Slide 1

Chapter 4. Estimating and Reducing Labor Costs

Slide 2

Subway – Firm Level Information

Started as Pete’s Super Submarines in Connecticut in 1965

Now, largest sandwich chain with 34,000+ stores in 98 countries

Estimated revenue: $12 Billion (compared to McDonald’s at $23 Billion)

Franchise model – each restaurant is independently owned and operated

Goal: “to become the number one Quick Service Restaurant in the World”

Average revenue per store: $445k (compared to $2.3M at McDonald’s)

Slide 3

Subway – The Franchisee’s Perspective

Relatively inexpensive to open a new store:Start-up costs for a restaurant are $100k to $200kNo cooking, no grills, and no fryolators*Potentially very small stores (as little as 600sqft is possible)Compares to about $1 Million to open a McDonald’s

Franchise model8 percent of revenue as royalty fee 4.5 percent of revenue as a marketing feeInitial franchise fee of $15k

Detailed training and instructions provided by franchiser (Doctor’s Associates)Two week training courseDetailed operations manual

* A kitchen appliance used for deep-frying.

Slide 4

Subway – Assembly Line for Sandwiches

What is the capacity of this line?

What are the costs of direct labor?

What is the labor content?

How would you run this process assuminga demand of 180 sandwiches per hour?

Slide 5

Source of pictures: www.bbc.co.ukwww2.isye.gatech.eduwww.travelpod.com

Job Shop

Batch Process

Worker-paced line

Machine-paced line

Continuous process

Low Volume(unique)

Medium Volume(high variety)

High Volume(lower variety)

Very high volume(standardized)

Utilization of fixed capitalgenerally too low

Unit variable costsgenerally too high

Examples from History:· In the matrix above, history has forced all industries to go down the diagonal· Examples: Eye Surgery, vehicle production, financial services

The Product Process Matrix and the Industrialization of Work(Figure 2.13)

Slide 6

How Long Does it Take to Produce X units? (R=flow rate = 1/cycle time or takt time)

• Time to Produce X units = X/R if system has a “full pipeline (WIP)”

• Time to produce X units = Time through an empty system +

- worker-paced line: Time through an empty system is the sum of all activity times- machine-paced line: Time through an empty system =(#steps) * cycle time

RateFlow

units1-X

Machine Paced Process and Worker Paced Process:How Long Does it Take to Produce X units?

Machine-Paced Process

Worker-Paced Process

No fundamental difference in productivity (except potential savings in handling time)

Machine paced process forces a common takt / eliminates inventory pile-up

Source of pictures: www.bbc.co.ukwww2.isye.gatech.eduwww.travelpod.com

Slide 7

How Long Does it Take to Produce X units with a continuous-flow process?

• Time to produce X units = Time through an empty system +

Machine Paced Process and Worker Paced Process:How Long Does it Take to Produce X units?

Slide 8

Scooter Production by Novacruz (Table 4.1)Components

Activity 1 Activity 2 Activity 3 Finished Scooters

Processing time 13분/대 11분/대 8분/대

Capacity 4.61대/시간 5.45대/시간 7.5대/시간

Bottleneck / Process capacity 4.61대/시간

Flow Rate Demand=125대/주=3.57대/시간Flow Rate=Minimum {Demand, Process Capacity}=3.57대/시간

Cycle Time 1 / 3.57대/시간 =16.8분/대

Idle Time 3.8분/대 5.8분/대 8.8분/대

Utilization 3.57/4.61=77.4% 3.57/5.45=65.5% 3.57/7.5=47.6%

Slide 9

a1

Act

ivit

y T

ime

a2

a3

a4

1 2 3 4

Bottleneck

=Idle Time

• Capacityi =

• Process Capacity=Min{Capacityi}

• Flow Rate = Min{Demand, Capacity}

• Utilizationi=

Review of Capacity Calculations

iCapacity

RateFlow

iTimeActivity

ResourcesofNumber itimeidledirectcontentlabor

contentlabor

+=

timeofunitperRateFlow

timeofunitperwages Total=

• Direct Labor Content=a1+a2+a3+a4

• If one worker per resource:Direct Idle Time=(a4-a1) +(a4-a2) +(a4-a3)

• Average labor utilization

• Cost of direct labor

Labor Productivity Measures

Labor Productivity Measures

=Activity time

Slide 10

Line Balancing and Staffing to Demand

43

30

Takt43

Time

1 2 3

Operator

Time

Operator

19 2116

33

27

1 2 3 4 5

43 s

econ

ds43

sec

onds

30 s

econ

ds

116

sec

ond

s

5

4

3

1

2

3

2

1

Labor content: 116 seconds / unit

Demand: 670 units per day

Work 8h shifts

8h=3600*8sec=28,800 sec/shift

Takt: 28,800sec / 670units=43 sec/unit

Target manpower== 2.7 ⇒ round up

• With waste in the current process, we can either increase capacity or reduce the number of operators• Better to leave all idle time concentrated on the last operator as opposed to spreading it equally• Staffing to demand: start with the takt time and design the process from there

116 sec/unit43 sec/unit

Toyota ⇒Multi-function Worker ⇒ Flexible Cycle Time

Slide 11

Line Balancing and Staffing to DemandActual Demand

Time

Volume

60

30

Leveled Demand

Volume

Takt time*

Takt

Resource planning

Manpower

60 60

30

1 1

2

6 6

3

Takt time 1 minute

Step1

Step2

Step3

Step4

Step5

Step6

Takt time 2 minutes

Step1

Step2

Step3

Step4

Step5

Step6

Volume flexibilityAbility to adjust to changing demands

Often implemented with temporary workers

Keeps average labor utilization high

Slide 12

Line Balancing and Labor Productivity: Summary

Labor Productivity is key for cost and for revenue reasons

Work has become increasingly standardized (process driven)

Improve productivity by:

Staffing to demand (increases utilization, avoids lost demand)Balancing the line (increases utilization, frees up capacity)Standardization of work / careful design

⇒ Reducing labor content⇒ Lower skilled labor (lower wages)⇒ Enables replication (growth / flexibility)

Toyota ⇒Multi-function Worker ⇒ Flexible Cycle Time

Slide 13

Time to produce X units

Activity 1 Activity 2 Activity 3

5 min 6 min 5 min

Sequence of unit

Time to finish X units(min)

1 16

2 22

3 28

4 34

5 40

RateFlow

units1-X

Slide 14

Worker paced line vs machine paced line

Worker-Paced Process

Machine-Paced Process

Activity 15 min

Activity 26 min

Activity 35 min

sum of all activity times = 16m

(#steps)*cycle time= 18m

Activity 15 min

Idle1m

Activity 26 min

Activity 35 min

Idle1m

The moving speed of a conveyor is constant →

Slide 15

timeofunit per RateFlow

timeofunit per wagesTotal=

• Direct Labor Content=32분/대

• 시간당임금=$12 ($0.2/분) ⇒ $6.4/대???

•Cost of direct labor

Scooter Example

Labor Content and Idle Time

per week producedScooters

per week Wages=

주대

주시간시간

/125

/35$12/3 ´´=

= $10.1/대 (vs. $6.4/대)