The Ultimate Guide to What is Manufacturing for Small Businesses

The narrative of a small business manufacturer

Now you have a better understanding of the industry and are maybe feeling more confident to pursue your fantasy of becoming a small business manufacturer, where the hell do you start!?

Or maybe you’ve already started but something doesn’t appear to be working and you just can’t figure out where the issue hides.

In this section we’re going to explain what a small business manufacturer will have to do, consider and, more importantly, how to prepare if they wish to survive in this highly-competitive industry. We’ll also try to achieve this in the logical order, from the very beginning (your idea) to selling your goods.

One way you can be sure to stay ahead of the curve is by utilizing a cloud-based manufacturing software like Katana, this way you can make sure all your businesses operations run smoothly and without a hitch.

Prototyping

You have your idea and even though you’d love to instantly invest everything you have to get this out into the public sphere, you simply can’t!

Patience is a virtue… Just, don’t use that one on your customers.

Maybe it’d be a good idea to attend showrooms and conventions to see if anyone is manufacturing a similar product to you. It might be that you could need to contract a manufacturer, and this would be a good place to look if you’re unable to create a prototype yourself.

Either way, as soon as you have the prototype: test, improve, test, improve, test, improve… getting feedback from others is invaluable.

If you’re onto an invention that’s revolutionary, it might also be worth looking into securing a patent on your design.

Bill of materials

Once you have perfected your prototype and now have a final product, you’ll be left (unless you for some reason never documented the alterations to your original recipe) with a bill of materials (BOM) which is essential for your manufacturing processes.

A BOM is a list of raw materials, sub-assemblies, intermediate assemblies, sub-components, parts and quantities needed to create your product.

Depending on your products construction requirements, you’ll be using one of three types of BOMs:

1. Modular BOM

Modular BOMs are used for products that require completion through sub-assemblies.

2. Configurable BOM or CBOM

Configurable BOMs are used in industries that have multiple options with customizable goods.

3. Multilevel BOM

Multilevel BOMs contain lists of the components, assemblies, and parts required to make a product. Sometimes referred to as a top-down method as the relation between the finished product and its parts are highlighted.

Think of it like a family tree.

The BOM, just like the prototype, can also go through reiterations as you perfect the process of manufacturing your product.

Routing manufacturing

So you’ve finished your bill of materials. If your items are customizable and have tons of different variations, you’ve probably realized that it’s going to be complicated manufacturing these products since they’re going to be traveling all over the shop floor.

Routing manufacturing is the route, or map, that you’re products are going to follow around your shop floor whilst passing through each process.

Your routing manufacturing is going to very much depend on what type of production workflow you follow.

Once you’ve completed your routings, you’re going to be able to identify the tasks which need to be completed, the order in which those tasks will need to be completed, the processes the item will go through, and the work centers which they will pass through.

For a simpler explanation:

Routing = lists of tasks needed for a manufacturing process that is used in making a product.

Manufacturing cost

From your BOM you’ll be able to calculate your manufacturing costs (MC). The sooner you calculate this, the faster you can get you, and your customers, a fairer price (something which we will go into more detail further down the narrative under cost of goods).

The manufacturing cost is determined by the amount of resources spent on creating your wares. This is figured out by looking at two types of expenses:

1. Direct manufacturing cost

Direct manufacturing cost comes from money spent on material and the cost from time spent manufacturing.

2. Indirect manufacturing cost

Indirect manufacturing expenses from utility bills, salary of non-manufacturing staff, and Maintenance, Repair, and Operating items (MRO).

Another thing you should be aware of is the cost of consumables, like if your product needs to be assembled with nails and glues.

To calculate your manufacturing costs, you will need to look at the three types of manufacturing costs which are, direct materials, direct labor and manufacturing overheads.

Your manufacturing cost formula should look something like this:

MC = Raw Materials + Direct Labor + Allocated Manufacturing Overhead = $$$

Figuring out your manufacturing cost will allow you to see if you’re being fair to yourself and not giving your product away for free.

What are manufacturing overheads?

The manufacturing overhead costs are the expenses from indirect factory-related costs incurred from products being manufactured.

Examples of manufacturing overheads are the costs for using machinery during production, rent and property taxes of the business’s premises, salaries and wages of workers and utilities for the factory.

However, it should quickly be mentioned that this does not include administrative costs, salaries and debts.

Manufacturing overheads are also known as factory overhead, production overhead and factory burden.

It is mandatory to assign manufacturing overhead to the cost of products, both for reporting their cost of goods sold (we’ll look into COGS a little later), and their cost within the inventory asset account (reported on the balance sheet).

Manufacturing order (MO)

You know how to build your product. You’ve completed your BOM and know exactly how much the manufacturing cost is going to be.

Now it’s time to look at your manufacturing order.

