How To BUSINESS MANAGEMENT
By JOHN HACKLEY
The Real Cost of Shop Rework Five ways to prevent this profit drain.
Sign Builder Illustrated
Now suppose that, just prior to shipment, an error is discovered that requires this job to be reworked to the tune of an additional $1,500 worth of labor and
the point is rework can be a profit drain that most companies can ill-afford when replacement profits are hard to come by. materials. This assumes that the company has sufficient unused capacity to redo the job (without adding more cost such as overtime) and there are still available
1. Proper production documentation. In a design-build (job shop) environment, typically the project was estimated and sold based on conceptual drawings or renderings done by a designer or architect. These are certainly enough to get the job in the door but rarely good enough to support the successful production of a product delivered on time and under budget. Without a rock-solid production documentation package, the job should not signshop.com
ou know that dependable quality is one of your most important competitive strategic tools. Whether small or large, a manufacturing organization needs to provide customers with great products and service exactly as promised each and every time. Quality control is a key component in this formula. When an organization fails to take its quality management seriously, it eventually results in some form of rework. Rework leads to the loss of profits, and in some cases (worse yet), the loss of a customer. This article is about eliminating the errors that create the need for rework. You know how important this issue is, but let’s do a quick review of the real costs to your bottom line before we jump into solutions. Suppose, for example, that a small manufacturing company has a pre-tax profit margin of 9 percent, then we can assume the average profit margin on jobs is also 9 percent. This means (on average) for every project with a selling price of $10,000, it has a profit of $900 (9 percent of the selling price).
production days left in the schedule to meet the original client promise date. The selling price is still $10,000, but the job now becomes a liability (costs you money) instead of an asset (makes you money). The impact of the rework is you’re out $900 from this client’s payments and $600 out of cash. That would send most managers reeling; but to make back the money lost by the errors, the company will now need to sell $16,700 of new business ($1,500/0.09). The repercussions are even greater! There are indirect impacts such as the cost of borrowing money, stops and restarts, management rescheduling, material handling, inventory restocking, hits on employee morale, and a general level of frustration throughout the company. The point is rework can be a profit drain that most companies can ill-afford when replacement profits are hard to come by. Yet many owners and managers don’t pay enough attention to rework or the environment that creates it. Remember the fastest, most cost-effective way to increase profits is to minimize or eliminate doing things more than once! The real tragedy here is that most of the errors that create the need for rework are preventable. It’s also not only the production shop that plays a role in the prevention; sales and design departments are important players too. Here are five solutions that will help you prevent rework!