How Good is your Costing System?

Paul Brown of the ICE Partnership proposes a tool to help improve your costing system and its visibility in your manufacturing business.

The market determines price but your costs are all about you. Your costs are built up from material, labour and various overhead allocations. The market will determine your margin!

The process described here is not for use by the company accountants – this is all about operations improvements and understanding how to constantly demand and drive improvement. There is no attempt in this tool to manage bought in costs – be it electricity, tooling, materials or sub contracting. That will be the subject of another article – this is all about your factory and pushing for improvement.

It may help you visualise this if we describe a typical environment where this tool has worked well.

How Good is your Costing System?

You are the Operations director of a £15M manufacturing company that makes a large variety of products in lots of different batch sizes. Some parts are made to order and some are made to stock from within the expected mix of runners, repeaters, strangers and aliens.
The shop floor is laid out in a mixture of cells for the runners and some family groups for repeaters. Functional machine groups are used for the balance of repeaters and all the strangers and aliens.

So now to the costing diagnostic.

Step 1 Data Capture Process

How good is your system at capturing what is actually happening?
Whether you deal in seconds or hours will depend on your cycle times and the level of detail required by your processes. Time spent be it machine time or labour time must be current and in as real time as possible and everyone should be included, temps and overtime must be captured as well as core hours.

Step 2 Accurate Estimates

Estimates should be based on your actual effectiveness and machine capability on your best ever day. Six Sigma calls this your process entitlement. If you can hit a certain level of performance on a good day then we should strive for that every day.
It is perfectly OK to apply a global or local “efficiency” factor for capacity allocation and pricing to acknowledge that there are lots of reasons why we don’t hit the entitlement every day. That is not reason for not knowing what perfection looks like.

Step 3 The workforce

You need to aim for a work force that is well trained, works well to create good repeatable processes form standard operating procedures, is well led, motivated and
works in a fear free environment. It must be fear free because when mistakes are made, and I did say when mistakes are made not if, the root cause can be found and acted upon. Well led means that supervision are demanding of excellence from everyone so consistent poor performance is handled professionally and with compassion.

Step 4 Relentless Lean Process

Operations leadership must be constantly challenging methods and eliminating waste by the relentless application of lean principles and refreshing the standards as they are improved. I like the word relentless, it gives the right level of intensity to the demand for continuous improvement.

Tracking your progress.
system robustness index

Here is screen shot of a natty little spread sheet that you can use to track your progress. If you would like one and a copy of the slides email me at: