Machine Shop Overhead

[xyzeugene]

Hello Machinists

This is my day's questions so I can see if starting a machine shop is feasible...

For the goods you sell what percentage do you add back into your product for overhead?

What is the breakdown percentage of your overhead?

What plans do you do to reduce your overhead yearly?

thanks

Eugene

[MBG]

Basically you are asking for profit margins right?

[neutronics]

I work for an established manufacturing company (we make industrial electronics) and our usual practice is that the price can be broken down into three equal parts: 1/3 BOM cost, 1/3 labor cost, the last 1/3 is gross profit. Obviously, this is a B2B pricing strategy. A consumer product-to-wholesaler or consumer product-to-enduser would be quite different, since retailers usually demand “keystone” pricing in my experience.

In terms of reducing overhead, we try to focus on labor; if we produce a bad design, it will usually take more man-hours for tuning. Sometimes savings can be found in the BOM cost by selecting a different vendor, negotiating the prices, or changing the design to use less costly and/or fewer components. There are often “make or buy” decisions that have to be made too; sometimes an outside machinist can make our hard parts more cost effectively than we can, but it takes additional management and QC checks on our side.

That’s the short version of how we manage costs and profit on the product side. The HR side is a different story.

I’ve read some of your past posts on this subject, but haven’t been able to figure out if you’re planning on opening up a job shop or manufacture your own components. Are you still making this decision? I suppose you already have some contacts, but in the past I’ve had really good luck paying an independent salesman a retainer to pump him for industry info. And when you’re ready you’ll already have a salesman to pimp you out. ;-)

[Caprirs]

Are you retailing products directly to consumers? That means serious markup to cover the costs of the transaction fees (2%-5% on credit cards), the time spent on the phone, nice packaging, after-the-sale support, etc. Someone has to set up, maintain and update the website. Selling products to distributors means less time on the phone, potentially no after-the-sale support (the retailer handles that), a simpler web site.

As a job shop, you basically quote hourly rate plus materials. Depending on the job, you can go up or down a little. For example, a part with a quick cycle time and some hand finishing will monopolize time tying the operator to one machine and unable to perform other tasks. Long cycles with no hand work means one operator can run several machines simultaneously thus allowing a reduction in the hourly rate by dividing the labor across those machines.

Compare hourly rates of other companies doing similar work to get an idea of where you should be. Some places can charge $40/hr for a simple 3 axis machine. Companies with trick new 5 axis machines may charge over $100/hr to pay for that cool machinery.