Three Factors to Consider when Measuring ROI

Posted On : Aug 1, 2018

Measuring ROI (Return on Investment) with labor management can be challenging. Many LMS providers focus solely on the performance standards (ELS) and then calculate what an improvement in those standards means financially. However, we have found that improvements in ELS often do not translate into reduced labor costs or improvements in profitability.

Easy Metrics measures ROI differently. We take a more holistic approach to the entire operation and put costs into three categories. They are:

1. Missing Time

Missing time is time that is unaccounted for, and it’s measured by comparing the time clock time you are paying the employee to the time tracked by your work flow systems (job codes, WMS, ERP, MRP, etc.). During the validation phase, we establish the baseline of missing time (it is usually 1-2 hours a day per employee) and then measure the reduction of it as employees improve the tracking of their work flow. Missing time, as it is reduced, will flow into direct labor or indirect labor, as well as reduce true missing time (actual time employees are not proactively working).

2. Indirect Labor

Indirect labor is work that is not creating direct economic value for your company. In other words, it’s work the employees do, but the company doesn’t get paid for it. These are things like safety meetings, cleaning, maintenance, etc. During the validation phase, we set a baseline indirect labor percentage and then measure improvements against it with the goal of reducing it.

3. Direct Labor

Direct labor is the work that creates economic value for your company. This is what you get paid to do by your customers. Easy Metrics takes a different approach in how it measures productivity gains. Changes in the ELS % (productivity) often do not translate directly into cost savings. We choose to look at cost per unit as the ultimate measurement. If ELS improves, then cost per unit should measurably go down. However, sometimes it doesn’t due to changes in process that effect the standard but do not effect the cost per unit. For example, picking with a high reach truck vs picking with a double pallet jack will have different labor standards due to the higher efficiency of the double pallet jack. But the cost per pick variance between picking with the double pallet jack vs the high reach truck can be as much as one-third the labor cost. From a standards perspective, the performance score may be 100% for each equipment pick, but the cost is very different. Cost per unit is the definitive measurement of success.

In order to accurately measure ROI, you need to look at all three cost centers above. If you just focus on direct labor efficiencies, you will likely see the labor savings in direct labor bleed over into missing time and indirect labor, thus showing no net savings in your operations. You have to proactively manage all three cost centers and measure the changes in each to get an accurate picture of your ROI.

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