Estimating and Selling Are Two Different Functions

by: Mark Porter, Dienamic MIS

There are many reasons to automate the estimating function within your bindery.

  1. Faster, more consistent estimates.
  2. Re-quotes are much faster.
  3. Allows you to spend more time planning the job then crunching numbers.
  4. Letter of Confirmation faxed or e-mailed provides a more professional image.
  5. Estimate history allows you to find and analyze estimates quickly.
  6. Single entry of data eliminates mistakes because estimate is automatically converted to a Ticket.
  7. Ability to download common or simple estimates to a junior estimator.

…and there are many more reasons, but one of the biggest reasons is the fact that estimating and selling are two different functions.

Estimating vs. Selling: Not Every Job Equals Profit

We have installed our software in 70-80 post press companies and have talked to many more binderies and print finishers over the years and very few, if any, operate their business using this concept. Most binderies estimate by calculating numbers and adding them up. They then present this price to the customer. There is no addition of markup at the bottom of the estimate. This signifies that these binderies do not practice the concepts of cost accounting that are vital to any job-oriented manufacturing industry.

When I bring up the concept that estimating and selling are two different functions, most binderies respond by saying that the market dictates the selling price. This is 100 percent true, but the market does not dictate your costs to produce the job. It certainly doesn’t stop you from evaluating if this job, at the market price, covers your costs and provides the desired return.

A good estimating system should use the production standards that you have determined through a variety of different methods that will be discussed shortly. The standards then can be multiplied by hourly cost rates that accurately reflect the cost of running the machine on a hourly basis. These rates are called Budgeted Hourly Rates (BHR) and they encompass financing charges, labor costs, benefits, miscellaneous materials, and overhead. Information as to the number of shifts and levels of productivity are entered and the software can determine accurate hourly rates for each piece of equipment.

When these hourly rates are applied to the production standards that you determined, you will have an accurate representation of how much the proposed job will cost to produce. You can now evaluate the risk, the desired return, and the markup of the quote to determine the selling price.

If the market will not bear your desired price, you now have all of the data required to evaluate at what price you are unable or unwilling to bid on the job. There may be times you will bid on work below your cost – BUT YOU WILL KNOW THAT YOU ARE BELOW COST.

Once time standards and BHRs are established, it is vital that you constantly monitor your production processes to ensure they are consistent with the standards used when estimating. For example, if we have our estimating system calculating the speed of the binder at 5,000 per hour and we are only obtaining 4,000 out on the shop floor, it means we are losing money on the job as soon as we win it. Conversely, if we are estimating at 4,000 per hour and actually obtaining 5,000 per hour out in production, it means we are losing jobs that we could be producing profitably. This monitoring can be done through software that measures productivity and compares estimate vs. actual values for every estimate.

These concepts of cost accounting and management information systems are vital to any job-oriented manufacturing businesses (such as binderies) no matter how big or small. The results will provide more data, allowing you to manage your business in a more profitable manner.

Budgeted Hourly Rates (BHRs)

BHRs are determined by simply identifying all of the costs for each cost center in your plant. The purpose is to recover all costs incurred in the production, sales, and administration of your bindery products. You have to be careful not to include costs that are not part of a production process and conversely, not miss costs associated with a production process. Either error will cause your hourly rate to adversely affect your profitability.

The process of determining BHRs begins with identifying the processes you perform in your plant. You must then determine and collect the related data. Just because ABC Bindery and DEF Bindery have the same folder does not mean they will have the same hourly rate. ABC Bindery may have paid cash for its folder, its facility rent may be less expensive, and it hires less skilled employees. This will all lead to a lesser cost per hour for ABC Bindery.

A sample BHR sheet for a folder is included to demonstrate the type of information that is required for the BHR calculation.

The Manufacturing Cost per Chargeable Hour is not the Budgeted Hourly Rate. It is useful if you must charge back house errors to the company.

The BHR reflects all costs incurred to produce the product, as well as the Sales and Administrative overhead. BHRs are not the prices. The calculation of the BHR multiplied by the time estimate should reflect the true cost to produce a product with no profit.

One note regarding overtime and multiple shifts. If a cost center is reaching 40 percent overtime, a second shift should be considered. The advantages of the second shift are the reduction of overtime and the ability to spread the fixed costs over a larger time block. This can result in substantial savings.

Software is available to easily calculate your BHRs based on industry-specific guidelines.

Production Standards The estimating system now has accurate hourly cost rates. The second piece of the puzzle is accurate production standards. Production standards are a measurement of the output that you achieve on a certain machine under a certain set of circumstances.

A bindery company can determine its production standards in six ways.

  1. Data collection
  2. Intuition
  3. Published results
  4. Competition
  5. Manufacturer
  6. Time and motion studies

Methods 2-5 use outside information that does not reflect your actual conditions and therefore is of very little benefit. Method 6 is accurate but very expensive and is not on-going. Method 1 represents the best method, as it uses your own historical data and is gathered in a continuous process that constantly reflects changes in your output. Shop floor data collection devices are used to constantly send data to Job Costing Software where the data can be sorted and analyzed by different jobs, machines, and employees.

Production standards are used by the estimating system to provide the time element of the quote. Production standards must be constantly monitored to ensure the estimating department is using standards that accurately reflect the production capabilities on the shop floor.

Both components of the estimating system, BHRs and production standards, can constantly change. Equipment gets old, new employees with less skill start working, and other factors change the production we achieve. BHRs change with rent increase, purchasing new equipment, and adding shifts.

A good system will allow you to monitor both components of the estimating system with an Actual vs. Estimate report for each job. This report will allow you to see at a glance how you estimated the job compared to how it actually was produced. Any variations should be examined. Weekly and monthly production analysis reports both of processes and employees will allow you to spot changes in production standards. This will ensure that your estimating system is always using the most accurate data and allow you to obtain the type of work that can be produced most profitably.

This is a good policy in good times and slow times. In good times, when there are never enough hours in the day, why work overtime to produce jobs that don’t provide you with a good return? In slow times, it is vital that you know your exact profit position when customers demand price cuts.

Again, software is available to help you easily perform all these functions, leaving more time to manage your bindery business in a way that is both well-informed and profitable.

Mark Porter is the president of Dienamic MIS Software. Dienamic develops and markets software solutions specifically for the post press industries of trade binderies and print finishers. Dienamic offers estimating software, management information systems (order entry, shipping, data collection, scheduling, etc.), and e-commerce software designed to meet the specific needs of binders and finishers. Dienamic offers stand-alone modules for BHRs, die management, and receiving goods as well. For more information, call (800) 461-8114 or e-mail mark@dienamicmis.com.