Using Easy Metrics to Track to Budget

Posted On : Jan 9, 2018

A top priority for most General Managers is meeting their monthly budget. Since labor is usually the largest controllable expense for most operations, gaining visibility and control over these costs can be a crucial component in a person’s ability to succeed in that role.

One approach to this challenge is to map out in detail the volume and labor spend for each direct and indirect process and then manage against that budget on a daily basis. While we have worked through this process with many of our customers, it can be a complex and time consuming endeavor.

In this blog I want to address a more simplified approach that can still give a General Manager the control needed on a daily basis to meet this critical requirement.

Step One:

After selecting a reference period, identify the percent of labor that needs to be reduced in order to meet your budget requirements. For instance, if your labor spend was $440,000 for the reference month, but it needed to be $396,000, then a 10% reduction in labor is needed to meet budget.

Step Two:

Determine the desired buffer. You may decide that you want to target a 2% buffer in order to accommodate variations in product mix and unanticipated expenses. Adding these two figures together gives you a goal of a 12% reduction in current labor costs for your operation.

Step Three:

Determine the desired path to achieve those results. Labor savings come from three main areas:

  • Reduction in Missing Time – the difference between paid hours and tracked hours (this is usually the easiest area to drive initial savings)
  • Reduction in Indirect Hours – Some indirect costs are required, such as Supervisors, Clerical, etc., but other costs, including housekeeping, meetings, downtime, etc. can be reduced.
  • Increases in Productivity – As productivity on Direct Processes increases, less labor is required to perform the same amount of work

We have found that roughly 50% of potential savings can come from the first two factors, and these are also the easiest to achieve. Therefore the manager who needs to achieve a 12% reduction in labor costs to consistently meet budget may set an initial goal of:

  • Reducing Missing Time by 5%
  • Reducing Indirect hours by 3%
  • Increasing productivity by 5%.
  • Technically, a 4% increase in productivity will only reduce labor costs by 3.8%, so I like to add an extra 1% to any increased productivity goal

Step Four:

Identify the status quo for each factor and then apply these goals to them

  • Current Missing Time is 18%, so the target goal is 13%
  • Current Indirect Hours are 37%, so the target goal is 34%
  • Current Productivity is 81%, so the target goal is 86%

Step Five:

Repeat Step Four for each Shift and Supervisor. For instance, the target Missing Time goal for 1st shift might be 11% and for 2nd shift 15%. This will give each Shift Manager and Supervisor specific targets to shoot for.

Step Six:

Track progress daily against these goals. Focus first on the Facility Scores, and then drill down to the Shift or Supervisor level as needed.

By following through on Step Six every day, and addressing any discrepancies with the appropriate supervisors, a General Manager will have a much greater chance of successfully achieving the facility’s budget each month. Although we didn’t address the impact of Overtime costs, improving these three factors will generally reduce the cost of Overtime as well.

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