Measuring ROI with Labor Management

p4P actual

Implementing a Labor Management System can be a powerful way to reduce the cost of labor at your facility, but before deciding to move forward you should have a plan on how you are going to generate and measure that ROI.

When working with clients to build their business case, we ask them to give three assumptions for the results they believe they can easily achieve with these tools. These assumptions should be extremely conservative so that there is little doubt that an ROI can be achieved as long as the team uses the tools on a daily basis. These assumptions are:

  • Reduction in Missing Time per employee per day – Missing Time is the difference between paid hours and tracked work during the day. It can be caused by inefficiencies at the start and end of shift or around lunch breaks, or it can be caused by inconsistent work throughout the day. We typically see around 1 hour per day per employee in Missing Time when we first start tracking all the data. A reduction of 15 minutes per employee per day is a conservative goal to shoot for
  • Reduction in Indirect hours – Most companies underestimate the amount of time and cost applied to indirect, or non-value-added processes. Although these processes are often required, gaining visibility into the costs down to the employee level enables managers to reduce this time to a bare minimum. As an example, one of our 3PL clients reduced their Indirect Hours from 39% down to 27% and saved $400,000 annually in labor. We recommend an initial target of a 3% reduction be used in the business case
  • Increase in productivity – Once your workforce is working for the full day (reduction in Missing Time) and working on Value-Added processes as much as possible (reduction in Indirect hours), then the focus should shift to making sure they are being efficient while working on these direct processes. This is the traditional area of focus for Labor Management Systems, and a 5% increase in productivity is a very low bar to shoot for

Based on these three conservative assumptions, an Easy Metrics customer should reach breakeven within the first 5 to 9 months and should go on to see a reduction in labor costs of around 10%.

The next step is to develop the game plan to deliver on these business goals. Our recommended Daily and Weekly Tempos enable a management team to surpass these targets by spending as little as 5 minutes per day and one hour per week on the key actions needed to drive these results.

The final step is measuring the actual savings. There are two main approaches to measuring ROI at your facility.

The simple approach is to compare the Variable Labor Cost/Throughput ratios before and after the implementation. For example, if a facility handled 1,000,000 units with $400,000 of labor during the month last year and 950,000 units with $323,000 in labor during the month this year, the cost per unit decreased from $.40/unit down to $.34/unit. Applying that savings to the 950,000 unit volume, the site saved an estimated $57,000 in labor during the month.
While this approach works well as a quick validation, it does have its limitations:

  • It assumes the workflow is consistent between periods – comparing a period early in the season that had a higher percentage of Inbound volume against a period later in the season that was weighted more towards Outbound volume would skew the results
  • It assumes product mix hasn’t changed – Increases in value-added services or smaller or more complex orders would negatively impact the results
  • It assumes the cost of labor doesn’t change – wage increases between the periods would negatively impact the results
  • It is difficult to tell where the actual savings took place

For these reasons, we prefer a more comprehensive approach to measuring ROI that is based on our three main assumptions:

  • Missing Time – we measure the % Missing Time during the initial period and compare that to the results going forward. Most of this reduction is waste being driven out of the system, but some of these hours are tracking errors where the employee was actually working but hadn’t logged into a job code properly. These legitimate hours will show up as an increase in indirect or direct costs and will not show as a savings to the facility
  • Indirect Hours – As mentioned above, we often see this cost jump initially as employees start accurately tracking their work, but once the Supervisors start focusing on this area, time spent on these processes is reduced. As an example, a new customer saw a significant drop in the average time spent on battery changes as soon as their Supervisors were able to see those metrics each day.
  • Productivity – By measuring the increase in productivity at the process level and applying that improvement to the volume of each process, you can calculate the facility’s savings regardless of the change in workflow between periods. There are three different ways of measuring changes in productivity: cost/unit, units/hour or performance against labor standards. Each one of these measures has its advantages, but they should all enable you to accurately calculate your productivity-driven labor savings

What we like about this comprehensive approach is the insight it provides into what is actually happening. We recently ran both approaches for a new facility that started early this summer.

  • The first approach showed an increase in volume of 53% and a corresponding increase in labor of 25%. The reduction in cost/unit equated to a savings of around $100,000 for the month.
  • The comprehensive approach provided much more insight. Missing Time was reduced by $101,000, but Indirect costs actually went up by $17,000. This reflects that some of the initial Missing Time was legitimate indirect work that wasn’t being tracked properly in the beginning
  • The productivity savings calculation also provided some interesting insight. The processes that had RF scanning showed a savings of $24,000 for the month, but the two processes that required employees to log into job codes showed an increase of $22,000 in cost as the employees started tracking their time on those jobs accurately.
  • The end result is that Missing Time was reduced by about $62,000 ($101k – $17k – $22k) and productivity went up by about $24,000. Adding in another $6,000 in savings on their Billable processes, the comprehensive approach showed a savings of $92,000 for the month. This matched up well with the results from the first approach, and provided more insight into what was actually happening on the floor.
  • Achieving a strong ROI with Easy Metrics is easily achievable as long as the management team understands the goals they are shooting for and then uses the tools each day to reach and surpass those targets.

Leave a Reply

Your email address will not be published. Required fields are marked *