Sitting in the boardroom of a major global food
manufacturing company, the CEO was meeting with the senior members of operations. As the room settled down, she stood to address
the team, “Grant us the ability to accept the things we cannot change, the
courage to change the things we can, and the wisdom to know the
difference.”
The COO remembered this mantra from several self-help groups,
but was hesitant to comment. The whole
team looked confused, not sure where the meeting was headed.
The CEO continued, “There are things happening in our
industry we can’t control. The cost of
raw materials is skyrocketing; transportation costs and energy prices are at
record highs. Yes, they all impact our
business, but we have almost zero control over these costs, so those are the challenges
we need to accept as reality, at least for now.
Today, we need to focus on what we can change.”
“Now comes the wisdom part.
Where are our major controllable costs?”
It didn’t take long for the group’s spirited brainstorming to produce the
biggest opportunity for change they could own.
Labor effectiveness just jumped out.
However, labor issues,
particularly the change management aspects, were always the most sensitive. The
CEO pressed the group to create a “Top 5” list of controllable cost reduction categories
directly tied to labor effectiveness and ideas on how to motivate the plant
management teams to take action. This is
the list of opportunities they came up with:
- Seasonal
and Variable Demand – Workload Fluctuations
- Reducing
idle time
- Reducing
overtime
- Minimizing
inventory/maximizing freshness
- Low
Cost Sanitation Practices
- Improve
Uptime with Better Maintenance Schedules
- Low
Productivity from Afternoon and Night Shifts
- Turnover,
Training, and Hiring Costs
This boardroom exchange, a typical last resort effort to
capture cost savings during economic downturns, is commonplace in today’s
world. Management teams wait until all other
options have been exhausted before talking seriously about effective labor
strategies. Labor strategy discussions can
be difficult due to the change management required to implement these types of
initiatives. However, with annualized
savings from full labor optimization projects ranging from 12 -17% of total
payroll, delaying evaluation of your largest controllable cost is very expensive. Although not exclusive to the food industry, companies
in this sector are being hit the hardest due to the rising costs of raw
materials.
The group reached out to Ethan Franklin, Managing Partner of
Core Practice Partners for insight. They
needed someone who had been through this exercise before and could comfortably
fill in the blanks about what they were about to undertake. He spent a few hours in a workshop format
sharing case studies of clients with similar challenges. Then he told the group the following:
“Exploring this “Top 5” list seriously
and in detail with real data may encourage management teams to make the right cost
savings decisions now. Knowing where
opportunities exist is the first step in the process to achieve these
savings. Actually capturing them is the
most difficult step.”
Next, he broke the areas out in more detail. This is a summary of his feedback.
Seasonal and
Variable Demand – Workload Fluctuations
Before designing the right scheduling systems for your
facility, a lot of homework must be done.
What does the seasonal demand curve look like? How high or low can demand go? Should overtime be built into the base
schedule, making it easier to flex down?
The specific needs of the business should always dictate the scheduling
systems. Unfortunately, many companies take schedules from one facility and
implement them in another. This simplistic approach usually results in hundreds
of thousands, if not millions of wasted labor dollars each year the wrong
scheduling system is in place.
When you look at specific plant demand profiles, which
requirements best suit your needs? Do
you need to be able to flex vertically (more hours on short notice each day),
horizontally (flexing out at the end of the week), or have the ability to
increase workforce density (more employees during the currently scheduled base
hours)? The typical client challenge is
that traditional schedules don’t get them where they needed to go. 8 hour shifts, including 3 shifts each day,
are probably the least flexible and understanding the financial implications of
the current scheduling system is critical.
The Cost of Time analysis is a strategic tool for
identifying savings opportunities. The
goal of staffing any operation is to match perfectly the workforce (the
available labor hours to complete the work) with the workload (the number of
people required to meet production demand).
It is highly unlikely that any schedule will exactly match the
workload. Adverse costs result from a
mismatch between the two. In an
understaffed situation (more work than people scheduled), overtime must be
used. The Adverse Cost of Overtime is
the difference between an hour of overtime and an hour of straight time. If staffing levels are higher than the
workload, then people are being paid, although no work is accomplished. This Adverse Cost of Idle Time is the fully
loaded cost of a straight time hour of labor – very expensive.
