Four steps to calculate the

manufacturing cost of sheet

metal products
April 2017 News

In today’s competitive markets, understanding the structure of the costs of a product

is essential to the improvement of the process as well as to a correct pricing
strategy.

The production cycle of a sheet metal product involves several phases from the raw
material to the product ready for delivery which include: cutting, roll
forming, bending, welding, punching, laser cutting, assembly of possible
accessories, painting and packaging.

My previous articles are focused on:

1. Understanding the scrap rate generated by different cutting processes

2. How to calculate the hourly cost and rate of a sheet metal production system
3. How to calculate the productivity and efficiency of a sheet metal production
system

We have seen how some of these parameters, for example the Efficiency of a
machine or its Hourly Cost, depend from a number of estimations and strategic
decisions the entrepreneur has to take. We have always to bear in mind, that the
result of the calculation will be affected by all these decisions.

Here, I will use some of the concepts and ideas of these articles and propose a
method to estimate the production cost of a single sheet metal product, and of a full
batch.
Dallan develops efficient technologies and machines in order to improve the
production cycle and to break down production costs. This is possible thanks
to the optimization of raw material utilization (up to 100%), and making
maintenance cost even more cost-effective.

Discover all the Dallan technologies and the production systems:

Roll forming Punching Laser cutting

machines machines machines

Index
• 1 Step one: breaking down the production cycle
• 2 Step two: calculate the cost of the raw materials
• 3 Step three: adding the cost of the machining
• 4 Step four: repeating the calculation for the different phases of the
production cycle
• 5 The 80/20 rule applied to the structure of the product cost
• 6 Important note
• 7 Conclusions

Step one: breaking down the production cycle

The formulas described in the previous article are meant to calculate the hourly cost
and efficiency of a single machine or system.

Since production cycles can be so different from one another, and may include
different phases, we need to brake the production cycle down to simpler processes,
as shown in the picture below.
In this way the output of Machine 1 becomes the input of Machine 2, carrying on its
production cost as if it were a new raw material.

Now, it is possible to focus on one of these production cycles at a time. Let’s start
from Machine 1.

Step two: calculate the cost of the raw materials

The manufacturing of one product requires one or more types of raw materials.

For example, a standalone roll former for drywall studs requires coils of galvanized
steel. In the case it is a complete system with roll forming and packaging, the raw
materials will be: metal coils, straps and timber tiles.

At this point, we need to calculate or estimate the amount of raw material that will be
required to manufacture one single product, including the scrap generated in the
process. In the first article, I showed how Elleci could generate an average gain of
15,9% on the raw material costs, by moving a set of articles to more efficient
technologies.

Let’s take as an example the product F of the a.m. article. The product has
dimensions 415x685mm, thickness 1mm and is obtained from a sheet metal plate
with dimension 1000×2100. We can fit 6 parts in this sheet, with a scrap of 19%. In
this case, we need to consider that the amount of raw material per one piece is a
plate with dimensions 700x500mm, thickness 1mm.

The cost of the raw material per one piece is given by this formula:
In the previous example, assuming 0,7 Euro per kg as the Material cost per kg, and
density of steel 7,8 kg/dm3 we obtain:

RAW MATERIAL COST = 7 * 5 * 0,01 * 7,8 * 0,7 = 1,91 Euro

This procedure has to be repeated with each of the raw materials entering the
process.

Step three: adding the cost of the machining

At this point, we need to have the following data:

• Hourly cost of the machine or system, as calculated with the method

illustrated in the second article. In this phase, we will not take into account the
overhead costs.
• Productivity (cycle time) and Efficiency of the system, as calculated in my third
article.

