Manufacturing....Here? Overseas?

[Tom Adams]

The beauty of being married to a financial controller for the manufacturing side of the company she works for is that whenever subject matter like the now defunct beginning of the end thread comes up, I can consult with the all-knowing, all-seeing.

In my conversation with Laura I learned that in a manufacturing environment, you basically only have three buckets fixed, variable, and consumable costs. Fixed costs would be your Engineers, purchasing folks, management, etc. Variable would be touch labor, material handlers, etc. And consumables would be things like paint, sandpaper, machine parts, electrical connectors, etc.

What I found interesting is that at her company, the variable cost (touch labor) only accounts for 3.42% of the total cost of the item. IOW, if it cost them $10,000 to build a backhoe, the touch labor costs is only $342.00. So the next question I asked her was if they were the exception or the rule? Her response was that where I work (she use to work here and did similar financial analysis), our touch labor ran between 4 & 5 percent and that overall, all manufacturing in the US runs under 6%.

So what does this mean? Well, it means several things. First, the bulk of the costs of manufacturing an item are the fixed costs and variable costs. Laura didnt give me a breakdown, but said that the biggest cost was consumables followed very closely by fixed costs. I think its safe to assume that consumables probably account for about 65% of the cost of the product. The next thing that should jump out at you is that in the grand scheme of things, reducing ones labor cost wouldnt yield any where near the same savings as a reduction in fixed or consumables. Its akin to the old adage of stepping over dollars to pick up nickels.

Our discussion also included tax breaks and natural resources and the role they play in a companys decision as where to manufacture a product. Suffice it to say, at a certain point, my wife began speaking in a foreign tongue and completely lost me. However, I did understand that its a very complex decision. Steel is cheap in South America because its mined and made there. So locating a plant there that made bulldozers would make sense. BMW decides to build here to get tax breaks they wouldnt get in Germany and they can depreciate the cost of their fixed assets over 20 years. So why not invest and build here? And so it goes.

BTW dodger.you made a comment about John Deere. For the record, there is no such company as John Deere. That might be the label on the product, but John Deere was bought out by Hitachi. The correct company name is Deere-Hitachi. Theres only one US heavy Machinery Company left Caterpillar.

Anyhow.just thought you guys might find this info interesting. Hell, for all I know, you probably know all this stuff already. So Ill shut the hell up now.

Tom

[Colin]

I did find this interesting.

Fixed costs would be your Engineers, purchasing folks, management, etc. Variable would be touch labor, material handlers, etc. ?

I thought fixed costs were depreciable items, like plant, equipment, etc.

Dont forget the role currency plays in outsourcing people and resources. India's average labor rate is about $3,000 per year for an employee at an electronics company. A normal hourly wage in India is about $1.46 an hour in US dollars! Far below our rate for skilled factory workers. This not only because their standard of living is so far below ours (in US terms and values), but also because as the largest, most successful empire in earths history, the US dollar is the 400-pound gorilla in a pack of monkeys. This means that unless the shipping is outrageous, making the unit in the cheaper, less developed country and shipping it here for sale in more valuable US dollars makes a whole lot of sense.

[Tom Adams]

Colin -

Fixed costs are the costs that are directly related to the finished good/product. Whereas depreciable items like the buildings or equipment are considered fixed assets.

And you make a good point about currency. It was when Laura started explaining the complexities of currency exchange rates that she kinda lost me. I mean, when you're building something here but you source components from Europe and the UK and China and where ever, the ever changing exchange rate can play havoc with your bottom line. That's why it may be advantageous to source everything from the country the plant is located in.

My wife's company (based in the UK) is transferring a major portion of their product line to the US plant. Not only is the labor rate here cheaper than the UK, we have less paid holidays - i.e. more productivity. Ironically, they can build a backhoe cheaper here than the plant in Brazil.

Tom

[dodger]

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On 3/16/2005 10:04:13 AM Tom Adams wrote:

The beauty of being married to a financial controller for the manufacturing side of the company she works for is that whenever subject matter like the now defunct beginning of the end thread comes up, I can consult with the all-knowing, all-seeing.

In my conversation with Laura I learned that in a manufacturing environment, you basically only have three buckets – fixed, variable, and consumable costs. Fixed costs would be your Engineers, purchasing folks, management, etc. Variable would be touch labor, material handlers, etc. And consumables would be things like paint, sandpaper, machine parts, electrical connectors, etc.

What I found interesting is that at her company, the variable cost (touch labor) only accounts for 3.42% of the total cost of the item. IOW, if it cost them $10,000 to build a backhoe, the touch labor costs is only $342.00. So the next question I asked her was if they were the exception or the rule? Her response was that where I work (she use to work here and did similar financial analysis), our touch labor ran between 4 & 5 percent and that overall, all manufacturing in the US runs under 6%.

So what does this mean? Well, it means several things. First, the bulk of the costs of manufacturing an item are the fixed costs and variable costs. Laura didn’t give me a breakdown, but said that the biggest cost was consumables followed very closely by fixed costs. I think it’s safe to assume that consumables probably account for about 65% of the cost of the product. The next thing that should jump out at you is that in the grand scheme of things, reducing one’s labor cost wouldn’t yield any where near the same savings as a reduction in fixed or consumables. It’s akin to the old adage of stepping over dollars to pick up nickels.

