100 per machine hour and you must recover $45,000, then the North American operator must outperform his low-cost labor counterpart by 450 machine hours per year.

So the question is: How much better do we need to be than our competition? In order to answer this question, we must establish a measure of real performance, one that reflects actual cost at alternative levels of performance.

Machine hours per man per year is a useful measure for machine productivity that can tell us how much better US companies have to be than the competition. A machine hour is the time in which a machine is spent actually transforming raw material. This time does not include setup, downtime, or idle time. The machine hour becomes the basic unit of value-added work. A customer will pay for machine hours because they relate directly to value-added time.

The most basic configuration is one man, one machine. In this configuration, the operator stays with the machine during the entire operation. The machine stops when the man loads parts, takes breaks, or sets up for the next job. In this mode of operation, the machine hours per operator per year are about 1000. The normal work year of a worker is 2000 hours, so this is about 50% of the paid labor hours. Every machine hour of production requires two hours of paid labor. This level of performance is very easy to obtain.

To improve this low level of machine hours per operator per year, a second machine is added to the operation. This is the one-man, two-machine configuration. Under this configuration, the machines have some automatic controls, which allow them to run a program, which can be stored and recalled through a cycle-start command, and executed on a CNC. While one machine is running its automatic cycle, the operator can then set up or load parts into the second machine. While the second machine is running, the worker sets up or loads parts into the first machine.

This one-man, two-machine configuration almost doubles the machine hours produced. The hours do not double because the operator takes breaks that cause both machines to stop operating. With the one-man, two-machine configuration, one of the two machines is usually operating while the other is idle. Every machine hour produced requires 1.1 hr of paid labor. The most common configuration of the machine operation in North America is the one-man, two-machine configuration. This yields about 1800 machine hours/operator/year. This configuration is becoming the common configuration in low-labor-cost countries as well.

To offset the higher cost of labor, North American manufacturers must increase the average machine hours per man per year from 1800 to 2250. However, this cannot be accomplished in a one-man/two-machine configuration. Alternative configurations of more machines per operator or higher efficiencies are required.

Obviously, the higher the machine hours/operator/year, the better the competitive position in the market. But getting the highest machine hours/operator/year requires large capital investments in automation that does not produce any machine hours directly. As more machines are combined into one work area, the scheduling of these shared resources increases in complexity. The ability to manage this much capacity in one area usually overwhelms the operation.

Automation is needed to exceed the 2000 machine hours per man per year. Purchase of automation has been a difficult decision for many North American manufacturers. Not only do they have to justify purchasing it, but they also have to learn how to manage this automation. Management of automation is usually where most manufacturers have the most difficulty. If automation is not managed to produce at least 2250 machine hours/man/year, then the automation will add to overhead and reduce margins.

Flexible machining systems (FMS), first introduced in the 1970s, offer anywhere from two to eight machines per operator. The FMS configuration uses an automated material-handling system to traffic parts between a common load station and each of the machines in the system. The operator stays in one location and loads parts for each of the machines in the system. Central or supervisory computer control directs the material handling system and monitors part locations. The systems have the potential to produce over 4000 machine hours/man/year. In terms of productivity, each machine hour requires only ½ hour of labor. This is a 400% improvement in productivity when compared to the one-man, one-machine configuration.

There is some risk with FMS technology, but tools and expertise are available to help manage the day-to-day operation to handle this risk. The reality of today’s flexible machining systems is that these systems rarely perform at utilization levels higher than 55–60% with traditional management techniques. Innovative management based on cost measurements and performance measures is necessary to obtain 80% or higher levels of utilization.

Flexible machining systems (FMS) are just one means to achieve more than 2250 machine hours per worker per year. Any automated manufacturing system with the following two characteristics can provide the performance benefits needed to offset the higher cost of labor. These characteristics are flexible capacity and automated material handling to provide uniform handling of a variety of parts and reduce labor content.

The automated manufacturing system can be either part-based or pallet-based. Part-based systems use robots to pick and place parts directly into machines. A machine cell with two machines, inbound part conveyor, outbound conveyor, and one robot is an example of this setup. With a minimal amount of labor, a daily mix of parts can be produced through this cell by using the flexibility of the robot and machines.

A pallet-based system uses a pallet and fixture to hold and orient parts for uniform material handling. Different parts can have different fixtures; the pallet remains identical. Any system that uses pallets to move parts through a process is an example of this. These include rail-vehicle machine systems, conveyor assembly systems, and crane warehouse-distribution centers. All of these systems provide a mix of parts to share the same equipment with automated handling.

Of course, the configuration and implementation of these systems comprise the easy portion of the project. It’s the daily management of the systems to achieve a desired level of performance that poses the challenges. Innovative software and measurement solutions are emerging to address these challenges.

There is no need for precision machining to outsource from North America. The high cost of capacity creates a level playing field, and North American manufacturers only have to outperform the offshore competitors to retain precision machining. However, traditional measures based on standard cost and efficiency will not provide the vision necessary to compete. The ability to compete will be determined by obtaining a minimum amount of flexible capacity, and how efficiently this capacity can be managed on a day-by-day basis.


Justifying Capital Investment

Accurate measurements of cost in flexible manufacturing, especially with new advanced technologies such as highly productive multitasking and five-axis machining centers, are beyond the capabilities of current standard cost systems.

Standard costing is based on history of performance with existing technology. It cannot accurately measure the daily mixes of parts produced by the same set of machines and team of operators. Standard cost is developed for the one-machine, one-man, one-part configuration. An alternative cost system called Actual Cost can accurately measure the impact and benefits of flexible manufacturing. The benefits of using the actual cost model are:

  • Cost is based on future level of efficiency not past/historic performance,
  • Cost per part is based on 100% absorption of capacity and identifies cost penalty for excess capacity,
  • Cost per part is known at various levels of efficiency for both machine and labor utilization, and
  • Cost per part accounts for actual production mix.

This article was first published in the May 2006 edition of Manufacturing Engineering magazine. 

Published Date : 5/1/2006

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