Mike on Manufacturing

How I Got Started in the Manufacturing Software Business – Part 2 of 4

2012-02-12T11:11:09-08:00

By Mike Hart

In mid-1988, to great fanfare, IBM unveiled the AS/400 product line, which was to replace their System/36 and System/38 mini-computer series. Several months prior to the announcement, we had invested in a fixed price license to Software PM, a System/36 based manufacturing system that we could private label and sell without paying any royalties.

The arrival of the AS/400 put us in a real pickle because the System/36 platform was obsolete. Not only did this threaten the viability of our software package, it also made our investment in a System/36 computer – around $60,000 – worthless.

Our company, Solution Services, faced a bleak future. The AS/400 had a similar architecture to the System/38 series, so it was fairly easy for System/38 programmers to transition to the new platform. But our six programmers had System/36 skill sets, the demand for which was drying up.

The writing was on the wall and Brady and I decided to split up and dissolve the company so we could each pursue our own interests. Brady went back to custom programming and made a good living on this own, without the overhead and headaches associated with running a crew of programmers. We remain the best of friends to this day and I owe Brady a debt of gratitude for inviting me into an industry for which I had no training or background.

My father and I decided to hang in there with our product because we saw great potential in the marketplace. Not only that, we are stubborn to a fault, eternally optimistic, and didn’t have any advisors to talk us out of it.

In the late 1980’s, the Los Angeles area was a major manufacturing hub and was the center of a thriving aerospace industry that supported a horde of small contract manufacturers.

Our new company, “Manufacturing Computer Systems”, consisted of me, the salesman and implementation services provider, my father, the lead generator, and one of our ex-Solution Services programmers as our tech guy.

We had to move our product off the System/36 platform. Software PM wanted another $30,000 for an AS/400 compatible version of the source code. We balked at that and tracked down the original author of the Software PM product and learned that he had a license to the original version of the same software and was working with another IBM VAR, who I visited in Illinois, that was helping with an AS/400 version.

After several lost sales it became clear that we were in the midst of a technical tsunami sweeping the tech industry – the advent of PC networks. Mini-computers like the AS/400 and those from HP, DEC, and others were still viable for the mid-market, but at the small business level at our end of the street, it was all going to PC networks, Novell leading the way.

We attempted to migrate our software to a PC-based flavor of Unix using a System/36 interpreter from Software Ireland, which didn’t work out, and then we tried a Baby 36 interpreter from California Software that would run System 36 code on PC’s, but that wasn’t satisfactory either. We finally realized that our MCS product was dead and our investment was lost.

In desperation, I looked around and found a PC-based manufacturing software package called Microware, from a one-man company located in Plano, Texas. It was written in Basic with a homemade database. It was much simpler than our MCS product – too simple, in fact, but I felt I could work with the owner/programmer, who I will refer to as “Karl”, to get the product improved. We struck up a deal that gave us a decent profit margin and we rolled up our sleeves, quickly selling some 25 systems at a pace of about three systems a month, for a price ranging from $3000 to $7500, depending on the number of users.

Not only were we selling software, but there was good money to be made with hardware at the time. Our programmer had the ability to assemble homemade PCs, which we would bundle with our software at a substantial margin. We also got involved with an operating system called Concurrent DOS where you could hook up dumb terminals (green screens) to a central PC.

For demonstrations, I carried around a computer that must have weighed 50 pounds and a huge monitor that weighed what seemed like another 50 pounds. Laptops were just entering the market and were quite expensive, so you do what you gotta do.

I handled product support using my car phone – one of those big metal boxes that sat between the two font seats and weighed a ton. One day early in this sales cycle, when several systems were going in at once, I received a phone call complaining about system speed. I had Karl contact the customer and he advised running a re-indexing procedure that restored the speed.

I quickly learned about databases and these things called “pointers.” It turned out that Karl’s database was built extensively with pointers, which can be thought of as a pile of coat hangers, and as such, equally hard to untangle.

What started as one phone call became an avalanche as our other installations started to go live and suffered from performance degradation. Re-indexing the database would temporarily fix the problem, but within a few hours of multi-user access, the system would again slow to a crawl. Karl was furiously trying to fix his database and he and I were calling customers and holding hands as best we could, hoping to solve the problem.

I found myself in a living nightmare. I had no solution to offer customers other than to re-index several times a day, and we were financially unable to return their money. Our relationship with Karl began to deteriorate as we withheld some money until he could fix the mounting problems with his database.

