Productivity is The Most Important Determinant of Living Standard of Group, Nation, Planet

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A Closer Look at Unit Cost and Labor's Role in Driving Productivity

December 8, 2015

A Closer Look at Unit Cost and Labor's Role in Driving Productivity

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1 © KRONOS INCORPORATED December 7, 2015 © KRONOS INCORPORATED December 7, 2015

Webinar: A Closer Look at Unit Cost and Labor’s Role in Driving Productivity

8 December 2015 Charlie DeWitt – VP Business Development

2 © KRONOS INCORPORATED December 7, 2015

Today’s story

• Labor productivity: The macroeconomic elixir – The key to growth – Drives consumption and creates a stable society – Provides a global competitive economic shield

• Understanding labor productivity at the microeconomic level: Unit Cost – Direct cost – Indirect cost – Units

• What you can do – Look at labor differently – Read Lean Labor – Talk with us


Productivity is the most important determinant of standard of living of a group of people, a nation or a planet1

Bill Conerly, Forbes, May 19, 2015 Conference Board Competitive Brief 2015

• Sustainable Middle Class • Global Competitiveness


Some global perspective

The United States has the highest productivity in the world at 66 US$ per hour

Productivity is the shield against low cost labor

competition


A macroeconomic view of labor productivity and unit cost

Labor Wage Rate

Labor Productivity

Unit Labor Cost

$

Labor Hour

GDP or Output or Units

Labor Hour

Labor Wage Rate

Labor Productivity

$

Unit


When it comes to labor there are two approaches and four options for driving profitability and growth

• Approach #1: Reduce labor costs – Choice #1: Chase low labor cost regions

– Choice #2: Hold down labor rates

• Approach #2: Improve labor productivity – Choice #3: Plant and Equipment

– Choice #4: Workforce Management

Unsustainable

Unwise or Impossible

Expensive & Inflexible

Competitive Advantage


A microeconomic view of unit cost and the impact of workforce management on productivity

$ Unit

Direct Cost + Indirect Allocation Units Produced

Labor Rate x Hours + Material Indirect Labor + Depreciation + G&A

Ideal Capacity x Availability x Performance x Quality

Right number of people? Right wage?

Good OT vs. Bad OT

Streamline, simplify, standardize Solve classic allocation problems

Policy management

Understand how people impact the business Create alignment

Find problems and fix them


Control direct labor costs

The Perfect Paycheck CO2 On Your P&L

Х Errors

Х Fraud

Х Administrative Inefficiency

Х No Visibility

Validated at the Source

Compliant

Completely Automated

Visibility & Control

Absenteeism Each point of

absenteeism = 1% of payroll

Uncaught Errors

Could cost 3% to 5% of payroll


Strategic HR: A long term plan for the right number and mix of people

• Full time – Min/max hours – Wage rate & benefits – Productivity – OT options

• Part time/Contract – Min/max hours – Wage rates – Productivity loss – Cost of acquiring/letting go

• Factors – Absenteeism – Turnover – Attrition

Benefits: • Simple analysis • Counter-intuitive insights • Clear definitions • Clear expectations • What if policy analysis • Confidence going forward

0%

50%

100%

150%

200%

1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65

Volu

me

Week

Strategic FT/PT Plan: MTO Environment

OT

Contract

PT

FT

Demand


The difference between good overtime and bad overtime

• Multi-national electronics component manufacturer

• Significant multi-location China operations


Old Way New Way

= 8 Hours Job # 1

Job # 2

Job # 3

Job # 4

• Wait time • Training • Breaks • Late INs • Early OUTs • Absence • Unallocated • Administrative

Direct Labor Indirect Labor

Х No information about individuals

Х No tools for staffing

Х No insight into individual productivity

Insight into labor productivity

Alerts to problems / bottlenecks

Detailed labor costing

Better staffing decisions

“Who came to work?” “Who / What is impacting the bottom-line?”

Understand how labor impacts your business


The Unit Cost Death Spiral Direct Costs Units

Indirect Costs Unit Cost

Product #1 $ 100 1000 $ 387 $ 0.49 Product #2 $ 110 950 $ 368 $ 0.50 Product #3 $ 120 900 $ 348 $ 0.52 Product #4 $ 130 850 $ 329 $ 0.54 Product #5 $ 140 800 $ 310 $ 0.56 Product #6 $ 150 750 $ 290 $ 0.59 Product #7 $ 160 700 $ 271 $ 0.62 Product #8 $ 170 650 $ 252 $ 0.65 Product #9 $ 180 600 $ 232 $ 0.69 Product #10 $ 190 550 $ 213 $ 0.73

Direct Costs Units


Product #1 $ 100 1000 $ 417 $ 0.52 Product #2 $ 110 950 $ 396 $ 0.53 Product #3 $ 120 900 $ 375 $ 0.55 Product #4 $ 130 850 $ 354 $ 0.57 Product #5 $ 140 800 $ 333 $ 0.59 Product #6 $ 150 750 $ 313 $ 0.62 Product #7 $ 160 700 $ 292 $ 0.65 Product #8 $ 170 650 $ 271 $ 0.68 Product #9 $ 180 600 $ 250 $ 0.72 Product #10 $ - 0 $ - $ -

Direct Costs Units


Product #1 $ 100 1000 $ 455 $ 0.55 Product #2 $ 110 950 $ 432 $ 0.57 Product #3 $ 120 900 $ 409 $ 0.59 Product #4 $ 130 850 $ 386 $ 0.61 Product #5 $ 140 800 $ 364 $ 0.63 Product #6 $ 150 750 $ 341 $ 0.65 Product #7 $ 160 700 $ 318 $ 0.68 Product #8 $ 170 650 $ 295 $ 0.72 Product #9 $ - 0 $ - $ - Product #10 $ - 0 $ - $ -

