Manufacturing

& Operations

Entrepreneurship 101
Kishore.Pochiraju@stevens.edu
2011 Stevens Institute of Technology. All Rights Reserved

Manufacturing & Operations

Learning Objectives: The students will
1. Learn basic business operations
terminology
2. Analyze and Manage Operations
3. Estimate Cost of Goods Sold

Module Outline
1. Operations Objective What are you selling?
2. Supply Chain How do you get your products/services?
3. Bill of Materials - What goes into your product/service?
4. Manufacturing Lead Time Are there any delays?
5. Cost of Goods Sold How much is spent on operations?
6. Gross Margin How much is left after op. expenditures?
7. Cost of Quality How much is spent to improve quality?
8. Operations Decisions How to manage operations?
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1. Objective for Operations

Does your business sell products, services or
both?
Example: A lady (Customer) buys a dress from your store
(Business)
Store sells a product Dress
Store sells a service - if it
performs alterations for a
better fit.
Or both.

Do all businesses selling

products manufacture them?
No! Not Necessarily!
Products can be obtained from a SUPPLY
CHAIN of vendors.
One or more suppliers can manufacture the
products.

2. The Supply Chain

Store

Order

Designer
Yarn
Supplier
Weaver

Order
Fabric +
Pattern
Apparel Manufacturer
Cloth
Dresses
Thread
& Trim

Supply Chains
Orders
Custome
r

Designer

Materials
(Cotton)

Patterns

Store

Dress

Apparel
Cloth
Manufactur
er

Weaver

Trim
Supplier
Buttons/zippers

Products

Yarn
Supplier

Dyes
(Colors)

3.

Bill of Materials (BOM)

A typical BOM lists

items, quantities,
costs and suppliers

Item

Quantit
y

Cost

Supplie
r

Embroider
ed Cloth

1m x 1.5 m

$75

Weaver

Black Lace
Cloth

1m x 1.0 m

$25 m

Lace
Weaver

Silk Lining

1 m x 0.75
m

$25

Us Silk

Zipper

1 x 60 cm

$2

YKK

Hem &
Threads

1m
3m

$5

Thread
Maker

Sub Total

$132

Make a comprehensive list of everything that will be

needed before the product can be built.
8

Product BOM Example

37 Parts for this projector assembly. All parts are shown.

Description field has the suppliers for the some of the parts9

4. Lead Time
Time taken for an order to be filled by a
supply chain.

Orders 100 Dresses

January 10, 2012

Store

LEAD TIME
60 DAYS

Apparel
Manufactur
er
Received 100 Dresses
March 10, 2012

10

Lead Time Example

2 days
per ton

Materials
(Cotton)

Yarn
Supplier

20 days

A yarn supplier takes 2 days to

manufacture (process) a ton of yarn
if all the raw materials are available.
Supply chain has lead time of 20 days for
materials and 10 days for colors.
Consider there are no materials or dyes
stocked, how many days will the yarn
supplier need to produce 1 ton or yarn?

10 days
Dyes
(Colors)

Total Time = Lead Time + Manufacturing T

= 20 days + 2 days
= 22 days
Total Time = longest lead time for supplies + process Time
11
Inventory: Stocking supplies and finished goods to reduce lead time

Review #1
Business operations may require both products
and services to be made available to the
customers
Operations require working with a supply chain
A map of the components of the products or
breakdown of services is required for effective
management of costs
Supply chains come with lead times time
between ordering and obtaining the products.
Next Segment
(Topics 5-7)

12

5.COGS Cost of Goods Sold

Cost of Goods Sold (COGS): refers to thecosts
of those goods --- products and/or services --a business has sold during a particular period
(e.g. quarter)
COGS includes Costs for:
All materials purchased,
All manufacturing (conversion from raw
materials),
&
Any other direct & indirect costs incurred
13

Bill of Materials (BOM)

iPhone 5 BOM

Mac Observer; Ifixit.com; http://www.isuppli.com/

14

Estimation of COGS
COGS= $199 +
Manuf. Costs
Typical Assembly
Costs: $8
COGS = $207
Includes automated
insertion of the
components and
soldering on boards
and manual
assembly of the
product.
Estimate based on
prior versions or
similar products.
http://www.isuppli.co

15

6. Gross Margin (%)

Gross Margin refers to the % revenue
remaining for other expenses and profit after
paying for the Cost of Goods Sold (COGS)
X 100

16

Gross Margin Example-1

Revenue per dress = $1595
Price paid to dress supplier = $550
Gross Margin = (1595-550)/1595 = 65.5%
The difference ($1040) is not profit to the
company, but the money left over from
operations to fund other activities such as:
research and development costs for the
designers
Trademark licenses
Advertisements
Utilities for the store
Customer service in the store.

17

Example 2: Gross Margin

Cost of Components = $187

Estimated Cost for Manufacturing + Other = $6.50 - $7

Total Estimated Cost of the Product

= $194

(Without IOS software related costs)

Apple sells at RM 1799 = USD $600

Gross Margin (%)

= ($600 - $194) / ($600) x 100

= 67.7
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Example 3:
Cost of Service
Store charges the customer $40 for reducing
the length of the sleeves and hemming.
Cost Assumptions:
Tailor Charges: $25 / hour for Hour = $12.50
Tools : Sewing machine, scissors (Tailor Provides) - $0
Materials: Thread (Tailor Provides) ; Hem Cloth = $5
Transportation to & from the tailor: $7.50
Cost of Goods ( Cost of Service)
= $12.50 (Tailor) + 5.0 (materials)
+ $7.50 = $25
Gross Margin = (40-25) / 40 ~ 37.5%
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Example 4: BOM For HeadSet

Package & Manuals

Back Cover and Logo

Charger and Headset

Clamshell Case

Over Ear Clip & Main Body

Battery, Circuit Board

20
Speaker, Microphone

COGS
Materials:
Case/Plastics
- $1.00
Speaker & microphone - $1.00
Electronics
- $6.00
Manufacturing - $0.50
Total Per Unit = $8.50
Factory Overheads (per quarter)
Administrative - $10,000
Other services to factory - $5,000
Units Made = 10,000
Number of headsets Sold 9,000 Units @ $30.