The very last Microware sale was the straw that broke our back as a company. I drove out to the customer on a Friday to pick up the check, which was for $7500, a big amount for us. I deposited it in the bank and wrote out a bunch of bills that were past due.

On Monday I discovered there was no money in the checking account and was told by the bank that the customer had stopped payment. I called the customer and he said that a person named Karl had called and said a portion of the money belonged to him. The customer understandably got cold feet on the deal and decided to stop payment. What a fiasco!

So what looked like a bright future just a couple of months became a dark quagmire as 1990 drew to a close. We had no product to sell, no technical solution for our customers, and bills to pay with no money coming in. We were unable to continue making lease payments to IBM for our System/36 computer, a total white elephant. Unfortunately, we had signed personal guarantees on the computer. Facing these grim facts, my father and I could not evade the inevitable – filing for personal bankruptcy protection.

End Part 2

Mike Hart is the co-founder and President of DBA Software Inc., a leading provider of manufacturing software for small businesses.

How I Got Started in the Manufacturing Software Business – Part 1 of 4

2012-01-30T10:30:56-08:00

By Mike Hart

This year marks the 20th anniversary of my company, DBA Software, and so I find myself in a reflective mood. 20 years is a long time in the manufacturing software business and I’ve seen many competitors come and go. But how did I get in this business in the first place?

To answer that question, I need to take you back to 1986, which was the year our family business, Hart Manufacturing, was sold. The company was started by my grandfather, Harold Hart, in 1927. We made watering and feeding systems for the poultry industry and expanded greatly in the late 1970’s, only to crash and burn when new poultry house construction collapsed as Paul Volker broke the back of inflation with 20+% interest rates.

I worked briefly for the new owners, but found I was not temperamentally suited to work for other people, especially people who buy companies primarily to milk their assets and let them die. I shared my disillusionment with my best friend, Brady Lincoln, whom I’ve known since junior high school. To my surprise, Brady invited me to partner with him in a programming services business. Why me, I thought? What did I know about programming other than the Fortran class I took in college and the water cooler talks I had with our IT guy at Hart Manufacturing?

In spite of my lack of qualifications, I nervously accepted the offer. I was at a crossroads in my life and had to try something different. I was 34 years old and had never worked outside the comfortable confines of the family business. What did I have to lose?

We named our new company “Solution Services” and set out to furnish contract programmers for the IBM System 36 mini-computer. Fortunately, Brady was a former partner in this type of business and knew the ropes. Typically, we charged $75 an hour and paid about half of it to the programmer. Brady took care of the technical side and my job was to find work for our programmers.

I never was comfortable with the contract programming business. The money was good when you were busy, but in between contracts you had to keep paying your programmers and you could get killed if the work wasn’t there.

Feeling like a fish out of water with custom programming, I looked for a way to contribute more to the company and learned that IBM had a value added reseller program for their proprietary software packages at the time – MAPICS for manufacturing, DMAS for distribution, and CMAS for construction. We signed up, feeling that occasional software sales would balance out our business and provide some custom programming work for our technical staff.

Our local IBM branch was in Woodland Hills in the San Fernando Valley area of Los Angeles. IBM promised to furnish us leads, and they did. But the leads were garbage. All the good leads went to the VARS with proven track records, whereas we got the crumbs.

In spite of the lousy leads, we dutifully did whatever IBM asked, figuring we’d rise in the VAR ranks over time. IBM was big on seminars in those days, so when they asked us to do one, we readily accepted. Unfortunately, they wanted the seminar to be on CMAS, by far their weakest software package.
.
The night before the seminar, I read the manual from cover to cover and thought I could fake my way through the presentation. It turned out that only five people showed up, which was good, because soon after it began, I realized that I didn’t know the construction industry or the software package much at all, and had to admit as such to my meager audience.

We finally got handed a MAPICS account that needed some additional modules. This was my first exposure to an ERP system other than the Pick-based software package we used at Hart Manufacturing. ERP systems were called “MRP” systems in those days and most of them ran on mini-computers from IBM, DEC, HP, Burroughs, Wang, and others.

I was fascinated by MAPICS and read all its technical manuals. Even though I had been in a manufacturing environment for most of my life at Hart, I was primarily involved with sales and marketing rather than production. When I actually got into the nuts and bolts of MAPICS, it all clicked. MRP, work centers, routings, costing – it all made complete sense to me. I discovered a knack for articulating manufacturing concepts well and could connect the software with real life examples drawn from my years at Hart to convey my points.

