The Profit of Efficiency David Ellings Business Mentors 2009 Large Loss and Business Development...

The Profit of Efficiency

David EllingsBusiness Mentors

2009 Large Loss and Business Development Summit, Chicago, Illinois

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What’s On Tap

1. Industry standards

2. Efficiency myths and facts

3. Study profile

4. A case study

5. The results

6. The hidden effect

7. The bottom line

8. Simple steps to improve your position

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Measuring Success?

Employees

Equipment

Building Size

Volume

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SALES:$5,000,000

EXPENSE:$4,850,000

PROFIT:$150,000 or 3%

SALES:$750,000

EXPENSES:$600,000

PROFIT:$150,000 or 20%

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NAICS Code

Industry Segment

Profit

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PROFIT

DIRECT COSTSOVERHEAD COSTS

0 – 22%

15 – 30%

50 – 80%

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DIRECT COSTS

50 – 80%

Direct Costs

20 – 50% Material/Equipment

50 – 90% Labor

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50 – 90% Labor

Focus For Efficiency

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Top Five Inefficiencies

• Materials • Buying smarter and using wiser

• Speed of work• Get your employees to move faster through the assigned

tasks

• Amount of management• Train your staff to function in the field with less

management oversight

• Pricing• Estimating program pricing problems

• Project size• Advance to larger projects…they are more substantially

more profitable

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True Inefficiencies

• Scheduling– Time management and efficient use of resources

• Material procurement– Multiple trips, retaining stock, price shopping

• Accuracy– Time card slippage, accountability, management

• Drive time– Most significant indicator, liability, waste, waste,

waste

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Ratio Difference Efficiency

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Study Profile

Executive Summary• Productivity trends carry a large impact

on profitability• Utilize detailed data gathered over three

years to analyze efficiency• Productivity focused on production

employees and management processes• Clear conclusions were able to be drawn

by the results

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Introduction

• Background– Productivity is the key factor of economic

health– Industry productivity is not well defined– Rely on productivity figures from sources of

questionable credibility• Exactware, Means etc.

– Ineffective management results– Need to offset the tightening of profits by the

insurance industry

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Introduction

• Objectives– Study efficiency trends over an extended

period– Create an awareness– Counter insurance industry pressure on

margins– Increase management tools– Nothing matters unless we increase….

$ NET PROFITS $

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Introduction

• Scope– Defined:

The American Association of Cost Engineers

“Productivity is a relative measure of labor efficiency, either good or bad, when compared to

an established base or norm”

– Its nature creates difficulties in tracing it as an absolute value over time.

– Information is gathered against movements of an established base, or benchmark value

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Introduction

• Methodology– Study detailed movement of 82 production

employees – Focus on inefficent time and not on production

cycles– Created buy-in through incentives and self-

improvement– Used sampling and statistical analysis techniques to

establish and confirm results– Sampled across all company production areas– Gathered data very quietly

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Affecting Factors

• Project Uniqueness– Each job is different and unique

• Environmental factors– Landscape, weather, and physical location

• Aesthetic factors– Level of quality required, material selection, existing

conditions

• Human factors– Expectations of adjusters, owners, managers etc.

– Uniqueness requires modification of the process…creating an inefficient learning curve at the beginning stages of each project activity

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Affecting Factors

• Technology– Hugh effect on overall productivity– Modify skill requirements

– Create difficulties in separating contributions of technology, management and labor to the efficiency

– Less motivation to add technological changes when the associated labor is not expensive

– Sometimes expensive and only a temporary strategic advantage

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Affecting Factors

• Personnel– Management

• Level of training, accountability, and knowledge• Documented studies – poor management activities account

for over 50% of the inefficiencies

– Production• Cross training, flexible contract increase efficiency• The fall of “real wages” within the industry

– Old skills retire...young talent goes else ware– Industry tends to retire or fall off at an earlier age

• Lack of formal training– Lowest of any formal sector of the economy– Workforce tends to be transient, causing a reluctance to invest

capital to train

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Case Study Assumptions

Employee• Carpenter

– Generalist to handle multiple tasks• Wage: $25/hour• Burden: 50%• Total cost to employee: $37.50/hour• Work year available: 1960 hours/year

– 2080 hours minus 3 weeks for holidays, vacation and sick time.

• Expected production: $100/hour

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Scenario One

7:00 AM arrive at your facility to get assignment and supplies

7:00 – 7:30 drive to work site

7:30 – 9:30 install trim (productive work)

9:30 – 9:45 break (paid)

9:45 – 11:30 finish trim and paint (productive work)

11:30 – 12:00 lunch (unpaid)

12:00 – 1:45 install interior doors (productive work)

1:45 – 2:00 break ( paid)

2:00 – 3:00 install door hardware (productive work)

3:00 – 3:30 drive back and unload items and paperwork

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Scenario One

Results

• 8 hours worked and paid

• $200 wages + $100 burden = $300 cost

• 6.5 hours productive revenue generation

• 1.5 hours unproductive time paid

19% of paid time unproductive

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Scenario Two

7:00 AM arrive at your facility to get assignment and supplies

7:00 – 7:30 drive to work site

7:30 – 7:45 get coffee then discuss project, activities last evening and other personal items with the rest of the production crew

7:45 – 8:00 unload supplies and tools from truck and set-up to work

8:00 – 9:00 install trim (productive work)

9:00 – 9:15 break (paid)

9:15 – 9:20 put away coffee, doughnuts and items from break

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Scenario Two

9:20 – 10:00 install trim but a scope clarification problem arises (productive work)

10:00 – 10:15 discuss project with home owner and/or call project manager for clarification

