Cost to Serve – the 4th Dimension of Labor Standards

Posted on: January 16, 2018

Engineered labor standards focus on all of the measurements that compose a unit of productivity for an employee. The labor standard formula is:

labor standard = AX+BY+CZ + . . .

Where A, B and C are the calculated coefficients done through engineering or observation and X, Y, and Z are the quantity. An example standard for picking could be:

Picking Labor Standard = A*(# lines) + B*(#case) + C*(#distance traveled)

You can have as many metrics as you want, however there is a point where the correlation of certain metrics to the labor standard is so small that it is not worth the effort to incorporate it.

Traditional standards, however, overlook a very key component of analysis and that is the cost per unit or cost to serve. Adding this information to the labor standard add a whole new dimension to your analysis, especially for the user of the standards.

One of our clients created comprehensive engineered labor standards for their picking process that had a different standards for each piece of equipment. The users were focused on performing to standard for each piece of equipment. However, when we added in the cost to serve for the process for each piece of equipment, a completely different viewpoint was established.

Below is the analysis:

The picking process was within a normal performance variance across all pieces of equipment. But the cost to serve on the High Reach Truck was almost 3X the cost to serve on the Double Pallet Jack. The client then adjusted the process so the High Reach Truck was used less. They ended up reducing their labor on picking by over $100,000 per year by this simple change. Additionally, they needed two less High Reach Trucks, saving an additional $70,000 in equipment.

Adding cost to serve to your performance analysis adds a whole new dimension to your analysis and understanding of your operations.

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