We all know about the wastes lean manufacturing identifies. But how does office overhead fit into the picture? There isn’t a single waste category that neatly captures office overhead, yet for small one-off jobs, the office can account for greater than 95% of the part cost.

Traditionally, the eight wastes are transport, inventory, motion, waiting, overproduction, overprocessing, defects, and unused skill. These focus fairly exclusively on shop floor operation. That makes sense for a volume manufacturer like Toyota, which first described waste in this way. Office overheads for processing orders are vanishingly small compared to the scale of a car sale, even more so when dealers handle much of the sales overhead. It makes sense that Toyota would neglect office overheads.

But office waste isn’t something that fabricators can ignore. Consider the estimating function. Not only does it require skilled labor, but average bid win rates more than double the effective cost. A bid requiring 15 minutes of labor, paired with a 30% win rate, might cost a fabricator $50 or more per earned purchase order, just for bidding (assumes $35/hour wage and 20% labor overhead for tax and health insurance, and 70% on-task time for the estimator). That excludes any back and forth required to communicate capabilities, material options, and manufacturability issues, and it doesn’t bake in other office overheads like office rental and utilities.

Of course, bidding is just the front of the funnel. To support new work, office processes involve purchasing, inventory receiving and storage, scheduling, ERP data entry for sales orders, work orders, items, BOMs, routes, and travelers. And on order completion, invoicing and receivables take additional attention. All told, a one-off widget that costs $3 in time and materials might reasonably cost nearly $80 just in office overhead. And that’s the shop’s cost. It doesn’t include margin.

Given the high cost of bidding and onboarding new customers, it’s no wonder that most shops triage incoming quote requests. It makes sense to be selective. Fabricators favor customers that are likely to send volume jobs, because high office overheads can be amortized across more parts. Taken to the logical extreme, this creates a business that makes the same parts repeatedly and rarely quotes new jobs.

Focusing on recurring work creates operational efficiency, but it comes with one negative side effect: revenue concentration. If shops favor large customers with repeat volume, they’ll tend to serve fewer customers. In the 2023 FMA Financial Ratios and Operational Benchmarking Survey, 61% of shops reported that half of all sales volume came from six or fewer customers.

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Read the full article at The Fabricator