Estimating Software Yields Higher Profits
Until early 1999, the shop quoted all its jobs using an Excel program developed in-house. Then, they began to use an engineering-based estimating program that provided more accurate representations of actual operating costs.
Liberty Brass is a 70-employee screw machine shop located in Long Island City, New York. The shop uses approximately 50 automated machine tools to make parts for customers in the automotive and instruments industries as well as others.
The shop, owned by brothers David and Peter Zuckerwise, also uses lathes and machining centers to perform contract machining services. According to CEO David Zuckerwise, approximately 75 percent of the shop's jobs are repeat orders, while approximately 25 percent represent first-run jobs.
Until early 1999, the shop quoted all its jobs using an Excel program developed in-house. Then, Liberty began to use an engineering-based estimating program that provided more accurate representations of actual operating costs.
"We wanted to make a commitment to learn what our actual costs were and to make sure that we accurately included both overhead and direct costs in our pricing," Mr. Zuckerwise recalls. "We wanted to make sure that our profitability was where it should be, and our Excel model didn't really account for all our overhead and costs."
This dilemma prompted the Zuckerwises to purchase a software system dedicated to estimating. According to David Zuckerwise, they chose Machine Shop Estimating (MSE) from Micro Estimating Systems—a subsidiary of OnCourse Technologies Inc. (New Berlin, Wisconsin) because the system's features more closely matched his firm's needs than competing products.
To take full advantage of the new system, the Zuckerwises found that a dramatic shift in the shop's corporate culture was necessary. They purchased MSE in 1998 at the beginning of an analysis of operations that included precise time studies for each piece of shop equipment.
"It took us that long to feel confident about our work center costs. It was a tremendously valuable experience," David Zuckerwise explains. "During the 7 or 8 months necessary to fully analyze our costs, we learned more about our business than ever before."
Without a shop management system or a true picture of its operating costs prior to this change, Mr. Zuckerwise characterized his shop as a typical, old-line company. This changed when the Zuckerwises analyzed current trends in their industry. To remain profitable in a global economy, they realized that their company needed to become much more dynamic. To accomplish this, the shop needed to leverage the knowledge gained from its experience. This involved an accurate assessment of the shop's operating costs, strengths and weaknesses.
Two principal factors have driven Liberty's turnaround in profitability. First, the company began using second-source parts where appropriate. Second, Liberty began to use actual operating costs—not rough estimates—as the basis for what it deemed as a reasonable profit level. Although both these strategies proved to be highly successful, pricing adjustments that arose from more accurate costing initially resulted in some lost customers.
When he added data from time studies to MSE's library of speeds and feeds, David Zuckerwise calculated new target levels for profits. In the process, he determined that many high volume jobs performed for his largest customers failed to meet the revised profit standard. When Liberty attempted to upgrade its prices, these customers balked.
"When we lost our three largest customers by raising prices, it really opened our eyes," Mr. Zuckerwise explains. "The jobs from those customers were somewhat profitable, but not as profitable as they should have been. Over the course of the year, we didn't replace that business in terms of volume, but we more than compensated for it by making capacity available to other customers whose work represented higher profit margins," Mr. Zuckerwise explains.
Since the new estimating software was installed, Mr. Zuckerwise reports that the system has frequently functioned as an important sales tool. The shop's estimators can simultaneously calculate estimates for as many as seven different quantities of a specific part on a single screen.
According to Mr. Zuckerwise, "If a customer tells us that we need to meet a specific price, we can expand our quantities until we reach that price, if possible. For example, if a customer wants 500 pieces at 80 cents each, we might tell him that we can only offer that price on an order of 1,250 pieces."
Liberty now uses the estimating software to generate all its bids. Thus, the shop can quickly determine whether a particular job's parameters allow an acceptable profit margin. If not, the shop can either refuse the unprofitable work or contract with a part supplier to provide a certain component of the job.
Buying components from overseas suppliers and outsourcing them to other local shops are key aspects of the paradigm shift that has occurred at Liberty since the new software was installed. Besides helping to win jobs, the software also helps Mr. Zuckerwise determine which jobs, or which aspects of jobs, to avoid.
"In many cases, it's also shown us when to outsource these items to suppliers that have better capabilities to make them. It's more palatable to work at a 35-40 percent markup on purchased items instead of using our valuable capacity for marginal work," Mr. Zuckerwise explains.
Despite the fact that Liberty uses second-source suppliers more often now than in the past, the company outsources strictly those parts that could be produced in-house if necessary.
Faster response time is another way to satisfy customers. According to Mr. Zuckerwise, updating estimates based on similar, previous jobs stored in the system helps Liberty's estimators save time. Estimators can use data from archived estimates for guidance while they work on new projects. Although the shop's two estimators have not increased the number of estimates they can perform in a given time period using the new software, Mr. Zuckerwise has seen improvement in both the accuracy of data and the estimates produced. In the future, the Zuckerwises hope to integrate MSE with its shop-management system, Infisy Global Shop.