Our discussion also included tax breaks and natural resources and the role they play in a company’s decision as where to manufacture a product. Suffice it to say, at a certain point, my wife began speaking in a foreign tongue and completely lost me. However, I did understand that it’s a very complex decision. Steel is cheap in South America because it’s mined and made there. So locating a plant there that made bulldozers would make sense. BMW decides to build here to get tax breaks they wouldn’t get in Germany and they can depreciate the cost of their fixed assets over 20 years. So why not invest and build here? And so it goes.

BTW – dodger….you made a comment about John Deere. For the record, there is no such company as John Deere. That might be the label on the product, but John Deere was bought out by Hitachi. The correct company name is Deere-Hitachi. There’s only one US heavy Machinery Company left – Caterpillar.

Anyhow….just thought you guys might find this info interesting. Hell, for all I know, you probably know all this stuff already. So I’ll shut the hell up now.

Tom

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Greetings:

I appreciate the update. At the time, the name was only John Deere.

But as long as they are Q. C.d here does not diminish my resect for Klipsch.

Thanks for the update, Appreciated greatly.

Best Wishes,

Win dodger

[BEC]

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On 3/16/2005 6:01:37 PM dodger wrote:

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On 3/16/2005 10:04:13 AM Tom Adams wrote:

BTW dodger.you made a comment about John Deere.  For the record, there is no such company as John Deere.  That might be the label on the product, but John Deere was bought out by Hitachi.  The correct company name is Deere-Hitachi.  Theres only one US heavy Machinery Company left Caterpillar.

Tom

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Tom,

I think that the Deere Hitachi is just a joint venture between the two companies for producing excavators.

"Deere-Hitachi Construction Machinery (DHCM) produces hydraulic excavators in North Carolina in the US and in Saltillo, Mexico. The company sells new and used equipment that includes compact excavators, rigid frame trucks, mining excavators and shovels, and forestry excavators. DHCM was formed in 1988 as a joint venture between Deere & Company and Hitachi subsidiary Hitachi Construction Machinery Co. The companies integrate their marketing operations in the Americas to streamline decision-making, improve customer support, and strengthen both the Deere and Hitachi brand names."

John Deere incorporated as Deere and Company in 1868. As far as I can tell it is still a US publicly traded company. Symbol DE.

Bob

[skonopa]

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On 3/16/2005 10:04:13 AM Tom Adams wrote:

Anyhow….just thought you guys might find this info interesting. Hell, for all I know, you probably know all this stuff already. So I’ll shut the hell up now.

Tom

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Next time I visit my parents, I'll have to ask my father some of these questions, as he was a materials manager (in some cases, the second ranking executive) in several companies over his long career. If somebody knows what goes into the cost of manufacturing a product, it is my father.

But a lot of what you said is indeed true, from what I've gathered from my father in other conversations over time.

[dodger]

In the case of Kodak, they gave no time for the City or the County to put together a tax incentive deal.

One of the things that has to happen to receive the tax reduction is to state how many jobs will be added in my County.

After some years of doing that an audit was performed, quite a number either did not create the new jobs or actually laid workers off. We as property owning residents pick up those tax breaks.

Taking the factors into account, an example of the profit margin is that of Contact lenses. The cost including all overhead, fixed and varaiable costs to make a pair averages ten cents.

It's too bad that Residents cannot negotiate tax breaks by threatening to move. Some call the breaks incentives, I call it Corporate Blackmail.

dodger

[MrMcGoo]

There is some misinformation regarding cost accounting and behavior in this thread.

Fixed costs do not vary with changes in production levels in the short time frames. Variable costs tend to vary in direct proportion to changes in production. Another class of costs is mixed costs. For example, you may have a minimum (fixed) utility bill each month, but over the minimum, you are charged according to use, a variable cost. All costs are variable in the long-run.

In the US, inventory costs of manufacturers are made up of three elements, direct labor, direct materials and manufactureing overhead. In high tech plants, direct labor is almost non-existent. The manufacturing overhead is where the cost is. Cost drivers for overhead are where modern analysis is oriented to help control costs. Machine setup costs big bucks; operator labor is non-existent, its totally automated.

Machines cannot be laid off, but can be sold, usually at a significant loss for recent acquisitions. Machines are viewed as fixed costs. People are either variable or fixed costs depending on their job, but again, in the long-run costs are all variable.

Bill

[Tom Adams]

Hey McGoo - Are you as pompous in real life or is it just your writing style?

Just curious.

Tom

[Mighty Favog]

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On 3/16/2005 11:12:19 PM dodger wrote:

It's too bad that Residents cannot negotiate tax breaks by threatening to move. Some call the breaks incentives, I call it Corporate Blackmail.

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Dodger-

The corporate office companies that are in downtown Cincinnati have been doing this for a few years now. They either want one helluva tax reduction or they want something a little more material like a parking garage built just for them in downtown (naturally space being a premium). Convergys started this around here about 7 years ago (new parking garage) in exchange for the promise to hire XX number of additional people for the office over a certain number of years. They did and shortly after moved them to another nearby office (Norwood, OH) just outside the city limits. And the garage isn't even done yet.

I found myself talking to one of their employees (of Eastern Indian decent) at the bus stop one day and his attitude was as if the city owed it to him to give his company what they want or they'll move the office just over the Ohio River to Covington, KY. I wanted to belt this guy but good for that big a chip on his shoulder.

All this just meant that property taxes went up for all the Joe-lunchpail residents and some of our schools are closing, and/or merged and grossly underfunded through what then becomes unfunded mandates by some law that was passed.

Since then a half dozen other companies have done similar things to hold Cincinnati City Council hostage and threaten to move. Only one time did Council not cave in. Needless to say City Council members here are a bunch of idiots.