This synthetic parameter depends mostly on the standard working times (ST) and consequently also on the automation level of processes. It also depends on labour efficiency (g) and the indirect labour incidence (i), but also on the number of working hours established by the contract (without considering holidays), as well as absenteeism for accidents and sick legally recognised permissions… In ‘‘benchmarking’’ research for manufacturing systems, it is important to use this factor when the different realities are comparable. To obtain an objective analysis, it is important to consider the data based on the product characteristics (dimension, complexity) and examination of the verti- calization degrees of the production (‘‘make-or-buy’’ configuration), correcting opportunely if necessary.
The above-mentioned productivity indicators, associated with unitary labour cost (payment and taxes), influences strategic decisions on new and existing sites for production activities, following the criteria discussed inSect. 1.2.
To conclude this section, it is important to underline that labour produc- tivity is not separate from product quality. In fact, a well-engineered process with efficient automatic systems contributes to optimization of working con- ditions, even from an ergonomic point of view, and at the same time improves product quality. So, productivity and quality of labour improve together.
The transformation costs and consequently the hourly cost (labour burden) are composed of three parts:
(a) The first part is the so-called variable part, because its annual amount is proportional to the activity volume (PAV, DAV). It includes the following factors of the cost per unit:
(a1) direct labour working hours (STn=g), to which apply the average hourly cost for labour (payment and taxes);
(a2) incidence on (a1) of the costs of direct material losses (rejects due to defects in the transformation process, over-usage in spite of standards in the bill of material);
(a3) incidence on (a1) of the costs of consumables and tools, connected to the transformation process;
(a4) incidence on (a1) of costs of energy and power supply in general, con- nected to the transformation process.
(b) The second part is thefixed part,because its annual amount is independent from the activity volume; it influences theburden, with reverse proportion to PAV (in the predictive phase) or to DAV (in the accounting phase). This incidence reaches the minimum point when the production plan fulfils the annual productive capacity and includes the following cost factors:
(b1) depreciations related to the cost centre;
(b2) fixed costs necessary for the functioning of the plant, even if charged to cost centre (overheads, technical and logistic departments, general equipment conduction, annual technical assistance, insurance…).
(c) The third part is the so-called half-variable part, because it has a ‘‘step’’ trend in respect to activity volume, in relation to the working shifts planned (PWT). Its incidence on theburden is minimal when the production plan fulfils the productive capacity of each weekly shift and includes the following cost factors:
(c1) indirect labour, partially considered proportional to the activity volume PAV, DAV, partially considered fixed, considering what is specified in Sect. 4.2;
(c2) maintenance costs, deployed in fixed and variable costs based on statis- tical analysis, according to criteria that will be specified later inChap. 6;
(c3) material handling costs, not included in the manufacturing cycle, deployed in fixed and variable costs based on statistical analysis, according to criteria that will be specified later inChap. 5;
(c4) energy and power supply costs (lighting, environmental air cooling and conditioning…), the amount of which depends on the number of working days and shifts.
Comparing the three above-mentioned cost factors (a, b, c) with the budget forecast and with the previous financial balance, it is first necessary to quantify the
differences in the activity levels (DAV compared to PAV). This calculation derives from the quantity of product delivered to the final product warehouse (volumes and mix), and shipped out for the standard costs, to which it is necessary to add or subtract:
• distinctions due to technical differences in the product, introduced as per request by the Marketing Department and transferable to the profits;
• distinctions due to activity transference (to or from productive units).
Furthermore, for each one of the three cost factors (a, b, c) it is necessary to quantify the variations that have occurred or are foreseen as likely to occur in spite of the standard cost, due to the purchasing price of materials and services, the labour costs and the energy service fees. These variations are considered as ‘‘ price effect’’ and include the effectiveness of negotiation.
Having separated variation due to, respectively, ‘‘volume-mix effect’’ and
‘‘price effect’’, the variation attached to each of the cost factors is determined by difference (efficiency or inefficiency in management).
For this purpose, it is necessary first to examine the standard working times STn, distinguishing the following variation causes:
(1) product/process technical changes necessary to improve/fix the quality level of the product (typically these changes worsen the cost);
(2) standard working time and investment reduction specifically approved for reducing the transformation cost (typically they are variable cost reductions balanced by higher depreciations);
(3) standard working time reduction for improvement of the process, not requiring specific relevant investments (they are variable cost reductions).
