|Global Knowledge Gateway||
Performance & Financial Management
3D Printing, My Father, and Cost Modeling
by Eli R. Khazzam, Senior Professional, Economic Development & Emerging Technologies. | June 1, 2015 |
I recently witnessed an example of 3D printing technology at an electronics store: a small machine quietly manufactured a model of a plastic cathedral, “printing” each strand of the intricate medieval edifice as onlookers watched. Not many people may appreciate the significance of 3D printing technology—not only as a wonder of the digital age but as a revolutionary game changer for the cost models that define the relationship between producer and consumer. In this two-part series, I examine some traditional cost model factors for manufacturers in the plastics industry and then how 3D printing transforms these factors.
A Traditional Look at Cost Modelling: Once Upon a Time in Plastic Manufacturing
Did you ever think about what goes into the production of the pen you just used or the frames of your sunglasses? What about that toy action figure you just bought your child? And how they are each priced?
From the early 1960s to the late 1990s, my father owned a small plastics injection molding factory in the now post-industrial landscape of northern New Jersey in the US. He had seven injection molding machines using “state-of-the-art” 1970s analog technology, running 2 to 3 shifts per day producing everything from housewares to toys to, eventually, pharmaceuticals. Each machine was solid steel combined with cumbersome piping, endless electrical wires, and dozens of switches collectively weighing several tons.
Each time a new product was created, tens of thousands of dollars had to be invested to make steel molds, which were complex and expensive tools with dozens of high-maintenance movable and interchangeable parts. Overhead cranes were needed to change the molds and retool every time a different product was made. Each day, hundreds of pounds of plastic had to be poured into giant hoppers as the machines produced new items every few seconds. Planning each production run required time and labor. To produce different size units or variations of products, parts of the molds would have to be mechanically adjusted. The technology was messy and labor intensive. Machines ran hot and needed vast cooling systems. They were hydraulic and required hundreds of gallons of oil to function, not to mention costly electric demands. Disruptive repairs were a common event.
To remain competitive and profitable, my father spent much of his time considering his cost model. Like many other small businesses, cost modelling was not a science: it was a hands-on, intuitive blend of old school arithmetic and a 6th sense for the future. You had to know your clients. You had to know the market. And most importantly, you had to know what type of factors (predictable and irregular) between client and market you could leverage to make your profit. These could include changes in raw material prices, seasonal consumer demand fluctuations, and the production capacities of your competitors. Thus, mass production could often be a measured gamble. For each production run, my father calculated his costs and profits based on:
- The cost of inputs: materials, electricity, labor, and packaging, the cost for which was variable and often tied to the fluctuating oil prices of the 1970s.
- Set-up time: the time cost expended when a machine was retooled and prepped from one production run to the next; this could involve hours or even a day for testing, calibration, inspecting, and production (other factors such as ambient temperature, slight changes in plastic quality, and inconsistency with the machine’s mechanical disposition also made this process variable).
- Quantity of production: the number of units produced was rarely exactly what the client ordered. Overruns were very common, as was overstocking to accommodate frequent requests for additional product based on irregular spikes in market demand. The key was not to get stuck with too much or not enough, the latter warranting an additional production run.
- Stocking costs: the cost of storage space to stock inventory. For a small business, space is often so critical and multipurpose that it involves trade-offs in other areas that could generate profits (storage for raw materials or equipment, additional manufacturing space, etc.).
- Transportation of goods: products need to be shipped to clients, who, in turn, package and ship them to distributors and stores. These costs are also dependent on the price of oil, distance traveled, and other logistical factors.
- Waste: In many forms of manufacturing, industrial waste must be calculated into the cost model. The plastic industry was no exception. Sometimes up to 10% of the plastic utilized would result in waste that could not be re-used. This cost was two-fold: wasted material and the cost of disposal for such material.
This is what mass-production involved for my father, and still involves for thousands of manufacturing businesses around the world. For small businesses like my father’s, each factor was even more threatening as any loss of time, materials, or wasted labor could directly affect profitability. Bigger businesses can afford to absorb fluctuations in these factors but small businesses have to be acutely aware of and in control of the entire process.
Check out my follow up to look at the changes 3D printing are bringing, “3D Printing Technology Shifts the Cost Modeling Game—What You and Your Clients Need to Know,” for more on where these technological shifts will take businesses and the accountants who work with them.
Like what you see here? Subscribe to The Latest, our customizable update sent every two weeks.
Do you have a perspective you'd like to share with the global profession? Email Gateway@ifac.org to inquire about becoming a Gateway contributing author.