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 The Bottom Line A series of easy to follow management tools tailored to the packaging converter. Paths of Glory One of the most common "what if?" questions a converter can ask is, "What is the most economical way to run this job through the plant?" More specifically, "At what point does it pay to switch from a less expensive, slower piece of equipment to a faster but more costly machine?" The answer can be found using a simple Profit Planning tool called Breakeven Analysis. To accomplish it, we need to know the hours involved and the variable machine hour rates of the two machines. Why variable rates? Full machine hour rates allocate fixed expenses such as rent, depreciation and taxes to each production center. Using anything but variable rates would be the same as asking, "How much rent will it take to run this job?" The question has no meaning. For this exercise, we are concerned only with costs that accrue directly as a result of running the job - labor, electricity, glue, etc. By excluding costs that accrue as a function of time, we won't cloud the true picture of our plant's performance. The following example allows us to find the order quantity where, no matter which of two production paths is chosen, each has the same cost. A six-corner carton can glue on either of two pieces of equipment. The old Right Angle makeready is quicker but it runs slow. The new Straightline makeready takes longer but it will run faster. At what order quantity will it make sense to switch from the Right Angle to the Straightline? To solve this problem, we use the formula: The difference in Makeready Dollars divided by the difference in Run Cost per carton 100 ÷ .10 = 1,000. Below 1,000 units, it will be less expensive to use the older, slower machine. Above 1,000 units, it will be more cost efficient to use the new one. 1,000 units, then, is the Breakeven quantity. Now, to answer the original question. Examine the table below. To solve for the formula, first find the difference in total makeready dollars. Then calculate the cost per carton on each production center to five decimals (the variable MHR divided by the standard run speed). Subtract the second answer from the first. Finally, divide the increase in total makeready dollars by the difference in the run cost per carton savings to arrive at the breakeven quantity.
Food: In Southern California, we recommend the Dal Rae on Washington Boulevard in Pico Rivera just off the 605 freeway. You won't find a better meal anywhere. Our faves are the dungeness crab marinara appetizer, big enough for two, the chopped salad, and the Pepper Filet Mignon. Mmmm. We'd eat there every week if our cholesterol could stand it. Food for Thought: Our friend, Mark Graham of Bell Paper Box in Sioux Falls, South Dakota introduced us to Flight of the Buffalo by James Belasoco and Ralph Stayer (Warner Books, 1993). It's an enjoyable, easy read with thought provoking ideas about leadership, management, vision and empowerment. |
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