I augmented my study of MAPICS with some academic material on manufacturing, most notably several books written by the manufacturing guru of the time, Oliver Wight. Wight taught me that efficient manufacturing is all about planning, flexibly responding to constant change, and to minimize expediting.

What shocked me about this first sale, which was only three or four additional modules, was how much paperwork was involved. We had to bring the customer to the IBM office and sign reams of paper – almost like signing a mortgage. It was ridiculously excessive in view of the relatively small size of the transaction, the fact that these were additional modules and not a first time purchase. All this time and effort tor a lousy 25% commission.

We then got involved with one DMAS installation, but the pattern was becoming clear. We were chasing a lot of leads with little to show for our efforts. The IBM products were high priced and hard to sell to the small companies I was calling on. The IBM VAR program was obviously a dud.

Then in one of the System 36 trade journals, I ran across a software package named Software PM where you could buy source code to an MRP system and private label it under your own name and make it your own product. This appealed to my inner entrepreneur. The cost was around $30,000, which was a lot of money, but back then you could recoup that amount with one or two sales. Software PM offered a payment plan, so we signed up.

I recruited my father, Warren, who was trying to start his own business sourcing components from Asia for local manufacturers, to help me with lead generation, and he plunged into it with his customary enthusiasm and eternal optimism. Solution Services was now in the software business with a product we named “MCS” (for Manufacturing Computer Systems). We quickly sold our first system to an aviation company in North Hollywood.

Then a bizarre set of events ensued that enabled us to use our own software. In early 1989, I was contacted by Bank of America to help them look for a buyer for the assets of Hart Manufacturing. The new owners had literally walked away from the company after unplugging the computer system and taking it to their factory to run their business, which was making fiberglass tool handles.

In January 1990, my wife and I went to the big poultry industry show in Atlanta where I found a buyer for the assets, Bill Edstrom from Edstrom Industries. Bill came out to California and asked my father and I if we could help him get Hart Manufacturing back in operation until he could move it back to his factory in Wisconsin.

Besides our knowledge of the company, we had one other thing he needed, which was a manufacturing software package, considering that the former owners took Hart’s old computer system. So Edstrom hired us and we embarked on a rapid implementation.

We moved our System 36 computer to the Hart office, hired two women to enter inventory items and bills of material, and within a week we were up and running and shipping product. Warren was back in charge, just like the old days, with a small workforce of ex-employees.

Our software did what it was supposed to do. There was only one catch – the platform that it ran on was totally obsolete.

End Part 1

Mike Hart is the co-founder and President of DBA Software Inc., a leading provider of manufacturing software for small businesses.

Manufacturing vs. Accounting

2011-12-13T08:43:05-08:00

By Mike Hart

The following is a typical scenario in the evolution of a small manufacturing business.

Every company needs accounting software to invoice customers, pay the bills, collect money, and run financial statements. When a company starts up and is small in size, it uses a low end software package such as QuickBooks or Peachtree because it performs these basic functions well and is low cost. .

The manufacturing side of the business gets by using the basic inventory, sales order, and purchasing modules offered by the accounting system and augments them with spreadsheets to handle manufacturing requirements.

This arrangement works satisfactorily when the company is small and transaction volume is light enough where a manager can still just walk out into the shop to get a handle on what’s going on with jobs and shipments.

The company has a good product and provides good customer service. Sales grow and transaction volume increases. And then it starts getting harder and harder to keep a handle on the shop. No matter how much effort managers apply to keeping up with growth, problems spiral out of hand and late deliveries and quality problems proliferate. Customers grumble and workers operate under duress.

This is when manufacturing software is needed because it is the only way to organize and deal with the complexity that is inherent to a manufacturing system once it reaches a critical mass in transaction volume.

The manufacturing people desperately need software that manages basic functions such as bills of material, routings and work centers, job scheduling and tracking, labor and overhead costing, process documentation, and subcontract service processing.

This is the juncture when conflict arises between the manufacturing and accounting sides of the business. Almost all mid-market ERP systems require using their financial modules and thus the accounting people are faced with changing all the processes they know so well.

The accounting people are perfectly happy with their software, and why shouldn’t they be? Today’s low end accounting packages are quite good when it comes to the financial applications of payroll, receivables, payables, banking, and general ledger.

If you avoid mid-market ERP systems and focus on small business software packages, several manufacturing systems enable you to continue using your existing accounting system.

