Maximizing Profits In The Injection Molding Industry

In today's economic climate it is more important than ever to ensure that profit margins are preserved. Financial institutions are now very reluctant to provide financial support to companies in the form of working capital or loans for capital purchases of plant and machinery.

At the same time, there is stiff competition from countries like China with many OEM's (original equipment manufacturers) placing their injection molding work directly with such countries for lower prices and in many cases, shorter deliveries. Thus to compete, companies in the Western World are under increasing pressure to lower prices and delivery periods – making it all the harder to maintain margins and greatly increasing the need to know and control costs.

"Too many companies run jobs on a molding machine with little knowledge of the true production costs," said Peter Jones, author of Budgeting, Costing, and Estimating for the Injection Moulding Industry, just published by iSmithers Rapra Publishing. "While all companies will check the cycle times and material costs against the original estimate initially, this is frequently the only in–production check that will be made," he added.

Suppliers of raw materials have also in many cases imposed stricter terms of payment to ease their own cash flow difficulties. These combined factors have led to a situation where many companies are finding it difficult to survive while others have already ceased trading.

In order to survive against this background, injection molding companies must be prepared to make some tough decisions and act on them. They must re-evaluate their working practices and adopt more efficient manufacturing procedures.

Whatever the structure of a company, Jones believe that there are a few fundamental factors that that are common to nearly all companies, which determines whether it will be successful.

1. There must be a market for their products or services.
2. They must be able to sell them competitively.
3. They must be able to supply these goods or services at the required quality and quantity.
4. They must be able to deliver them on time.
5. They must make satisfactory profit.

Given the fact that a company has prepared an achievable financial budget and that conditions 1, 2, 3 and 4 above have been met, the costs will have to be kept within budget to enable condition 5 to be realized.

Unfortunately, it is frequently the running costs of a company that can spiral out of control if they are not properly monitored and controlled. While some costs are fixed (like salaries, rent, rates and insurance) are relatively straightforward to monitor and control, production manufacturing cost are not.

For example, too many companies run jobs on a molding machine with little knowledge of the true production costs. While all companies will check the cycle times and material costs against the original estimate initially, this is frequently the only in–production check that will be made.

Of course, at the end of the accounting period, the overall position will be revealed through annual or half yearly profit and loss accounts. Unfortunately this is too late to take any action on work that has already been produced. To remedy this, more frequent checks must be made based on actual costs rather than theoretical ones.

In the author's experience, some of the reasons why some jobs show a poor return (or even a loss) – and as discussed in the book – are:

• The original cost estimate was incorrect
• Incorrect or inadequate mold design or mold construction quality
• Inadequate provision for ejection of the parts
• Too high a level of rejections (Failure to meet the quality requirements)
• Running a mold with a damaged cavity or with impressions "blanked off" impressions
• Use of non-budgeted overtime to meet production deadlines

These are just a few of the many areas that can generate additional costs and lead to depleted profit margins.

Overlooked Costs
According to Jones, there are also many hidden and overlooked costs that will adversely affect a company's performance if not kept under control – but will impact the bottom line of the project, and the company, all the same.

It is essential that all costs are recovered in every category. There are several areas that can be identified, which Jones describes in detail in Budgeting, Costing, and Estimating for the Injection Moulding Industry: everything from poor electrical power factor and poor housekeeping, to use of overtime and running jobs on higher MHRs than planned; from material contamination to running loss leaders; and much more.

The Jig is Up
A perfect example of an overlooked cost that Jones talks about in Budgeting & Costing is repairs to tools, jigs and dies.

Repairs to tooling are needed in almost all plastic processing activities. It is also inevitable that through damage or wear, some mold components will need to be repaired or replaced during the production life of the product. While an allowance is normally made to cover these situations, it frequently does not cover all the costs that are likely to occur. A global fixed percentage based on the overall cost of tools, dies, jigs and fixtures may result in non-differentiation between basic and more complex tooling which can lead to:

• Too small a cost added to expensive complex items; or
• Too large a cost added to simple straightforward items.

This means that the more complex items will be under-costed leading to under-quoting this type of work leading to attracting more work of this nature through appearing to be more competitive than others are.

Clearly the opposite is true for simple straightforward work leading to reduced competitiveness. This is illustrated in the following example.

Example. A global on cost of 7.5% is applied for all tools, jigs, dies and fixtures (items). The shows a global on cost approach applied to all tooling whatever the cost of it. (In this example, tooling A is complex and tooling B straightforward.) In view of the original cost of the tooling, it is unlikely that the on cost of $6,000 would be sufficient in the case of damage to it during a working lifetime of, say, five years as this only amounts to $1,200 per year for servicing and repairs. Repair costs to expensive tooling can be very large so it is necessary to apply a realistic on cost at the start. Comparing this with the $225 per year for the straightforward tooling B (which is much less likely to break down as much because it is simpler), the on cost for tooling A is inadequate and a higher on cost of, say, 10–15% may be more realistic.

Table 5.1 Global on cost

It can be seen that the on cost percentage clearly increases as the original cost of the tooling increases. Hence, for the example in the table, the on cost for the original tooling is inadequate, and based on these results should be about 14.8%.

In view of this, it is recommended that companies should carefully analyze their own costs for repairs and establish their own basis for adding on costs related to the size and complexity of the mold in the future. This can be achieved by using a mold estimating program like the one described in Chapter 15.

Jones goes into detail on numerous other hidden or "overlooked" costs in Budgeting & Costing.

The Power Factor
The power factor (PF) is a measure of how efficiently the electricity supply is being used. The higher the PF, the lower the electricity costs will be.

Many companies do not know what their PF actually is and could save a substantial amount by installing PF correction equipment.

Rejects Occurring During Production
Every costing should include an allowance for rejects during a production run. Rejects will inevitably occur in almost all production processes, which can be due to:

• incomplete, trapped or distorted parts;
• machine breakdowns that require restarting the job – generating rejects until full processing conditions are re-established;
• tool breakages;
• overoptimistic production rates resulting in distorted parts;
• material problems associated with varying quality, wrong specification, wrong color or shade; and
• parts that fail quality control requirements.

To a certain extent, these types of rejects are normally to be expected in most production processes and an overall allowance must be made to cover these, usually through a global percentage on cost. For normal straightforward products this is normally around 5% but for more difficult work it may be a higher value. As long as these contingencies are covered at the initial costing stage all should be well.

However, there are other areas where unforeseen costs occur where the reject level will increase above these levels – sometimes substantially:

• incorrect processing conditions producing variable results;
• trying to manufacture too many parts at the same time (e.g. running a 64-impression injection molding tool when it should be only a 32-impression tool to achieve the necessary control and quality);
• using machines that are not accurate enough for the purpose because of age, wear or lack of sufficient control systems; and
• using substandard processing materials or excessive amounts of reprocessed materials.

There are many other areas where hidden or overlooked costs can creep into the process – impairing a company's ability to maintain their margins. With careful planning – and by placing requisite emphasis on ensuring the understanding of complete costing and estimating – this problem can be greatly reduced.

SOURCE: iSmithers