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Hynes Blog

Balance Tooling Costs and Cash Flow

Posted by Phil Misch on September 12, 2014

11413432186_f53443ba12_zCash is king. 

For manufacturing companies, equipment and tooling costs are two investments that have a significant impact on cash flow. The cost of tooling often dictates what production process best fits the project.

The terms and conditions of each production run will vary, but for the most part, tooling either 100% owned or not. Below we analyze two different approaches to balancing tooling costs and how it affects cash flow.

Approach #1: The Partial Short Play

A manufacturer may choose to borrow tooling or pay a portion of total tooling costs to “rent” tooling for a specified amount of time. This approach means that tooling is not owned, but there is less upfront cost.

The advantage to borrowed or partial ownership of tooling is it frees up cash flow. However, the glaring downside is that your total cost of ownership will increase over time.

There is no such thing as free tooling anymore. Partial tooling investment ties up capital on the shop floor, and often requires additional payments or fees to manufacture with another supplier or in-house.

If a manufacturer does not own the tooling or does not choose to amortize it over time, they will inevitably pay for it in the future. Much like leasing a car, you can make payments to use the tooling, but you will eventually have to pay in full to own it.

Approach #2: The Amortization Long Play

The long play is to amortize tooling costs over a specific amount of time. At ARF, we believe that owning your tooling saves you a headache of additional costs further down the road.

The downside to this approach is that it ties up cash flow in the short term. But by amortizing tooling costs over the production run, you can disperse the costs over several months or quarters. High volume roll forming extends production runs, providing more bang for the tooling buck. Plus, at the end of a production run, 100% of the tooling is owned and can be used for future projects.

Proactive Cost Avoidance 

Tooling cost is just one of many manufacturing costs (e.g. setup, labor, materials, shipping) that have to be considered before starting a new project. The proactive cost avoidance approach can avoid future increases in costs and reap long-term benefits such as reduced material, assembly and shipping costs, and minimal holding and handling costs.

Additionally, finding value-add fabrication partners who support a cost avoidance approach have the potential to contribute to sales growth, improved margins, optimized cash flow and higher efficiency.

To learn about cost avoidance strategies in sourcing and how they can result in long-term savings, read 4 Cost Avoidance Strategies for Metal Fabrication.

Image Credit: torbakhopper via Flickr

Topics: manufacturing, tooling