In my Manufacturing Software Directory, the following software packages in the “small business manufacturing” category offer some type of linking with QuickBooks – Catalyst Manufacturing, ERPLite, Job Master, MISys SBM, pc/MRP, Pedyn P2000, RealTrac, and Visual Jobshop. Some of these products also link to Peachtree.

My company’s product, DBA Manufacturing, offers a financial transfer option that is generic in nature so that the product can be used with any outside accounting system, not just QuickBooks. DBA also includes its own financial modules if you prefer integrated accounting.

Be aware that these so called accounting “links” vary widely in how they work. You may be required to use certain versions of QuickBooks and you may have to synchronize versions in the future so that updates remain compatible. Be careful of systems that do not use their own sales order and purchasing modules because these modules in QuickBooks and Peachtree are not adequate for manufacturing requirements.

There are always compromises to make when you operate with two separate systems. If there is a clean separation between the operational modules in the manufacturing system and the financial modules in the accounting system, the compromises are minimized and the two system approach is a practical solution. On the other hand, if there is lots of mixing and matching of functions between the two systems, you can end up with a hybrid system that satisfies neither side of the business.

Mike Hart is the co-founder and President of DBA Software Inc., a leading provider of manufacturing software for small businesses.

Manufacturing Software Packages for Small Business

2011-11-24T10:20:10-08:00

By Mike Hart

Here is a link to the latest iteration of my manufacturing software directory, which provides links to websites for all the software packages I know of that are potential candidates for use by small businesses.

Manufacturing Software Directory

All these software packages are advanced manufacturing systems, meaning that they include work centers and routings instead of just the bills of material offered by light manufacturing systems such as QuickBooks or Peachtree. Light manufacturing systems emphasize inventory, but ignore job scheduling and shop floor control and therefore limit your efficiency potential.

Technically, a “small business” is defined as any enterprise with up to 500 employees, but the small businesses to which this blog is directed have fewer than 100 employees, and in most cases, fewer than 50 employees. I consider companies with 100 to 500 employees to be “mid-size” companies.

Accordingly, I’ve divided my manufacturing software directory into two groups of products – small business manufacturing systems, which are generally suited for companies with 5-100 employees, and mid-market ERP systems, which are generally suited for enterprises with 75-100 employees.

Note that there is overlap between the two product classifications in the 75-100 employee range. Companies of this size fall in the middle and may be suitable for either category, depending on requirements, company growth, cost, and other considerations.

Keep in mind that number of employees is not always an accurate indicator of company size. Companies that do a lot of outsourcing may have relatively fewer employees, but much more revenue per employee than worker-intensive companies.

Another factor that determines software suitability is whether a company has multiple sites or not. In general, small business systems are for companies with a single factory and shipping location. A company with multiple production facilities and warehouses will need a mid-market ERP system that has a multi-site architecture.

I do not claim to have intimate knowledge of all these software products. My classifications are based on hearsay from customers and colleagues over the past 25 years of being in the manufacturing software business, and from a review of website content. Most small business manufacturing systems publish their prices and are modestly priced, whereas virtually all mid-market ERP systems do not publish prices and only furnish pricing on a quotation basis.

Most small business systems offer an evaluation system so that you can assess the software on your own. Mid-market ERP systems are generally evaluated through live presentations, either onsite or online.

Small business systems can be implemented with or without onsite help, whereas mid-market ERP system implementation almost always involves onsite consulting and training.

Initial investment and the ongoing cost of ownership is dramatically different between the two software categories. To get a rough idea of what the differential is, refer to this post I made last year.

How Much Does a Manufacturing Software Package Cost?

If you are searching for a manufacturing software solution, I hope this directory saves you some leg work and gives you a good idea of what is available in the marketplace and what products might be suitable for your company size.

Mike Hart is the co-founder and President of DBA Software Inc., a leading provider of manufacturing software for small businesses.

Does Your Software Address the Manufacturing Fundamentals?

2011-10-30T10:52:13-07:00

By Mike Hart

Business software packages address all kinds of functions, including inventory, purchasing, sales, CRM, e-commerce, service, project management, financial applications, and human resources.

These functions are important, but if you have a manufacturing company and your software does not address the fundamentals of manufacturing, you will never reach your efficiency potential, no matter how good your software might be in these other areas.

What are the fundamental features that are essential to any good manufacturing software package? Here is my list.

Routings

Routings enable you to define the processes used to manufacture your products and to specify the work centers where they are performed. Routings provide workers with manufacturing specifications and enable you to schedule jobs, track jobs in progress, and calculate the cost of labor, outside services, and factory overhead. Any software package that lacks routings is not a serious manufacturing solution.