The manufacturing order, depending on how you prepare your products (MTS, MTO or ATO) will come through either due to stock levels or from a sales order and will be prepared as the manufacturing instructions.

Manufacturing orders can be classified into an internal order (to be manufactured by the company itself) and subcontract order (to be manufactured by subcontractors).

But what happens if you create a manufacturing order, but don’t have the materials to fulfill the order?
The next trick is to stay ahead of your manufacturing orders, as to not create delays and keep your customers waiting.

Throughput time

There’s another metric very similar to manufacturing lead time which can be valuable to the small maker.
It’s known as throughput time, and basically tracks how long it takes you to get a product made from when the manufacturing order comes in, to the second it’s ready in the stock room.

The main difference with lead time is that it doesn’t include any of the waiting time before manufacturing or the delivery times after it.

But getting intimate with this number is going to let you know how well you’re doing on the production side, and even give you some ideas on how to improve efficiency too!

Here’s the basic formula to get you started:

Throughput time = The time taken to complete manufacturing / each unit of product

But, when calculating your throughput time you should be mindful of:

Processes;

Inspection;

Moving; and

Queuing.

These all affect how long it will take to manufacture an item.

Manufacturing lead time

The manufacturing lead time is the calculation of the time the sales order comes in, up until its creation.

You can calculate your manufacturing lead time by adding together the different production times for your product:

Order preparation time + queue time + setup time + run time + move time + inspection time + put-away time

The method in which you forecast your lead time will determine on if you’re an MTO or MTS business.

MTO = creating manufacturing order to production and shipment

MTS = creating manufacturing order to production, receiving sales order and inventory stock

So, you have a plan of attack formulated, but now it’s time for the execution.

Manufacturing floor-level control

The manufacturing floor-level control is the prioritized task list for every production employee and production line.

Consider it like a manager role, where they’ll need to schedule, monitor workflow and delegate responsibilities to employees.

How you implement this is up to you, however, you’ll want to use a system where workers can easily access a schedule calendar, so they know exactly where they need to be and what needs to be done.

You can go that extra step by looking into making this easier with production scheduling software.

Smart manufacturing software

There are multiple ways in which you can handle your manufacturing floor-level control, and the most used tactic is making scheduling timetables through excel.

Which takes time, resources and, believe it or not, will cost your business money!

Smart manufacturing software means you can manage your inventory, production processes, and sales orders from one easy-to-use dashboard.

Every little detail in a Smart Manufacturing System has been designed with the precise needs of the growing business in mind.

Master production scheduling

Your master production scheduling will inform you what you need to produce, the quantity, the deadlines and everything that is related to production, even production lead time.

It is crucial that you have a master production scheduling if you want your business to operate properly. Also, it’s a good habit to instill early as it will help when your business scales up.

Other master production schedule objectives are:

1. Making your demand flow smoother
2. Keeping your lead-time low
3. Standardizing communication across your business
4. Helping you to prioritize workloads
5. Keeping production stable
6. Generating workable plans for your manufacturing orders
7. Assisting in making accurate purchase and transfer orders

You can figure out your master production scheduling by product list, variation sub-lists for each product, year, month and week and production quantities.

The sooner you design your manufacturing production scheduling, the quicker you can optimize your businesses work flow and take advantage of the benefits.

Supply chain management

Supply chain management is quite simply getting your product from Point A to Point B.

A supply chain manager is concerned with the “design, planning, execution, control, and monitoring of the supply-chain activities with the objective of creating net value, and building a competitive infrastructure, leveraging worldwide logistics, synchronizing supply with demand and measuring performance globally.”

Their other responsibilities will include negotiating with suppliers to get materials, shipment of materials as efferently as possible and to get the product on the store shelves as quickly as possible. 

Essentially, they make, source and dispatch products.

If you’re a small business manufacturer, you will almost likely be doing this already, but at least now you know the term of what you’re doing!

However, this could be a role of one or more individuals when your business expands into an empire. 

We hope you’re still with us, because we’re going to move onto the next thing you should take into account, which will help you with making sure you don’t under or over price yourself.

Cost of goods sold (COGS)

The cost of goods sold(COGS) examines how much it costs your business to sell inventory over a given period of time. However, there’s no set time when a business should make these calculations. The frequency is completely up to you. 

However, it is essential for you to look into your COGS as it can be used in reporting your business income tax and, most importantly, study your companies’ expenses.

When you’ll be figuring out your COGS, you’ll want to include income and expenses:

Income = The sale income from manufactured goods and the sale income from any resold goods

Expenses = Raw materials and direct labor costs

Be cautious when making these calculations, as some manufacturers have made the mistake of including the incorrect income and expenses. 

Your formula should look something like this:

COGS formula – COGS = (Beginning Inventory + Additional Inventory) – Ending Inventory

Which about completes it on the narrative. It’s one thing to know all this, but how do you actually use all the techniques listed?