Learn how to reveal costs by employee, and to transform that data into major productivity gains
OpsFM is a combination of best practices, cost accounting, tools, and culture that increases an organization’s ability to deliver services and products at high velocity by understanding the unit economics of labor – how much it costs to do everything in an operation. The understanding of cost and waste enables organizations to evolve and improve activities and processes with high labor impact faster than traditional continuous improvement methods. This speed enables organizations to serve customers better, and profitably compete in the market.
How OpsFM Works
Under an OpsFM model, operations teams are empowered to be financially accountable in environments where labor cost variables/variances exist. IT, Operations, and Finance share the same goals and language around labor cost and performance as it relates to delivering services and products to customers.
The core metric of the OpsFM model is the labor cost of every activity. In some OpsFM models, quality, safety, and employee engagement may also become integrated alongside the financial metrics. In these cases, Human Resources integrates into the OpsFM team, with shared goals.
These teams use practices to automate processes that historically have been slow, manual, or done by human observation, exposing the business to errors and bias. They use a technology stack and tooling which help them quickly and reliably make decisions based on objective data, improving their operation by cutting waste in labor hours, improving utilization, and making processes more efficient. These tools also help operators independently set goals and monitor their own performance, a practice that normally would have required a supervisor to measure, analyze and communicate, further increasing the team’s velocity.
Benefits of OpsFM
Labor cost management directly impacts company culture and business bottom line.
OpsFM high performers have near real-time visibility of all labor spend. Individual teams understand their portion of total labor spend, and are enabled to budget and track against targets.
Similar to having a clear understanding of household expenses and budgets, this level of diligence causes more benefits than just cost savings. The side effects of an OpsFM culture are increased productivity, better team coordination, and reduced stress in the team environment.
Speed – Innovate for customers faster. Adapt to changing markets, and get efficient at driving business results. Identify inefficient processes, equipment, facilities, and operators quickly and with reliable data. Take action on these inefficiencies faster than other continuous improvement methods.
Reliability – Ensure a positive experience for customers. Have enough operators staffed to deliver to customer expectations and demand, and ensure operations are flowing at the rate the customer requires. Meet the quality expectations of the customer, according to their own specifications. Make tradeoffs for the customer’s benefit and outsource when it makes sense.
Competition – Compete in the market for both talent and profitable customer relationships. Offer and deliver better working conditions and pay for operators compared to the market. Create profitable customer relationships by eliminating or restructuring unprofitable customer arrangements. Fire unprofitable customers and allow unprofitable business to be attempted by your competition. For profitable operations, under-bid competitors in the market, and compete on price by driving efficiencies into your labor cost structure.
Scale – Manage your labor costs and processes at scale across your entire network of operations, at multiple physical locations/facilities. Automation and credible data help you manage complex or changing customer requirements efficiently with reduced risk.
Collaboration – Build more effective teams under an OpsFM cultural model, which emphasizes accountability, transparency, and shared ownership. Operations, Finance, and HR teams share a common language for planning, forecasting, and budgeting for labor. This reduces friction in cross functional teams, and also within the operations team itself.
Safety – Operate efficiently while retaining control and preserving safety. Set realistic performance goals, based on actual cost benchmarks. Engaged operators, who feel they own the results of their work are more focused on their work, less likely to make mistakes, and look out for the needs of their co-workers.
Training – Have better, more productive conversations resulting in skills development. Help your team’s understanding of the correct, safe and efficient way to do any particular process. OpsFM data shows areas that need improvement quickly and more accurately than eyes-on-the-floor observation. If an operator is behind on performance, they may not understand the process or how to do it correctly. Training opportunities present themselves in the data of an OpsFM model.
Employee engagement – Drive a culture of ownership across your team – both as individuals and as a team. In an OpsFM culture operators: understand their job, want to contribute to the success of the operation, and apply energy and focus to their work. Use cost and performance data to celebrate wins and address things that are not working. Give operators a chance, when they are falling behind, to voice inefficiencies or lapses in processes. Utilize stretch goals to give opportunities for incentive pay on an individual basis.
Why OpsFM matters
The problem is shared goals and accountability….the solution is an OpsFM culture.
Labor is not something that supports a business, it is an integral part of the business and it enables businesses. Having the ability to flex and scale to meet increasing customer expectations means having the right labor in quantity, type, cost, and speed.
The digital era has brought customer expectations that require fast delivery of products and services that vary in type and volume. The old centralized methods of managing labor and labor costs are antiquated, because serving customers is no longer a one-size-fits-all proposition. Henry Ford-style assembly lines, where everybody does the same thing over and over each day are not the reality of modern operations. Operators do a variety of tasks and processes throughout the day, with various types of equipment, in different types of facilities from one another, meeting different customer requirements.
Serving customers is complex and customized and “cost to serve”, that is what it costs in labor to service a customer, varies between customers, processes, and product types. Measuring labor as an aggregate, as it has been done in the pre-digital transformation era, doesn’t work. What’s needed now is a model that breaks down labor costs into tiny units of measure for full visibility, understanding, and performance target setting.
