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Current Online Topic: CALCULATING MACHINE CAPACITY
 

IMM 04/01

Does anyone have a method or formula to determine total machine capacity that can be used for justification purposes? Any method or formula would also need to take machine downtime and maintenance into account
There are two ways to do justifications: rule of thumb and fully detailed. The decision of which method to use depends on the nature of the justification. Using the rule-of-thumb methods, a fairly standard annual capacity number is 70 percent. If you are looking to demonstrate the need for adding capacity, take the ideal number of available hours (hours per day available times number of days running per year) and reduce that ideal by multiplying by .70. This number takes into account a stable operation (one that is increasing capacity by adding days or shifts) and routine maintenance for tooling and machinery, and may leave a little room for the unplanned. This number is conservative if your shop has long runs of the same product. Conversely, a short-run shop with multiple material and tool changes may work hard to reach 70 percent.

The complete capacity or cost/benefit analysis approach uses as much information as you can gather about a specific project. Cost items to consider include the following: the initial purchase price; loan, buy, or lease costs; operating expenses (electricity, shop overhead for the specific area o the new equipment, lubricants, and fluids); spare parts inventory; shipping, rigging, and installation costs; new auxiliary equipment costs; and training expenses. Using these items instead of a standard machine rate requires more work but it separates costs into categories that can be studied for specific issues rather than setting press expense rates. This list usually covers the majority of costs and financial professionals will be happy to explain these numbers, or at least give them to you. The difficult part is demonstrating how spending this money benefits the company more than spending it elsewhere, or simply investing it.

You need additional information to calculate a return or justify the investment. If your justification is for capacity only (there are no make or buy issues and no speculative investments) you will be comparing overtime costs to new equipment costs on standard time. How much does it cost to run overtime? Do you need two people per shift to run an automatic operation? Is there a general increase in absenteeism when overtime becomes routine?

If you are meeting requirements with one or two days of overtime, a new press will give you two to five times the capacity you need. What will you do with the extra machine time? Are there sales opportunities that have been bypassed because you didn't have the capacity? Asking questions like these may give you several payback items that normally do not appear on a justification sheet.

If you need to justify a new project, or wish to make an investment in capacity, the issue is more complicated. As a general list, you need the estimated cost of the products to be produced, the quantity to be produced, and the time frame for delivery. Separate the costs into categories such as material, factory overhead, labor, packaging, and so forth. Know which parts of the cost picture are related to the new equipment.

In a complete new project, the numbers are fairly straightforward. Is there more income than expense? At a minimum, this is an annual sales vs. total expenses question, not a single order issue. Say a new project has a per thousand parts profit of $50, but only runs for two months of the year. Does that $50 pay for the idle equipment? If there is idle time available, is it salable or completely lost? How fast can it realistically be sold? Does getting this work increase the work for the other equipment? If so, the additional revenues should be part of the justification. I have seen where adding one 20 percent-utilized machine increased existing equipment usage by 50 percent. With the additional information, even the accountants were excited.

The third need for justification is to replace old equipment. Here you will need to treat the differences between old and new as the income. Make a spreadsheet with cost items, a column for each machine, and a difference column. How much less does it cost to run the new machine on an hourly basis (ask the equipment vendor for actual data, not vague promises)? How much additional uptime can be expected from the reduction in maintenance? Have you run a trial in the new machine at the vendor's location? If so, did existing tooling run faster or produce less scrap? You will need additional lines in your spreadsheet to show these savings. I recommend showing either a per-part or per-thousand parts line and then showing the annual savings. If running faster eliminates overtime, include all relevant overtime costs. On one project we replaced 48 inspectors and manual equipment with one optical CMM, produced statistical data, improved throughput by 10 percent in manufacturing, and reduced defect-related rejections for a total savings of $250,000. - R. Caufman, RC Marketing Inc., (814) 726-7442, rcmktg@penn.com.