The #1 financial
mistake companies make is to believe that a reduction in overtime will save
money. The financial reality of overtime is that even after adding in the
time and one half premium, overtime is often less expensive than straight time since
there are no additional benefits or other costs, including vacations, that are included
only in the first 40 hours. Overtime numbers stand out on financial reports and
cause management to overlook the real opportunity to reduce idle labor costs –
the number one labor cost hurting American manufacturers.
Idle time is the real
profit killer. Idle time can
originate from equipment dwntime, overstaffing, poor relief staffing and
seasonality. Whatever the cause of idle
time, it is a cost with no benefit. All
benefits and wages are still a cost to the company during this period of no
productivity. Companies pay full
benefits and full wages with no return on the investment. On the other hand, overtime is a flexible
tool that allows management teams to capture swings in workload. Overtime is only used when workers are
needed. Therefore idle time during these
periods is highly unlikely. A slight
additional cost is counterbalanced by fully utilized employees. However, as with every strategic scheduling
tool, there are limits, so your decision to use overtime strategically, must be
made by weighing carefully every possible operational scenario.
Problems arise when
schedules are created to handle what is happening today with little or no
thought for what will happen tomorrow, next month, or next year. A review of past practices is required to
help build forecast models, which are critical to the development of the right
scheduling system. Consider future
changes, such as product lines that are being phased out in the next 12 months
or consolidation of products and services. Although forecasting will never be
100% accurate, one must understand the magnitude of the flexibility required when
designing schedules. Different schedule
systems have different abilities to flex up and flex down as well as
significantly different cost profiles.
Before starting to design a schedule system, understand the workload. A carefully planned schedule system should
have the flexibility to handle both the foreseeable business changes as well as
the unforeseen changes with minimal disruption.
Low Cost
Sanitation Practices
Production downtime during sanitation periods limits capital
utilization and typically creates idle labor time. Even as a leader in the food manufacturing
space, sanitation optimization was overlooked.
Current practices are typically seen as not negotiable. Although timely sanitation is required,
management teams usually sanitize based on the schedule routine. Often there are opportunities to reduce labor
costs and increase uptime, even in situations when sanitation processes are
considered “optimized”.
Mr. Franklin remembered that several years ago the business
unit manager of a 400 employee subsidiary of this food manufacturer implemented
a system change. He thought he had fully
optimized the sanitation process. He implemented extended runs to reduce the
frequency of sanitation and cut the process to 4-hours. Unfortunately, the
production labor schedule was not changed.
This meant the production, sanitation and maintenance schedules still
were not synchronized. So, while the
plant saved a little bit of money, they left an amount six times larger
unclaimed. The schedules that Core Practice Partners eventually designed
reduced production idle time and cut start-ups and shut-downs in half, while
increasing capital utilization by almost 10%.
In addition to all the cost savings for the company, employees had more
days scheduled off each week and still maintained a 40-hour paycheck with
overtime opportunities for those who wanted it.
Having continuity between connected groups is critical. Sanitation practices and schedules are at the
heart of creating a facility without any unnecessary and costly constraints.
Improve Uptime
with Better Maintenance Schedules
Maintenance teams are often the highest skilled employees in
any facility, and in order to retain them, most management team compromise effective
scheduling practices to keep them happy.
The result is that most maintenance teams have schedules that are not
conducive to maximizing production uptime.
Maintenance teams often work Monday through Friday with a concentration
of employees on day shift.
Corrective maintenance and other unplanned challenges are
very expensive. Having staff that mirror
the production schedules makes sense, but some of the most important maintenance
department workload should involve preventive maintenance and tear-down
activity. These activities can only take
place when production is not running.
For companies on a 120 hour production schedule (Monday through Friday
with three 8 hour shifts), the only possible time for this work is on the
weekends. Companies often absorb
maintenance idle time during the week with some overstaffing, and then are
forced to have employees come in unscheduled on Saturdays and Sundays to work
for time and one half and double time. Some
maintenance managers might respond that they can find plenty of things for the
mechanics to do during Monday through Friday, 9 to 5, but highest priority preventive
maintenance tasks can only be done when the lines are not running. Having a day shift mechanic rebuild the
backup motor to the backup motor is not the best use of a scheduled 40-hour
week.