Bills of Material

It’s impossible to manufacture without a bill of material, meaning a list of the components that comprise each product. Virtually all software packages offer at least a rudimentary bill of material, but there are advanced features that can benefit your efficiency, including revision tracking, phantom assemblies, and multiple outputs.

Cost Rollup

Knowing your costs is essential to good decision making. The cost rollup calculates the total cost of each manufactured product up through all levels of the product structure and breaks the cost into these elements – material, setup, labor, outside services, and factory overhead.

MRP

Jobs and purchase orders should be generated on a “just in time” basis by an MRP program that takes into account stock on hand, net demand from sales orders and jobs, and item reorder levels. Any software package that relies on shortage lists and manual planning is not a serious manufacturing solution.

Job Release

You must have the ability to gauge and control when jobs should be released to production so that the shop operates at its optimum carrying capacity without getting overloaded.

Job Traveler

The job traveler provides workers with the specifications needed to perform processes accurately with high quality. Product documentation is core to any quality assurance or ISO-9000 program and will be required by your customers if you are a contract manufacturer. Ideally, your software will also support linked documents and custom item labeling.

Work Center Scheduling

To operate the shop efficiently, you must know what job sequence to run next in each work center. Jobs that are behind schedule should be given priority over jobs that are running ahead of schedule. This way, all jobs meet their scheduled finish dates and you avoid expediting rush jobs at the expense of other jobs.

Job Tracking

You must have the ability to track jobs in progress so that you can keep jobs on schedule and react quickly to problems. Job tracking is accomplished through the real time reporting of job sequence completions, using standard hours or collecting and reporting actual labor hours.

The bulk of your efficiency gains will be achieved by focusing on these eight core functions and getting them down cold. All the other bells and whistles that festoon so many manufacturing systems may have some peripheral value, but are not fundamental to reaching your efficiency potential.

Mike Hart is the co-founder and President of DBA Software Inc., a leading provider of manufacturing software for small businesses.

How to Make Money with Lean Manufacturing

2011-09-29T07:46:32-07:00

By Mike Hart

You hear about “lean manufacturing” all the time, but just what is it?

Simply put, lean manufacturing means completing jobs on time using the least amount of inventory and WIP possible.

Your overall efficiency is measure by how much inventory and work in process is required to support your sales. The less you use, the more efficient you are.

Let’s break my definition down further

Lean manufacturing should be important to you because it is the key to making money in a manufacturing company. Let’s break my definition down further.

"Completing jobs on time..."

... means that you have the ability to establish realistic job finish dates and you can reliably finish jobs on time. This reduces expediting costs and increases customer satisfaction and sales. More volume spreads your fixed overhead cost over more units, which boosts gross margins.

"Using the least amount of inventory and WIP possible..."

...means that raw materials and components are procured on a just in time basis, which reduces working capital requirements and increases return on investment. Shop throughput is optimized by scheduling work centers in coordination with available capacity to shorten queue times. Faster delivery increases customer satisfaction and sales, requires less working capital, and boosts cash flow.

The Bottom Line Benefits

To summarize, lean manufacturing yields these benefits:

Lower expediting costs
Increased customer satisfaction and sales
Lower overhead costs and higher gross margins
Less working capital and greater return on investment
Improved cash flow

So clearly, lean manufacturing is the key to making money in a manufacturing company. But how do you put lean manufacturing theory into actual practice?

You need a software package with these elements

Lean manufacturing is not difficult to master, but it does require using a software package that includes these fundamental elements:

Bills of Material
Bills of material enable you to define the raw materials, components, and subassemblies that comprise your products. You cannot significantly reduce inventory without accurate bills of material.

Work Centers and Routings
Work centers enable you to organize your shop and outside subcontractors for scheduling purposes. Routings enable you to define the processes used to make your products. You cannot significantly reduce WIP without work centers and routings.

MRP
MRP enables you to automatically generate jobs and purchase orders based on desired reorder levels and estimated lead times. MRP is the key tool used for achieving inventory reduction.

Queue Control
Queue control enables you to release jobs and schedule work centers in coordination with available capacity. Queue control is the key tool used for achieving a reduction in WIP.

So what are your manufacturing software options?

Basically, manufacturing software falls into these three categories.