The formula to calculate the cost of the machining is the following:

For example, with a cycle time of 12 seconds, efficiency 80,5% and a Machine
hourly cost of 77,3 Euro we obtain:

MACHINING COST = 77,3 * 12 / 0,805 / 3600 = 0,32 Euro

So the total direct cost of the production for one piece is:

And in our example:

TOTAL PRODUCT COST IN MACHINE 1 = 1,91 + 0,32 = 2,23 Euro

In this case, the cost of the machining represents just the 14% of the total cost of the
product, where the raw material represent the remaining 86%. These percentages
may vary, but it is clear that any saving in the raw material (with the optimization or
elimination of the scrap) can be highly beneficial to the overall production cost.

In some productions, we may need to produce a specific tooling that cannot always
be calculated as a part of the machine.

In this case I prefer to see it as a part of the investment to complete the production of
N parts, and use this formula:

(Total production cost) = N*(Raw material cost) + N*(Hourly Cost)*(Cycle time per
one piece) /(Efficiency) + Tooling costs

Note that this formula is slightly different from the one I suggested in the article about
the hourly cost, since the setup time is already taken care of by the Efficiency.

Dallan develops lean production systems and highly efficient machines. The
latest innovation regards the sheet metal laser cutting applied to in-line coil
fed production. Pluriannual Dallan experience in in-line production systems
allowed us to develop a revolutionary laser cutting machine that joins the
flexibility and cost-effectiveness of fiber laser cutting with the efficiency and
productivity of coil-fed production.

DISCOVER HOW DALLAN LASER CUTTING SYSTEM WORKS

Step four: repeating the calculation for the

different phases of the production cycle
Now that we have calculated the production cost from raw material to the output of
machine 1, we can repeat the procedure for the other machines or phases that
complete the production cycle.

The output of each machine carries on the costs attached to it by the previous
processes, until the end of the line is reached and the product is ready for the
delivery.

The 80/20 rule applied to the structure of the

product cost
The simple methodology illustrated in this article can lead to significant insights
about the structure of the product cost, as well as helping to identify where to act to
improve the profitability of a product or product line.

In the above example, with the cost of the raw material being 86% of the total cost, it
is clear that any % in saving in the raw material (for example by reducing the scrap
rate) will lead to a proportional reduction of the total product cost.

In a production cycle that includes several phases, it will be possible to understand

how each phase contributes to the total industrial cost making it possible, for the
production manager, to prioritize the interventions for the improvement of the
process.
As deep connoisseur in sheet metal working processes, Dallan focused its
development in highly efficient production systems and technologies. In-line,
coil-fed philosophy ensures the highest optimization in raw material utilization,
meaning less scraps and more revenue than traditional systems. Moreover
innovative and sustainable technologies guarantee a reduction of operating
and maintenance costs.

DISCOVER THE 3 ADVANTAGES OF COIL-FED PRODUCTION

Important note
In the introduction of the article I pointed out that the output of this methodology is an
estimation of the total product cost, since several of the parameters we use are the
result of a decision or estimation of the production manager.

In addition to that, note that this method does not take into account the logistic costs
due to storing and moving the products from one machine or process, to the next. If
this process is manual, these costs can be an important part of the total cost and
they should be estimated by the production manager. For this reason the production
in line is always preferable.

Anyway if the logistic of the products between two machines is automatic and carried
on, for example, by a machine or automatic storage, this phase could be considered
as another phase of the process, where the automatic storage is another machine
characterized by its Hourly Cost and by a Cycle time that is the highest of the cycle
times of the machines that come upstream and downstream.

Conclusions
This article completes the series of articles dedicated to the calculation of the
machine hourly cost, efficiency and scrap rate.

In the previous articles, I highlighted the factors that the entrepreneur and the
production manager have to consider when deciding the machines hourly cost and
rate, and the importance of the organization of the production in order to guarantee
the high efficiency of machines and systems.

Modern production systems allow for fast, automatic and highly efficient production,
where setup times for tool change are constantly reduced or – as in the case of laser
cutting machines – eliminated.

Even with highly automated system, often the cost of the machining represents a
smaller percentage of the raw material cost. For this reason, any saving in the raw
material cost in terms of scrap reduction becomes highly beneficial in terms of
reduction of the overall industrial cost.