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December 1st, 2015 #08197 Page #11
Todd Drummond Consulting LLC.
Increasing Net Profit While Sacrificing Labor Efficiencies?
www.todd-drummond.com Phone: 603-763-8857 todd@todd-drummond.com December, 2015 Copyright © 2015 Sometimes we lose focus of the main goal of creating more net profit for the company by focusing too much on one aspect of our business. Too often individuals focus too much on perceived labor efficiencies while limiting their overall capacities. Does reducing labor cost always produce more net profit? Here are two prime examples where this may be something you should reconsider.
Todd Drummond Todd Drummond Consulting www.todd-drummond.com
How often do you hear or talk about labor to board footage or labor to piece count? Might it be that one can lose focus by giving all one’s attention to labor costs and forgetting about the big picture of actual margin dollars per given time period? When the schedule exceeds 4 or more weeks, during the peak periods of the build season, is it more important to achieve additional sales and increase the total margin dollars per day or is it more important to use the least amount of labor per unit? Which of the cases below would benefit a company more when sales orders are not meeting the demands of all the potential customers? Case 1. Always focusing on cost per unit to maximize efficiencies? Example: A steady lower overall production rate limiting the labor cost per unit and therefore the total capacity. Case 2. Sacrificing labor cost per unit to gain additional gross margin dollars? (more sales). Example: Allowing labor costs per day to increase by adding additional personnel to increase capacity and yet the additional labor costs are always less than the gross margin dollars gained.
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In this example, there is a direct correlation between the loss labor efficiencies (35% GM @ 11% Labor Vs 33% GM @ 13% Labor) and the increased overall sales gains. Yet, it also translates to additional gross margin dollars. Now, I’m not necessarily advocating reducing your efficiencies for greater sales, but it is worth considering when you are losing sales and, therefore, losing gross margin dollars per time period. Sometimes there are net profits to be gained from sacrificing perceived labor efficiencies when you are gaining greater sales dollars (margin dollars) per time period. There is currently a trend to apply the just-in-time lean principle of cutting using only linear saws to meet the demands of the build table(s), but many are doing this by sacrificing the maximum capacity of the build tables. The simple explanation for this type of production system is to sacrifice one station processing limit (cutting) while matching another (assembly) in order to maximize labor savings overall. However, in order to do this, you may have to limit the number of personnel per build table because the supporting stations, such as cutting, cannot ramp up capacity due to built in limitations. (In industrial engineering terms: theory of constraints and line-balancing practices). An example of this folly would be trying to cut large quantities of common trusses such as AG trusses or even a large commercial project with large runs using only a linear saw. A five-blade component saw would easily outpace a linear saw for single-board-per-stock-piece runs of seven or more and would then be able to provide enough cut material for the larger build teams assembling the large run orders. These types of large runs, depending on their spans, normally allow for a greater number of personnel on each of the build tables in order to produce more trusses per shift. So why not design you production system for the best of both worlds? Why limit the capacity of cutting using only linear saws for all types of order processing? One should be able to maximize efficiencies and also ramp up capacity by adding personnel when sales call for it. One should always design the production systems with flexibility in mind. One final point I wish to state is that, many times, adding additional personnel may actually drive down the labor-cost-to-sales-dollars ratio and also increase labor efficiencies per unit. It just depends on the conditions and needs of the tasks to be performed. One should always keep the end goal of increasing total gross margin in mind before rushing to conclusions about perceived labor efficiencies. It is not always as simple as reducing labor cost and, therefore, it will increase net profits.
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