21

Gross Margin
Direct
Manufacturi
ng Costs
per Unit
Sold

Indirect
(Overhead)
Cost per
Unit Sold

Cost of Goods Sold = ($8.50 + $15000/9000)

= 8.50 + 1.67 = $10.17
Number of
Headsets Sold
9000 @ $30.

Gross Margin (%) =

((30-10.17)/30) x 100 = 66.1%
Inventory = 1000

0-9000 = 1000
22

Gross Margin for Headsets?

Sales Price
~ $20
Sales Price ~ $100
Low Margin
e.g: COGS = 15

High Margin
e.g: COGS = 30

Margin: (20-15)/20 *100 = 25%

Margin: (100-30)/100 *100 =

70%
23

COGS for Manufactured Products

Manufacturing & Operations
Raw materials

Workforce

Buy from
Sub-Contractors
Sold Or
Stored in Inventory

Finished
Products
Required
Production
Sales Forecast

Plant

Efficiency
Reduces
$ COGS $
24

Indirect Costs
Indirect Costs: All costs that are incurred in
support of production but not directly
related to production
Administrative: Costs for administrative
support for production
Human Resources: Costs to manage labor,
hiring and discharge functions
Information Technology: All costs related to
information technology needs of the production
system.

25

Typical Distribution of COGS

26

7. Cost of Quality
What is Cost of Quality? Portion of COGS spent to
increase quality of the product.
Example

Components
Enhancing
Quality

High Quality
Option

Low Quality
Option

Speaker

$3 (better
bass)

$1

Battery

$7 (Longer
Life)

$2

Background
Noise Processor
Chip

$5

$0 (Not used)

Production
quality control

$4

$1

Cost of quality for

this example: $15
Cost Sub-Total
$19
$4
Product has full Cost
functionality
even with the lower
Difference
+ $15
quality options!

27

Review #2
Gross margin can be increased by lowering COGS
COGS = Cost of Materials + Cost of Manufacturing
+ Overheads
Detailed BOM and supply chain Detailed cost
estimates
Detailed understanding of manufacturing
processes in your business More accurate
manufacturing costs
Dont forget the overheads.
Next Segment
(Topic 8)

28

8. Managing Operations
Decisions
1. Number of Units Produced (Production
volume):
Target for this quarter: Meet sales forecast
Constraints that limit production: Plant capacity,
worker availability and raw material availability
2. Workforce Management: Number of Workers,
Productivity and Costs
3. Ordering Raw Materials: Lead time and risk in
receipt of materials
29

Operations Decisions
Raw materials ordered
will be available in the
next quarter.

Workers hired will be availab

next quarter due to training

Permanently let go
Temporarily laid off,
will be available next
quarter
Units bought from
contract
Manufacturer

Produced by the plan

30

Workforce Estimation
If Worker Productivity = 250 Units / Quarter
And you need a produce 7200 Units
You will need: (7200/250) = 28.8 workers
This means, if you have in this quarter:
Greater than 30 Workers Too Many (inefficient)
30 Workers Without Overtime
24 to 29 Workers with Overtime Pay

Low Cost
Solution is
in this Range.

Less than 24 Workers Not Enough (inefficient)

31

Plant Decisions
Money is needed to
build plants and for
maintenance.
Maintenance enhances
worker productivity

You can sell plants

that have more than
5000 capacity

32

Cost of Goods Report

Tally of all costs

incurred

COGS Estimates

Investment
required to run
the operation
33

What is a stock out?

When you have 0 inventory at the beginning
of a quarter (demand exceeded supply)
--- You have a stock out!
Stock out is a lost opportunity to sell and make
profit.
As raw materials have a lead time, it is
important to keep some finished goods in the
inventory.
34

Summary
This module defined:
COGS
Gross Margin
Bill of Materials
Manufacturing Decisions
Determine production units for the current
quarter
Order Raw Materials for the next quarter
Manage Workforce
Build New Capacity
35

Module Evaluation

We are now at the end of the module. You will now need to take the
module quiz-1 and achieve at least a 70% grade.

If you do not achieve a 70% grade in the 1st quiz then you should
study the module again and take the 2nd quiz. You will be required
to get a 70% grade in the 2nd. If you cannot achieve this you will
need to talk to your instructor.

If you do achieve a grade of 70% or higher on the 1st quiz you may
take the 2nd quiz if you would like to try and get a higher grade.
The highest grade in either quiz 1 or 2 will be recorded.

You will also need to complete the module survey evaluation as

part of our course quality control process. The survey module
evaluation must be completed in order to have your quiz grade
recorded.

Thank you for listening to the Manufacturing and Operations

module.
36

Time to take the quiz &

a survey on this module

Click on
icon for
hyperlink

Learning Assessment

Module Assessment Survey

Press Escape
to Quit from the
Presentation Mode

37