Light Manufacturing Systems
These are general accounting software packages, such as QuickBooks or Peachtree, that include bills of material with the ability to commit and deduct kits of components. Light manufacturing systems can help reduce inventory, but do not include work centers, routings, or queue control and therefore completely ignore WIP reduction and are thus unsuitable for lean manufacturing.

Mid-Market ERP Systems
These systems are designed and priced for larger enterprises with 100-500 employees. Virtually all mid-market ERP systems offer bills of material, work centers and routings, and MRP. Some offer queue control, but most do not, so some of these systems are better suited for lean manufacturing than others.

Small Business Manufacturing Systems
These systems are designed and priced for companies with fewer than 100 employees. Some include integrated accounting and others link to outside accounting packages such as QuickBooks. Virtually all small business manufacturing systems include bills of material, work centers and routings, and MRP, but few offer queue control, which is essential for WIP reduction.

Can you afford not to be lean?

Lean manufacturing is not just a theory; it is a proven methodology originally pioneered by Toyota and now followed by successful manufacturing companies the world over. Lean manufacturing is about eliminating all wasteful uses of resources throughout your production processes.

By far the most wasteful practice is using excessive inventory and WIP relative to your sales. This needlessly ties up working capital and is the cause of myriad problems, including costly expediting, extra material handling, quality problems, delayed shipments and payments, all of which harm your bottom line and cash flow.

Carrying extra inventory and WIP is far more expensive than you may think. In the same way that obesity is a “silent killer” that leads to hear disease and diabetes, excess inventory and WIP is the source of many costly problems that can ultimately be fatal to your business if left unaddressed.

Mike Hart is the co-founder and President of DBA Software Inc., a leading provider of manufacturing software for small businesses.

Part Numbers Cannot Be Open to Interpretation

2011-08-29T15:28:59-07:00

By Mike Hart

Many small manufacturing companies operate using general accounting software such as QuickBooks combined with spreadsheets to address manufacturing issues. I refer to this is an “informal” manufacturing system.

In an informatl manufacturing system it is common for component specifications such as revisions and manufacturer part numbers to be entered on the fly during purchasing, as specified on drawings or spec sheets. This type of manual purchasing is a slow and cumbersome process where mistakes can easily be made.

In a formal MRP system, however, all manufacturing specifications are driven by your internal part numbers. A part number must be highly specific because in an MRP system there is no room for interpretation. A part number cannot have multiple meanings or purposes.

This is why an item must be designated as manufactured or purchased, but cannot be sometimes manufactured and sometimes purchased. The costs and specifications involved in manufacturing and purchasing are completely different. Only with a unique part number can those specifications be differentiated.

If a purchased component has different revisions, each revision must be given its own part number. This is the only way different variations of an item can be specified in bills of material and jobs.

In contract manufacturing, if one customer requires a component to be sourced from a specific manufacturer part number, while another customer requires the same component to be sourced from a different manufacturer part number, two part numbers must be created to represent the two manufacturer part numbers. This is the only way each customer’s bill of material can be made manufacturer-specific.

If a component specification changes during the course of a job, the component part number should be swapped out with an alternate part number that represents the spec change.

Always use a unique part number for any variation of an item. For example, if an item can be stocked as painted or unpainted, the unpainted version should have a different number than the painted version. If an item can be stocked as “new” or “used”, the used version should be identified with a different part number than the new version.

When MRP generates purchase orders in response to your job specifications, all item, supplier, and manufacturer specifications are already established among your purchased components. You do not determine or change item specifications on the fly like you can freely do when using an informal system.

So in a formal manufacturing system, the source of all item specifications lies in the internal part numbers that comprise your bill of material and job details. Purchase orders are generated automatically and are never customized on the fly.

Automated purchasing within an MRP system, driven by unique part numbers, is far more accurate and efficient than manual purchasing within an informal system.

Setting up unique part numbers for each variation of an item is a requirement for accurate costing and purchasing. It may be perceived by users as additional work, but the extra effort is more than compensated by the avoidance of problems caused by part numbers without precise meaning.

Mike Hart is the co-founder and President of DBA Software Inc., a leading provider of manufacturing software for small businesses.

Cost for Efficiency

2011-07-29T10:36:33-07:00

By Mike Hart

Traditional cost accounting can lead to bad decision making. This is because it measures and rewards local efficiencies at the item, job, and work center level, which is actually counter-productive to overall efficiency.

Cost precision is a myth

The most common mistake in manufacturing costing is to assume that each job has a precise cost. Taking each job cost as a literal cost leads to poor decision making in regards to job scheduling, inventory, and product pricing. These poor decisions can have a profoundly negative impact on your overall efficiency that gets translated into longer delivery times, increased inventory, and higher product costs.

