Thursday, January 28, 2016

Make every inch be a profit center

I took a service call the other day that very quickly turned into a productivity conversation.  The customer had a large oven that was not functioning as it should and they wanted to repair it.  The oven needed a few parts and it would run as it was designed.  That repair bill totaled about $750.  However, the conversation with that customer quickly changed once he explained more about his business.  He bought the oven at a bargain.  He only ran one automatic and one manual and the oven at full capacity was more than he needed and took up most of his shop.  That got the two of us running through some numbers.

Square footage costs
Large ovens are for
high production volume

Any business owner can tell you that square footage cost is a major expense in their monthly budget.  In certain sections of the country the cost per square foot is so prohibitive that each item placed in the space is calculated for its ROI.

ROI should be analyzed for every item on a shop floor.

Let's take a look at the shop that I mentioned earlier.  That customer was in Los Angeles and he was in a lesser expensive industrial park.  His cost per square foot was $11.50. 
  • Automatic 12'x12' $1,656 per month
  • Manual 8' x 8' $736 per month
  • Current oven  $1,035 per month
If he changed to an oven that was appropriate for his production his space usage cost would drop to $621 per month. A payout of $4,968 per year.

Match your volume with
your production but give your shop
a little growth room.

Power consumption

I understand that this customer was not going to move and that ROI on the space was not his concern.  However, I also mentioned the power consumption of a machine that is not producing goods to its full capacity.

  • Current oven  480V, 85A  with the presumption that the power cycles 50% of the time, his cost per hour to run the oven is approximately $5.  For a full year, his cost is approximately $9,800
Now let's say he installs an oven that is production appropriate.  
  • New oven  240V, 85A  with the presumption that the power cycles 50% of the time, his cost per hour to run the oven is approximately $2.5.  For a full year, his cost is approximately $5,000
His annual power savings on the oven is $4,800.

Potential lost production
Numbering systems are
just one of many ways
to increase revenue

So it was agreed that this customer was not moving, so he could not understand the lost ROI on the floor space.  He did concede the power issue and that he could pay for a new oven in 1.5 years.  

We did get back to his floor space ROI when he mentioned that he was missing out on the opportunity of producing athletic jerseys.  I suggested that the floor space that the current oven was using could be converted to a number printing location, then he understood the ROI on that space.

Athletic numbers offer a value per unit of about $2.50.  He was currently not producing any because he did not have the space or the equipment.  With either a transfer machine or a small numbering system, the floor space would then produce goods instead of costing him space.  
  • Transfers cost $1.50 per jersey
  • Net increased potential revenue of $1.00 per jersey.
  • Potential production of 30 per hour equals a potential ROI of $30 per hour.  A yearly potential ROI of $60,000.

When to switch?

Every shop has a "good enough" item.  In this case, the oven was good enough when the customer purchased it.  However, should he fix it?  I do not think so.  There is too much potential income and too much wasted costs with the unit he has.

Every shop should look at how their floor space is allocated.  It is producing revenue or costing the shop profits.  

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