The right answer is typically a mix of repairs and
preventive maintenance scheduling that regularly schedules employees on
weekends at straight time. Also, a
better distribution of maintenance employees over each 24 hour period can
reduce idle time on day shift and better cover the 2nd and 3rd
shifts. Often management teams retort
that although that sounds like a good idea, they have no idea how to implement
such a perceived radical approach.
Innovative scheduling techniques can give employees an additional 91
days off, including an extra 13 weeks of vacation – all for the same pay. Yes, on some of these schedules weekend work
is built in, but you get more than half your weekends off. This is one way to balance operational needs
with employee quality of life.
In the end, if you can’t get the right maintenance people in
the right place at the right time, your production teams (the largest
population in your facility) will spend unnecessary time idle, waiting for
lines to be fixed and running again.
Lower Productivity
Levels from Afternoon and Night Shift
Often management teams look at headcount requirements to
make sure lines are staffed properly.
Even when each shift has the same number of employees, productivity and
quality levels often vary greatly. Have
you looked at productivity by shift? Some
of these variations have to do with starting up the operation on a Sunday night
using the less senior third shift employees. Other scenarios also include lost productivity
based on inexperience including inefficient change over activity, start ups and
shut downs, and other skilled activities that may be unfamiliar to newer shift
workers.
In extreme cases, in industries such as nuclear power plants
and refinery operations, skill balance is so important that rotating shift
schedules are always used. They are very
rare in the food manufacturing business.
These schedules require each employee to work all the different
schedules over the course of several weeks, so that no shift is preferred over
another. One week you may be on day
shift, the next week on afternoon and the week after that you may be on
nights. Skills on each shift are blended,
and no group is left exclusively with new hires. Employees in most cases are not excited about
these types of schedules, but understand the requirements that have required
them to make adjustments. It is critical
in a rotating shift environment to get it right - to include the needs of the
employees and to make sure the rotation is both healthy and safe.
For employees who are not on a rotating schedule, it is rare
that a new schedule with a rotation can be implemented. One reason to move from a fixed schedule to a
rotating schedule is to address critical safety concerns that can’t be solved
by training. (This would be in
industries such as nuclear power or the refining.) However, as mentioned above, these industries
usually start with a rotating schedule.
In other industries, starting people on fixed shifts and later having
them rotate can start a riot. It would take a massive change management program
to move employees from a fixed schedule to a rotating schedule – and unless it
is absolutely necessary we advise you to avoid that situation. However scheduling strategies, along with a
well designed training program, can deliver the right skill balance without
requiring a shift to a rotating schedule.
It is possible to create incentives for employees to work
off-shifts. However, paying them more is
not a good policy because it doesn’t address the real issue. When shift differentials are part of
compensation, they are misused 99% of the time and simply are not
effective. When people have low morale
due to their schedules, it is the schedules that require fixing, not the
pay. Typically, extended shifts allow
off shift employees more days off where they can be on the “normal” schedule,
one that allows them to spend time with their families and go to sleep during
the night hours.
In the end, skill imbalance is a often a less noticeable
area of labor cost, but when savings are critical to success, this area cannot
be ignored.
Turnover,
Training, and Hiring Costs
It isn’t only employee productivity that drives success, but
employee retention is also critical. The
cost of turnover has many facets.
Recruiting, hiring, and training are key categories and can easily range
between $2,000 and $5,000 per employee when all costs are included. With the right labor strategies, employees
will want to stay and perform. Having
schedules that fit in with family and social schedules and provide not only the
right time off, but predictable time off can make you the employer of
choice. Most management teams aren’t experts
in scheduling and end up doing the best they can with the schedule they
inherited. Adjusting employee schedules
in ways they weren’t designed for can cause real heartache for employees.
Conclusion
Returning to the boardroom, the executives had only
accomplished the easiest part of the challenge.
Identifying key areas to save money is helpful, but the actual capturing
of the cost savings is what matters. Too
many companies try to cram in solutions after seeing the big cost saving
opportunities. They typically leave
their employees in the dark as to the reasons why. Proper education about the business reasons
for change needs to be coupled with clear employee feedback so solutions are
blended to serve all groups involved.
Remember, you may only have one chance to get it right, don’t make
mistakes you may not be able to fix later.
Have the courage to make the tough changes. Have the wisdom to know the difference
between real opportunities and low value changes that will disrupt your
workforce.