Has your company ever come to the realization that the value of your inventory is a function of the material cost and the labor costs that have gone into making those products? And you’re not tracking it!

Capital equipment manufacturers and any other labor intensive assembly manufacturing has traditionally had a tough time parsing out the labor value of their on hand inventory. It’s very relevant information not only for tax purposes, but also because project costs will not reflect the appropriate As an example, I recently worked with a Jobscope customer who makes automation equipment, and they frequently produce subassemblies ahead of time and keep them in ‘stock’. Later they will use these subassemblies in projects as the need for them arises in various configurations. It is far more cost effective to produce these subassemblies in bulk beforehand rather than on a demand basis alone.  The labor component of the subassemblies is between 40-60% of the cost of the unit. However, until recently, they held the subassemblies in ‘stock’ at one unit cost. When the assembly was issued to the project, the cost of unit was transferred to the project cost as material cost, not broken out as 60% material, 40% labor as it should have been. divisions of labor costs vs. material costs if your inventory and sub assemblies don’t break those costs out.

This is a common problem among manufacturers that hold several components of their final products in inventory for some amount of time. The reason for this is an inherent limitation in many ERP solutions available today. Although some ERP solutions will parse out labor costs vs. material costs for projects that are in process (WIP), most do not separate out those costs for inventory items. Thus once an assembly on the shop floor is issued into stock inventory, it loses its costing granularity and the costs are held as one ‘material’ cost. Obviously, this is a big concern if you want a true representation of material vs. labor costs on your projects.

So what is the solution? Well, each ERP applications will come up with their own way to represent these costs correctly in the final analysis through reporting or journaling, but the obvious answer is to retain the costing categories for products you produce yourself and hold in stock. If these cost categories of labor and materials are maintained in stock, they can be transferred to the next project and applied to the correct category in work-in-progress (WIP). Several years ago, based on customer suggestions, Jobscope took the initiative to create cost categories for both stock and lot inventory so that build to stock inventory could be issued to subsequent jobs and the costing of those projects would remain accurate.

In the example above, once the automation equipment manufacturer started using the Jobscope solution, they found their project costing metrics changed significantly. Labor cost increased and became a truer representation of the actual labor expended on the project and material costs went down.  Now they can trust their project costing numbers as they pertain to labor vs. materials and they can make better decisions on pricing, margin control, estimating, etc.

For many Engineer-to-Order and Make-to-Order companies, it is an important feature that they don’t recognize or appreciate until they are far into an ERP installation. When you are evaluating ERP software, ask your software vendor if they can transition labor costs for a production item through stock to a later project or job without losing the granularity of its original costing categories.

The answer might surprise you!