Then, it is necessary to examine the variations due to other cost factors such as:
direct labour losses (1 g), incidence of indirect labour (i), direct material losses (deviation compared to the standard requirements in the bill of material), utili- zation of specific power supply and consumables, outsourced fees for production process services…
By analysing the nature (positive or negative), the make-up and the causes of these variations, both in the predictable phase (budget) and the final balancing phase, it is possible to understand the economic effectiveness of the production processes management.
2^ MODE
When the manufacturing systems are using hard automation solutions, the cost centres are organized by ‘‘homogeneous groups of equipment’’ or by ‘‘one-piece-flow integrated systems’’. The transformation cost is assigned to single products based on hours of utilization of the machines/equipment, referring to the specific standard productive capacities SPCnand applying the relative hourly functioning cost(machining burden).Activity levels correspond to Net Planned Working Time NPWT.
As we have seen inSect. 3.2, the standard productive capacity SPCnis relative to each of the products n in charge and corresponds to what is obtainable if operating without breakdowns and managerial failures.
Not using the available productive capacity (1-U) determines the amount of ‘‘unabsorbed fixed costs’’. To evaluate the transformation cost trend, it is necessary to compare first the machine load (NPWT=net planned working time), foreseen in the budget, to that actually scheduled. The variation of cost due to the activity levels (utilization degree of the systems U) can be distinguished from that due to the overall equipment efficiency (OEE). These parameters are measured as described previously inChap. 3.
The analysis of the utilization of cost factors, for the products actually in manufacturing, can also be achieved as described in the previous point, even if their incidences change, being activities with a higher impact on depreciations and maintenance costs.
Just as necessary as the building of the cost centre is that of the ‘‘manufac- turing homogeneous systems’’, to which it is possible to apply the above-men- tioned analysis criteria, although this method is more complex than the previous one. For this reason, it is not used in the Final Assembly Plants, where it is preferable to assume the standard working time STn as reference for the accounting of transformation costs to the products (1^ mode).
The 2^ mode is, however, predominantly used for economic control in the manufacturing of ‘‘capital intensive’’ components, which are technically homo- geneous but with different part numbers and destined for more customers. In this way, the cost of machinery/equipment is properly assigned, clearly demonstrating the negative economic impact of the non-utilization of productive capacity. As a consequence, it is possible to decide if it is convenient or not to take other orders, even if with a minor profit margin in spite of normal rates, to make better use of the production capacity.
These criteria and methodologies for financial analysis fall under the module of ‘‘Finance for the Enterprise’’. The following diagram solely represents the typical trend of transformation unitary cost versus planned working time (corre- sponding to activity levels). In the given case study, the available working time is equal to three daily working shifts (22 h/day). This amount of working hours is typical of ‘‘capital intensive’’ automotive productions.
TUC¼UVCþðAUÞAFCþðAUÞSFCP3
n¼1 nSFC
ðSUÞ where:
AWT available working time (22 h)
n number of scheduled daily working shifts
AU degree of utilization of the available annual productive capacity SU degree of utilization of the available productive capacity in each shift n TUC transformation cost per unit
UVC variable cost per unit
AFC annual fixed cost incidence, with full utilization of productive capacity SFC shift fixed cost incidence, with full utilization of productive capacity.
By analyzing the diagram in Fig.4.4, it becomes clear how important it is to concentrate work in shifts, avoiding open, unfilled shifts as much as possible and using, if necessary, overtime.
Let us conclude this section by emphasizing that the so-called ‘‘continuous improvement’’ in labour and system productivity can be achieved only through the co-operation of the Production Management, Manufacturing Engineering, Maintenance and Logistics Departments.
The Finance Control Department is in charge of ensuring that ‘‘input’’ is complete and coherent, during both the budgeting and final balancing phases, using the necessary ‘‘auditing’’ activities and working up a constant monthly, quarterly and annual ‘‘report’’ on achieved results.
(PWT) PLANNED WORKING TIME
3° shift 22
AWT
(SFC) min.
(AFC) min.
UVC (TUC) min.
TUC
(hours/day)
1°shift 7,5
2°shift 15
TOTAL UNITARY COST VARIABLE PART ANNUAL FIXED COSTS SHIFT FIXED COSTS FIXED COSTS (NOT ABSORBED)
T R A S F R M A T I O N
U N I T
R
C R Y
O S T
Fig. 4.4 Transformation Total Unitary Cost (TUC) trend in relation to Activity Level variations