Most operations we talk to are being challenged to drive down their labor costs. This may seem like an overwhelming task, but with access to the right data all it takes is a little discipline and consistency.
Easy Metrics was developed to solve this exact challenge when we ran the operations on a fixed bid basis in Distribution Centers for some of the world’s largest retailers. We knew we needed to eliminate 10% of our labor costs in those operations in order for our outsourcing company to operate at a profit. What we discovered is that with the right tools and methodology, what seemed overwhelming was actually fairly straight forward. In the end, we far surpassed our 10% savings goal while improving both safety and incentive bonuses for our teammates.
The first step is to set your savings targets. A good rule of thumb is the following:
- 30% of Savings from the elimination of Missing Time
- 20% of Savings from the reduction of Non-Value Added Time
- 50% of Savings from increased Productivity
Missing Time is the difference between the paid hours on the time clock and all of the work performed by the employee, whether direct process or non-value added jobs. We consistently see over an hour per day per employee of Missing Time accumulate throughout the day when companies first gain visibility into their workforce. An example of Missing Time would be for an employee who started work at 6:00 and had a 10 minute start up meeting, but didn’t log into his first job code or perform the first RF scan until 6:35. We see the same gaps before and after lunch and prior to the end of shift. We also see gaps occur during the day when an employee is working on Picking but has 25 minutes between pick scans and didn’t log into an indirect job code. A conservative goal for most facilities is to reduce Missing Time by 15 minutes per employee per day. Achieving that goal would result in a 3% reduction in labor costs.
Non-Value Added Time, or what we refer to as “Indirect Hours”, is legitimate work that often needs to be performed, but should be minimized as much as possible. Examples include Downtime, Waiting on Work, Housekeeping, Meetings, Clerical, etc. While this work is often required, we consistently see companies underestimate how much of their labor costs are being spent in these areas. A 3% reduction in Non-Value Added time is a conservative goal once detailed visibility into this time is available.
The final driver of savings comes from increased productivity. This often requires fair goals based on multiple metric labor standards and detailed tracking of employee activity. Increasing average productivity by 10% is very achievable once this information is available. Assuming 55% of hours are spent on Direct Processes, an increase in productivity of 10% would equate to a reduction in labor costs of 5%.
Combining a 15-minute reduction in average Missing Time, a 3% reduction in Non-Value Added hours and a 10% increase in productivity on Direct Tasks would result in an 11% decrease in labor costs. Now that you have your targeted improvements, the next step is to apply them to your current metrics in order to determine your Target KPIs. For example:
- Current Missing Time = 65 minutes (13.5%). Target Missing Time = (65-15)/480 minutes = 10.4%
- Current Non-Value Added = 32%. Target Non-Value Added = 32% – 3% = 29%
- Current Productivity (ELS%) = 82%. Target ELS% = 82% * 110% = 90.2%
Now that you know your KPI goals the final step is to manage to them daily. As an example, Easy Metrics customers receive a Daily KPI email with these metrics in the subject line and the details broken out for each Shift and Supervisor in the body of the email.
The most important routine a General Manager can follow to achieve the 10% savings goal is to look at these KPI’s once a day and follow up with any manager or supervisor who is not tracking towards the goal. This routine accomplishes two things – it creates a metrics-driven culture within the organization and it causes the supervisors and managers to closely track their own KPIs and be prepared to describe the steps they are taking to correct any deficiencies when they get the inevitable call from their boss. Once this methodology becomes part of everyone’s daily routine the time spent glancing at the KPI report and addressing any discrepancies may take only a few minutes each day.
We followed this methodology when running the large Distribution Centers mentioned above and were able to decrease the labor costs by much more than our initial 10% goal. I knew that an operation was going to be successful when the manager not only expected my call but was prepared with the action plan to address whatever issues were preventing their teams from achieving their Target KPIs.