Part II - Preparing a Business Case
In the previous issue of the Canadian Welding Association Journal (Fall 2007), Part I of this article focused upon developing a welding productivity-improvementproposal that “fit” with the priorities of senior management. I suggested that, when welding professionals are examining potential opportunities, they should give careful consideration to the current business priorities of the firm and apply a decision matrix to determine ideas with the strongest likelihood of success. Essentially, this methodology is a simple tool for fi nding the low-hanging fruit from the myriad of potential productivity-improvement opportunities within the welding and fabricating industry.
Occasionally, excellent opportunities for productivity improvements are very simple and low-cost "no-brainers." Two examples of these types of improvements are providing better information to welding operators regarding process settings through the use of work instructions (Welding Procedure Data Sheets), and providing fi llet-gauges to welders and training them to recognize and reduce over-welding. More often, however, an idea for a breakthrough on welding productivity requires the development of a comprehensive business case to help justify a capital expenditure to senior management. Some of the basic elements that could be included in this type of a justifi cation are explained here:
Detailed Weld-cost Analysis
Using customized software, such as the Weld_IT© CD-ROM (available from the CWB Learning Centre), or computer spreadsheets, it is relatively easy to isolate the costs associated with an arcwelding operation, and make comparisons between various process options. For example, direct cost comparisons can be made between an FCAW and an MCAW process, or a semi-automatic and a mechanized operation.
One criticism of using this technique alone, however, is that this type of analysis is, at best, only a good estimate of the real operational costs. For example, in the spreadsheet printout shown in Figure 1a and 1b, labour costs account for 90% of the total cost of this mechanized welding operation (excluding base materials), with the balance being divided between electrode wire, shielding gas and electricity costs. How these machine or labour rates were determined, and what goes on when the arc isn’t running must be considered in greater detail before proposals for capital expenditures can be created.
Also, by excluding the cost of raw materials, this analysis leaves the impression that direct labour is the greatest component of the welded item’s cost, when many Canadian firms find that direct labour is actually a relatively small portion. This is particularly true in industries that utilize automated manufacturing processes, or fabricate their products from particularly expensive raw materials.
Machine or Labour Rates
Direct labour charges to jobs are normally costed through work centres. The longer a job takes in a particular work centre, then the higher the cost of the manufactured item will be. Work centres where the costs are primarily related to expensive capital machinery are calculated as machine rates, while those where labour is the primary determining factor are called labour or shop rates.
Common factors that are used by firms to determine the rates include direct labour costs, capital-asset depreciation, plant-overhead allocations, machine supplies, and maintenance costs. An example of a spreadsheet printout for calculating the machine rates of a robotic arc-welding cell is shown in Figure 2.
In the example, overhead costs are allocated to the work centre only as a function of the area that it occupies in the plant. Many businesses have more sophisticated techniques of associating costs to products or processes using activity-based costing methodologies.
Item Costing
Many manufacturing firms structure their bills of materials as a series of items on a product tree. These items could be purchased components, manufactured in-house as discrete components, or manufactured into a welded assembly from a number of lower-level items from the product-tree structure. The cost of a manufactured item includes all of the lower items that go into creating it, including raw materials and scrap allowances, plus the cost of the operations required to produce it (e.g., machine rate x time). An example of a spreadsheet printout for calculating the item cost of a welded component is shown in Figure 3.
Break-even Analysis
While many more-sophisticated techniques are used by firms for financial analysis, the break-even method is a useful basic tool for choosing among alternative processes. An example would be when a technologist is trying to decide whether a robotic arc-welding system could be justifi ed as an alternative to a semi-automatic or manual welding operation, as shown on the spreadsheet printout (Figure 4).
The break-even-analysis method assumes that the fi xed costs (those that remain relatively constant regardless ofthe level of output, such as depreciation) and the variable costs (those that fluctuate directly with the level of output, such as welding consumables) remain constant over the range of product volumes being considered.
Implementation Plans
An important component of a good business case for productivity-improvement projects that is too often overlooked is a well-thought-out implementation plan. Nothing will irritate a senior manager more than hearing, "The new welding robots are here! Now what do we do?" Even the most basic project-implementation plan should have a well-defined scope, goals for completion dates, assigned resources (both financial and human), and a communication plan to senior management regarding the project’s progress. New production technology will require installation and commissioning, pre-start health and safety reviews, operator training and production trials before going into service. Plans beyond the actual production start date should also be considered, such as for ongoing maintenance and technical support to the equipment and the operators.
Some basic knowledge of project management techniques will go a long way to adding credibility to any proposals for productivity improvements. There are many books and software packages that can provide guidance in this process.
Common Pitfalls
By definition, a labour-productivity improvement must involve either increasing the amount of production from a fixed amount of labour or decreasing the number of workers (labour hours) required to create a fi xed amount of production.Too often, projects to improve productivity fail to achieve measurable and sustainable gains in these metrics. A common reason for these failures is a lack of attention paid to the production bottlenecks (as described in Part I of this article) to achieve an improvement in overall throughput. Another common source of project failure is "featherbedding," where labour content doesn’t actually decrease, even though the production rate remains unchanged.
The failure of the technology to achieve anticipated production or quality targets is also a common problem. The importance of having competent technical support or maintenance personnel available and providing adequate system training to operators and supervision should not be overlooked. In many plants, the root cause of welding or fabrication process-change failures can be traced to a poor understanding of the processes involved; for example, when an electrician with no training in welding processes is left in charge of setting up and programming a welding robot. Occasionally, the failure of a project to meet management's expectations is simply due to the project having been originally oversold to gain approval.
Managing the implementation of any type of new technology in an industrial environment is challenging. We have to overcome and manage the resistance to technological change from the shop floor,but also convince our bosses that we know what we are doing. As discussed in Part I of this article, it is imperative that we, as welding and fabricating technology specialists, choose our “battles” well, but it is equally important that, once the project is selected, we demonstrate appropriate due diligence in preparing the project for management approval. The basic elements in a business case have been presented here; however, the reader should be aware that in some cases, and especially where the stakes are large, a much more extensive justification may be required to gain the required approval.
Note: The Microsoft® Office Excel spreadsheets illustrated in this article are available as a free download to Canadian Welding Association members from its website, www.cwa-acs.org.
Jim Galloway, B.A.Sc., C.E.T., is a Professor at Conestoga College in Guelph, Ont., where he teaches in the Manufacturing Engineering Technology - Welding & Robotics and Welding Engineering Technician programs. Previously, he held the positions of Welding & Fabrication Manager at Husky Injection Molding Systems Ltd. (Bolton, Ont.), and Director of Welding Technology at National Steel Car Ltd. (Hamilton, Ont.).
This article was orginally published in the Canadian Welding Association Journal, Winter 2008 and was written by Jim Galloway