In industries where costs have escalated in the last decade, such as government and medical services, there are unique advantages of utilizing an OpsFM model. In these industries, the efforts to quantify processes and their associated labor costs are in their infancy, and there is nearly limitless room for improvement and growth. An OpsFM model in these industries would benefit society as a whole, as it would reduce costs for the people and ensure better care.
In industries or environments like warehouse operations, distribution and e-commerce, an OpsFM model is the gold standard. The world’s top e-commerce companies already employ operations finance teams to drive performance. Built from a digital-first position and armed with data, they’ve used it as a competitive strategic advantage. The adoption of OpsFM culture for more mature companies in retail, distribution, manufacturing, 3PL, food & beverage, and pharmaceuticals helps better position for market share protection and long-term growth. OpsFM helps these companies ward off potential competitors that are approaching labor from the ground up with a tech stack, tooling, and mindset of financial accountability.
How to Adopt an OpsFM Model
The OpsFM cultural philosophy
Transitioning to an OpsFM Model requires a change in culture and mindset. The reality is that labor cost management directly impacts the business, and it always has. But the old methods of eyes-on-the-floor observation as a way to judge performance, supervisor judgement calls (not based on data, and often biased), and managing people out of fear and panic are obsolete. Letting go of those bad habits is positive for the team and the business. With OpsFM they are replaced with objective data on which to gauge performance, scorecarding for individual and team success, productive and individualized coaching, and collaborative problem solving based on real-world scenarios when performance goals are incorrectly established.
On the corporate side, between operations, finance, and HR teams, there is another cultural and mindset shift. The shift that the financial accountability of labor is shared and clearly understood. Budgets and planning for headcount are not based on a whim or a guess. They are based on real data of how much labor the business needs to serve customers according to forecasts. Equipment and facility budgets are clearly understood as they relate to customer requirements, and the operators’ usage of them, particularly when new equipment is needed to reduce costs and improve efficiencies in labor spend. Revenue and pricing of products is determined by the realities of labor cost structure, not what company sales departments and finance wishes it could be. When shared financial accountability for labor is realized, the business can stop practices that burn labor at a loss, digging a hole of unprofitability that can only be worsened with more volume sold. Finance departments can finally, with accuracy, know where the business stands in profit and loss by product and service type, and by customer.
HR team mindset is affected and contributes to the OpsFM team in several new ways. HR is transformed into a strategic partner for finance and operations teams. Advanced OpsFM practitioners compensate and bonus individuals who are out-performing. The criteria for establishing performance in an OpsFM model are two-fold: clean operations data down to the individual employee, and fair, objective, and defensible performance standards. Agreeing to implement performance-based incentives can require a mindset shift to HR partners who have struggled to successfully implement such programs in the past, due to crude design, poor data quality, or unfair and indefensible standards.
In a virtuous cycle that benefits the whole company, HR teams are able retain top talent and attract the best talent in the market, because they can either offer higher base salaries (because of efficiencies driven by OpsFM), or offer new-hires flexible and attractive performance compensation that other employers may not have (because OpsFM analytics enables these programs).
Perhaps the biggest shift happens at the corporate level, between operations and corporate finance. OpsFM bridges the communication divide between operations and corporate finance providing the data insights that financially explain workflow variances.
The OpsFM cloud architecture enables companies with multiple independent physical locations to integrate their operational data into one consolidated and singular decision-making model. In the past, operations in different locations had been managed and run in siloes. In an OpsFM model, all the locations are managed as one team. Best practices can be shared among one another, inefficiencies can be identified and improved, and great performance can be duplicated across a network, instead of living at only one facility. OpsFM is a cultural shift that brings together operations owners at local facilities that collaborate together, instead of operating in their silo as the owner of their location. The common language of the localized operations team leaders is labor cost and performance, and shared accountability is also cascaded to their own teams.
There are several practices that help organizations evolve and improve activities and processes with high labor impact faster through visibility into granular labor cost and performance data and managing the business by that data. Most of these practices are accomplished with proper tooling.
Practice 1 – Workflow management
Workflow management is the practice of monitoring and logging activities during working hours. Some form of data capture is required, and the captured data is correlated to an activity. Workflow management is facilitated by scans and logs captured by operators, and also through automated data capture. Operators regularly scan or create digital logs of activities they are performing, or other events that are happening at that time. Logged events can take many forms such as: an item has been moved, sold, or assembled, a service has been completed, certain equipment has been used, or a task has been completed.
These logs and associated codes are stored in a central repository, after which the time to perform activities is calculated and correlated to the: equipment, employee, customer, facility, location, department, supervisor, shift, process, product type, and more.
The key goals of workflow management are harnessing transactional data in one system of record to increase operational efficiency, improve customer experience.
Modern workflow systems include: Warehouse Management, CRM, ERP, Point of Sale, MRP, and Time and Attendance.
Practice 2 – Activity Based Costing
Activity based costing is a practice of allocating workflow labor costs to the sources of their use. Each activity is associated with a process and can be subdivided further into sub categories such as customer, product type, etc.. The amount of time spent on each activity is used to determine the cost of the activity, based on fully burdened wages.