Smaller run sizes are more costly, but only on paper

A good example of how literal job costing leads to poor decision making is your run size policy on make to stock items. If your objective is to achieve the lowest unit cost possible, an easy way to achieve that is to increase job run sizes, which spreads your fixed setup cost over more units.

Increasing your run size lowers the cost on paper for this one product, but at a high hidden cost that gets applied to all your products. Large run sizes clog up job schedules, tie up work centers and aisles, increase WIP, and reduce your quality.

Setup is really an overhead cost

The assumption that setup cost is a literal cost is what leads to the incorrect decision that increasing run sizes is a good thing. In reality, setup is more of an overhead cost than a direct cost because you tend to have a fixed payroll cost for setup personnel, regardless of how many setups they perform in a given period. When you treat setup as an overhead cost, the cost gets spread over all your products so that no one product bears a high setup cost.

Increase your setups and reduce your run sizes

The far more efficient practice is to reduce your run sizes, even though it will increase the number of setups and create more work for your setup personnel. Shorter run sizes can have a profoundly positive effect on your overall efficiency that greatly outweighs the extra setups. Jobs are easier to schedule and get performed more quickly using less material.

A single shop rate leads to better decision making

A single hourly shop rate for labor leads to better decision making because no single job gets penalized or rewarded based on what workers happened to be used or whether the job was run during regular or overtime hours.

A single shop labor rate blends all your individual direct labor wage rates into a single rate that reflects downtime and overtime.   With a single hourly shop labor rate you can freely allocate labor resources where and when they are best needed, without regard to cost implications.

Overhead is an indirect cost

Another example of how literal job costing leads to poor decision making is to assume that factory overhead is a direct cost.   If your objective is to achieve a target profit margin on each job or product, treating overhead as a direct cost can lead to poor pricing and product line decisions.

Material, subcontract services, setup, and labor are direct costs. Even though setup and labor are costed at a single shop rate, which is an “approximate” cost, that cost is still directly associated with each job’s estimated or actual job hours.

Overhead is different. It represents the overall cost of running the factory, including managers, supervisors, maintenance personnel, rent, utilities, and supplies. This overall cost gets allocated to each unit of production, but only on paper. Overhead is an indirect cost, not a direct cost.

A job or product can lose on paper, but still be profitable

If you treat overhead as a direct cost, you can mistakenly conclude that some jobs or products are unprofitable because they lose money on paper. In reality, provided that direct costs are covered, some of those jobs or products may be valuable contributors to your overall profitability, even if they appear to be losers on paper.

Factory overhead is essentially a fixed cost. The only way to reduce the unit cost of overhead in your products is to spread this fixed cost over more units of production. Therefore, any product that covers its direct costs contributes additional units of production that helps absorb your fixed overhead cost. You are better off keeping what appears to be an unprofitable job or product because it helps lower the unit overhead cost of all your other jobs and products.

Increasing shop utilization is the best way to lower costs

The most dramatic way to lower unit costs and improve margins is to spread your factory overhead cost over more units of production. Therefore, it is often to your benefit to take on certain jobs and to keep certain items in your product line that lose money on paper, but help absorb your factory overhead cost.

A single shop rate for overhead is best

As with labor, a single hourly shop rate for overhead is the best way to evenly allocate overhead across all your products without unduly penalizing or rewarding one process over another.

Mike Hart is the co-founder and President of DBA Software Inc., a leading provider of manufacturing software for small businesses.

The Economics Favor Videos for Software Training

2011-06-17T09:32:44-07:00

By Mike Hart

A major source of revenue for ERP software companies and their resellers is providing live training, both on site and via off site seminars. I believe that a significant portion of this revenue will erode in coming years because the economics favor video training over live instruction.

Live instruction has a low cost-benefit ratio. Not only are good trainers expensive, it’s the travel cost that eats you alive. It is rare for trainers to live in your locality or for seminars to be hosted in your city. To justify the travel cost, training sessions are stretched over several hours or days, which lessens their effectiveness because of information overload.

By contrast, video training has a high cost-benefit ratio. Software videos are inexpensive to produce and are delivered over the Internet with zero distribution cost. They can be viewed at any time of day or night, on site or at home, by one person or a group of people. They can be viewed in short sessions as needed for effective information retention. And they can be watched again and again.