Direct Costs Units


Product #1 $ 100 1000 $ 504 $ 0.60 Product #2 $ 110 950 $ 479 $ 0.62 Product #3 $ 120 900 $ 454 $ 0.64 Product #4 $ 130 850 $ 429 $ 0.66 Product #5 $ 140 800 $ 403 $ 0.68 Product #6 $ 150 750 $ 378 $ 0.70 Product #7 $ 160 700 $ 353 $ 0.73 Product #8 $ - 0 $ - $ - Product #9 $ - 0 $ - $ - Product #10 $ - 0 $ - $ -


"The key to success was our rigorous and disciplined analysis which was able to provide direction to our IT investment. Combining best of breed can deliver competitive advantage that the ease of a single system can’t deliver.”

- Michel Boeckx, CIO, Aker Philadelphia Shipyards.


It is now possible to “see” The cost of data collection has plummeted and the ability to analyze it expanded

Equipment Availability What equipment?

Scheduled time

Run time

Materials Type of material?

Cost

Amount

Equipment Performance What equipment?

Standard rate

Actual rate achieved

Quality Which work order?

Total units produced

Good units produced

Before

8 hours? Doing what?

Data in Silos Poor integration

Labor not tracked Direct vs. Indirect

Productivity & Impact

1,000s of Work Orders Millions of data elements


Linking labor to the element of work All that you need to know to improve labor productivity

After

Captured Integrated Analyzed

Materials Equipment Availability

Equipment Performance

Quality Labor

Type of material?

What equipment?

What equipment?

Which work order?

Who?

Cost Scheduled time Standard rate Total units produced

Wage rate?

Amount Run time Actual rate achieved

Good units produced

How long?

10011 10001


Use OLE to get to root cause Improve throughput, capacity and quality

OLE Category Major Loss Category Example of Loss

Availability Availability is the ratio of time the operators are working productively divided by the amount of time the operators were scheduled.

Breakdown Changeover

• Lack of training and experience • Unplanned absenteeism • Maintenance mechanics delayed • Poorly scheduled breaks and lunches • Material handlers starved the machine

• Set-up personnel shortages or delays • Lack of training, skills and experience

Performance Performance is the ratio of the actual output of the operators divided by the expected output (or labor standard).

Reduced Speed Small stops

• Operator inefficiency due to lack of skills, experience or training

• Poor operator technique due to lack of skills, experience or training

Quality Quality has many definitions, but a common one is the ratio of saleable parts divided by the total parts produced.

Scrap or rework Yield or start-up losses

• Operator error • Set-up team error • Maintenance mechanic error

• Set-up team error • Maintenance mechanic error • Operator error


Manage floating bottlenecks in the moment

• Uncovered capacity equal to 50 extra people

• No change on the floor = continued delivery of differentiated service

• Fueled 15% year over year growth of the company

Results Achieved

Major US based electronics components

distributor


Why don’t individuals do what is in MY self-interest?

• The Problem – Adam Smith got it right

• Individuals do what is in their best interest

An individual intends only for his own gain, and he is in this led by an invisible hand to promote an

end which was no part of his intention.

Acme Distributors

• Why should I work more efficiently?

• Why should I be more careful?

• Why shouldn’t I take a long break?

• Why is OT out of control?

• Why is pick accuracy poor?

• How can I improve throughput?

What’s in it for me? Why don’t they get it? VS.


Mythical(?) alignment solutions

• What if the individual benefited when their work contributed to the company’s success? – Profit-sharing: Difficult due to “free-rider” and uncontrollables – MBO: Difficult due to subjective nature – Punishment: Get more flies with honey than vinegar – Incentive pay: Too hard to do… too much granular data needed

Acme Distributors


What if you could align what INDIVIDUALS do to the interests of the business?

Acme Distributors

Worker Benefit Incentive Pay Option Company Benefit Make more money than they would by picking up casual OT

Pay individuals based on orders they process per day

• Improved throughput • Reduced OT

Safer, more efficient drivers make significantly more money

Pay drivers based on performance against delivery standards

• Increased deliveries per day • Reduced safety incidents

Careful workers make significantly more money

Pay individuals for their pick accuracy

• Reduce rework costs • Improved customer sat

Verifiable performance at the individual level is required to align individual’s interest with the company’s interest


Example

• Wholesale food distributor

• Multiple incentive pay plans – Pick accuracy

– Driver delivery

– Orders processed

• 10% productivity improvement

• Doubled case volume throughput

Individuals can possibly add $10 per hour to their pay, but in return there are higher expectations from those people


Many other examples

• Labor cost variance

• Order to cash in field service operations

• Preventative maintenance through labor tracking

• True product costing


What can you do next?

• Think about how your people impact all aspects of your business – Use your imagination. Endless

opportunity.

• Read Lean Labor – An approachable overview of

specific ways you can think about labor differently and do something about it

• Contact Kronos – Business Assessment – Labor Data Exploration


Q&A


THANK YOU

Kronos is the global leader in delivering workforce management solutions in the cloud. Tens of thousands of organizations in more

than 100 countries — including more than half of the Fortune 1000® — use Kronos to control labor costs, minimize compliance

risk, and improve workforce productivity. Learn more about Kronos industry-specific time and attendance, scheduling, absence

management, HR and payroll, hiring, and labor analytics applications at www.kronos.com.

Kronos: Workforce Innovation That Works™.

For more information contact your Kronos representative,

call (800) 225-1561 or visit www.kronos.com.

http://www.kronos.com/

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Productivity is The Most Important Determinant of Living Standard of Group, Nation, Planet