In an OpsFM model, you can use activity based costing for granular cost allocation mapping labor consumption to the sources of their use. Because workflow data is captured down to each respective employee, unit economics of activities can be understood with accuracy.
In order to practice activity based costing, first the transactional data from the workflow management systems need to be transformed by allocating time and cost to every transaction.
Because activities are translated into their costs through the practice of activity based costing, products and services can be priced with accuracy, cost overruns can be avoided, financial projects can be improved and overtime can be reduced.
Practice 3 – Time Utilization Management
Time utilization management is the practice of identifying the source of and reducing under-utlized labor. The critical dependency of an effective time utilization management practice is full visibility into what’s happening during all working hours.
This is accomplished by gaining visibility into previously unaccounted-for and untracked labor hours in the organization’s workflow management systems.
When time utilization management is done properly, 100% of time in a day is allocated in increments to workflow processes and cost centers. Initially, about 50% of an operator’s time can be accurately accounted for, leaving the other 50% invisible. Capturing this invisible time requires business process adjustments and additional data capture.
New or modification of existing tooling can accomplish time capture and allocation of an entire workday. Sometimes this is accomplished by creating additional job codes in your existing workflow management system. For example, in distribution, many WMS systems allow you to add indirect labor job codes to track non-production work. Other options include time clocks or Easy Metrics Job Trak®.
On average, companies that have not tracked time utilization before will see an hour or more per day of unaccounted for time per operator. However, with a focused time utilization management practice, best in class organizations can reduce untracked time to below 5% of total time.
Practice 4 – Benchmarking
The practice of benchmarking is the process of measuring and comparing actual performance metrics against another set of performance metrics. Benchmark comparisons in an OpsFM model are: actual vs. labor standards, actual vs. network, and actual vs. industry standards.
The goals of benchmark comparisons are to improve or maintain quality, time, and cost. Benchmarks answer the questions, “How are we doing?” and “Is that good compared to my peers?”.
Actual vs. Network: Compare utilization rates, process performance, workflow variance and their associated financial metrics across your network. See what the economic impact would be if you optimize to the best-in-class within your own operations.
Actual vs. Industry Standards: Compare your operating cost KPIs against performant operations in other companies.
Actual vs. Labor Standards: Compare your operating cost KPIs against engineered process standards, or machine-learning derived labor standards. Understand the financial benefits of achieving KPIs against the organization’s own labor standards.
Practice 5 – Labor optimization
Labor optimization is a practice that embodies two important aspects that work in harmony with each other – optimization of underutilized labor, and identification and improvement of inefficient processes.
Operations managers or analysts identify areas of underutilized labor, figure out what is causing them, and work to improve them. On average, employee utilization is by far the biggest cost savings opportunity for an operation. With an OpsFM model, utilization issues are spotted and triaged down to the individual operator. However, larger utilization issues at the team level or network level can and are frequently spotted for bigger impact, including facilities, shifts, and supervisors.
The other aspect of labor optimization is addressing unhealthy processes themselves. Process metric ratio comparisons of top and bottom performers by process and within each facility exposes process problems.
Tooling with prescriptive analytics helps to pinpoint inefficient or overly-expensive processes. Collectively, an OpsFM team comes together to reconfigure these processes, and measure the results and financial impact of the reconfiguration.
Practice 6 – Planning, budgeting & forecasting
The practice of planning, budgeting, and forecasting labor in an OpsFM model is driven by right-sizing the team to match demand. A realistic view into what it costs, in labor, to deliver products and services is the core metric of an OpsFM operating model. Having granular visibility into labor costs helps fuel an effective planning, budgeting and forecasting practice.
One of the biggest contributing factors to poor utilization is inaccurate labor forecasting. Over-staffing leads to under utilization and under-staffing leads to overtime. Overtime is correlated with decreased productivity and increased cost/unit, sometimes to the point of unprofitability – where more volume leads to even larger losses.
Operations teams accurately forecast their organization’s labor needs by department, shift, and process. The guesswork of a staffing forecast for seasonal, weekly, or daily peaks and valleys are eliminated in an OpsFM model with proper tooling. Historic data in their OpsFM tool brings precision to a labor forecast. In absence of it, forecasting is a guessing game carrying large financial consequences caused by under-or over-staffing.
Once an accurate forecast is made, OpsFM practitioners track their workflow to forecast so they can dynamically reallocate their labor as needed.
Practice 7 – Communication and Collaboration
Increased and clearer communication in an organization, and the collaboration of its people are key cultural aspects of an OpsFM model. The use of OpsFM tooling and automation of reporting give teams a productive way to drive a healthy workforce, with common language that everyone understands – from within the operations team itself and between HR, Operations, and Finance. Teams build strong cultural norms around monitoring data, making data-driven decisions and using data to solve problems and drive out inefficiencies. The continuous feedback loop that answers the questions “How are we doing? And “How am I doing?” help drive an ownership culture where people align more closely on personal and shared goals.
The OpsFM model relies on a tech stack and tooling to help teams evolve and improve activities and processes with high labor impact, and deliver products and services reliably for their customers. These tools automate manual tasks, and help teams with complex operations environments at scale.