To be sure, live instruction is popular among employees. Taking a class is a nice break from the usual routine. Many seminars are hosted at tourist destinations to attract attendees. It’s fun to spend two or three days in New Orleans or Miami with all expenses paid.

I do not sense that mid-market ERP software companies are moving in any big way towards video training because they will not rock the boat on their lucrative training revenue until customers demand lower cost alternatives.

Large enterprises still largely buy into the live instruction model. A good friend of mine has been involved in an SAP implementation the past couple years and has attended several conferences and seminars in places like Las Vegas and Orlando.

At the small company level, though, people are embracing low cost video training. As I survey software web sites, I notice that video training materials are now commonly offered with small business software packages.

Many of the videos you see on websites are lousy – but so are many live instructors. Videos that are well scripted and delivered can be highly informative and effective.

Unlike with a live instructor, you cannot have a Q & A session with a video. Some questions will inevitably arise. It is therefore important that your software’s support plan enables you to submit support tickets or provides some other means for getting questions answered.

Live training will always be around for those willing to pay for it. It is popular with employees. But much of the information goes in one ear and out the other when you subject people to more material than they can absorb. By contrast, video delivers information in bite size chunks that people can retain, and for a tiny fraction of the cost.

Mike Hart is the co-founder and President of DBA Software Inc., a leading provider of manufacturing software for small businesses.

The Manufacturing Pendulum Is Swinging Back from China to the USA

2011-05-23T11:05:42-07:00

By Mike Hart

I have long thought that American companies have gone overboard in moving so much manufacturing to China. On paper, the cost savings were and remain significant, but there are many hidden costs – shipping, logistics, communications, product recalls, intellectual property theft, counterfeiting – that offset the cost savings advantage. Blinded by the huge potential of the Chinese domestic market, American companies have flocked to China over the last decade, fearing that if they didn’t do so, some other competitor would and they would be out of the game.

Because of the fear of not being in the Chinese market, America companies over-corrected and rushed to China without weighing all the costs. At first, manufacturing in China was a no brainer because labor costs were so low. But labor costs have risen dramatically over the years and all the other hidden costs of doing business in China are coming to light.

The Boston Consulting Group (BCG) created a stir in the media this month when they released an analysis projecting that the United States will experience a manufacturing renaissance in the next five years as the wage gap with China shrinks.

Press Release – Made in the USA Again

Here is an excerpt from the press release addressing the closing wage gap:

“All over China, wages are climbing at 15 to 20 percent a year because of the supply-and-demand imbalance for skilled labor,” said Harold L. Sirkin, a BCG senior partner. “We expect net labor costs for manufacturing in China and the U.S. to converge by around 2015. As a result of the changing economics, you’re going to see a lot more products ‘Made in the USA’ in the next five years.”

After adjustments are made to account for American workers’ relatively higher productivity, wage rates in Chinese cities such as Shanghai and Tianjin are expected to be about only 30 percent cheaper than rates in low-cost U.S. states. And since wage rates account for 20 to 30 percent of a product’s total cost, manufacturing in China will be only 10 to 15 percent cheaper than in the U.S.—even before inventory and shipping costs are considered. After those costs are factored in, the total cost advantage will drop to single digits or be erased entirely, Sirkin said.

When you compare the United States and China, you have to compare individual regions. Some areas of China still have incredibly cheap labor, but most of the manufacturing is in the Eastern coastal areas where companies bid up wages competing for the limited supply of skilled labor needed to run all these modern plants. In addition, industrial land is in short supply and office rents and utility costs continue to rise.

Here in the United States, you would never locate a new plant in my state, California, but labor and tax-friendly states such as Mississippi, Alabama, and South Carolina are highly cost-competitive.

Here is a good article I ran across from EDN magazine that makes similar points to the BCG analysis from the perspective of the EOEM (electronic original equipment manufacturers) industry:

Manufacturing Trending Away from China

Companies are learning that proximity to the markets they serve is more important than cost savings, especially as the cost gap continues to narrow. Being able to supply products quickly when needed is often far more important than having lower cost products with long lead times.

China is here to stay as a manufacturing power. The shear size of its own economy guarantees this. And China remains ideal for certain types of high-volume manufacturing with long lead times. But if you consider all the advantages certain regions of the United States offer – skilled workers, proximity to markets, communication skills, supply chain efficiency, intellectual property rights, and a lower dollar – all the conditions are ripe for a manufacturing renaissance in this country.

Mike Hart is the co-founder and President of DBA Software Inc., a leading provider of manufacturing software for small businesses.