10:15 – 10:30 install trim (productive work)10:30 – 10:40 at 10:20 the carpenter realized that there

wasn’t enough trim to complete the work, so a discussion about this issue occurs with the crew and the carpenter winds down his activities to get ready to leave for a store

10:40 – 11:00 drive to Home Depot (even though there was another lumber yard 5 min away but was unknown to the carpenter)

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Scenario Two

11:00 – 11:30 locate trim in store, pick-up a couple of other supplies on your account, look at a the new compound miter saw, look at bath fixtures for a home remodel or side job, go to pro-desk to check out, converse with pro-desk manager about the weather or sports, load items into truck and leave

11:30 – 11:40 stop for gas and snacks

11:40 – 12-00 drive back to project

12:00 – 12:30 lunch (unpaid)

12:30 – 12:40 conclude lunch and put away lunch supplies, clean-up and use restroom

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Scenario Two

12:40 – 1:00 install last piece of trim ( project completed for the day, other supplies to arrive tomorrow)

1:00 – 1:15 wind down from activities and load vehicle

1:15 – 1:30 drive to a different work site

1:30 – 1:45 set-up tools and work at new site, also greet and discuss things with crew/homeowner

1:45 – 2:15 install windows (productive work)

2:15 – 2:30 break (paid)

2:30 – 2:35 put away coffee, doughnuts and items from break

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Scenario Two

2:35 – 2:50 install insulation (productive work)

2:50 – 3:00 wind down for day, load truck and leave

3:00 – 3:30 return to facility, drop of time sheet/paperwork and unload supplies and debris

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Scenario Two

Results

• 8 hours worked and paid

• $200 wages + $100 burden = $300 cost

• 3.0 hours productive revenue generation

• 5.0 hours unproductive time paid

63% of paid time unproductive

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The Cost of Inefficiency

Scenario One

Scenario Two

Industry Average

1.5 hrs = $56.25/person/day = $13, 781/year

5.0 hrs = $187.50/person/day = $45,937/year

2.6 hrs = $99.00/person/day = $24,255/year

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Is this it….

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No, it is just the tip of the ice berg!

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What about the revenue that should have been earned during the inefficient time spend….

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Lost Revenue

• 2080 hrs in a work year = $208,000– 3 weeks removed for vacation, holidays, etc.

• 1960 possible productive hours in a year

• At $100/hr = $196,000/person/year of

revenue generation

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Lost Revenue

Scenarios

1. $36,750/yr of lost revenue per person– 367.5 hrs unproductive = 1592.5 hrs productive

2. $122,500/yr of lost revenue per person– 1225 hrs unproductive = 735 hrs productive

Avg. $64,680/yr of lost revenue per person

– 646.8 hrs unproductive = 1313.2 hrs productive

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What Does All of This Mean?

Company Assumption

• 1,000,000 revenue for year– 60% direct costs = $600,000

• 25% materials/equipment = $150,000• 75% direct labor = $450,000

– 25% overhead = $250,000– 15% profit = $150,000

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What Does All of This Mean?

Company Assumption

• We will use the average efficiency to test

1/3 of production day is inefficient2 hours 38 minutes non-productive

5 hours 22 minutes productive time

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Small Increase, Big Gain

5% increase = 25% more profit

• Productive time– 5hr 22min to 5hr 37min…..or only 15 min/day– 12,000 hrs of labor in our example – 1,500 personnel days per year– 1,500/days X .25hrs X $100 =

$37,500 increase in PROFITS

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Results

5% increase = 25% more profit

• 1,000,000 revenue increased to 1,037,500– 60% direct costs = $600,000

• 25% materials/equipment = $150,000• 75% direct labor = $450,000

– 25% overhead = $250,000– 18% profit = $187,500

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Results

5% increase = 25% more profit

Therefore with the exact same costs the company was able to produce an increase of $37,500 of additional revenue which increased the profit by the expected 25% from $150,000 to $187,500 with only 15 min of increased production per person each day.

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Results

5% increase = 25% more profit

In addition, in order to capture the same profit of $187,500 without increasing the efficiency would require a 25% increase in the revenue or an additional $250,000 of sales….

Which is the easier improvement?

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Actual Results

Four Year History• 62% increase in employee retention• With incentives wages increased 6½ X greater

then rate of inflation• 18% increase in margins• 76% decrease in paid none revenue travel time • 36% decrease in management related

inefficiencies• 54% reduction in production inefficiencies

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Actual Results

42.4%

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Strategies For Corrections

• Put production on a pedestal– Plan and use your production staffs 2080

hours as your first priority

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Production

• Create and post and organization chart– Make sure each production person know where they

lay and who supervises them

• Emphasis safety and safety training– Let them know you are interested in their well being

• Create a detailed job description for each employee– Change them as the positions change

• Create a review form holding them accountable for the items in the job description

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Production

• Include them in meetings• Offer training incentives• Have a clear and concise path for career

mobility• Remove cancers immediately

– Hire tough…fire fast

• Create and implement an incentive plan – Both personal and team based– Small perks and recognition go a long way

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Production

• Remember:

You can’t manage what you can’t measure-Jack Welch

And

Trust but verify-Ronald Regan (with special credit to Phil Rosebrook Sr.)

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Strategies For Corrections

• Put production on a pedestal– Plan and use your production staffs 2080

hours as your first priority

• Monitor and reduce drive time– Monitoring is the blood test of your

businesses health check-up– Single most reducible and inefficient time

spent

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Drive Time

• Start/stop day at job site– Production staff should start and end day for all non-

emergency work at the job site– Use technology to monitor the process– Review company vehicle policy– Pay mileage instead of allowance

• This will allow a tracking mechanism for drive time

– Add runner for material delivery• Better yet use your suppliers to deliver material

– The numbers do not support staff material procurement

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Strategies For Corrections

• Material Handling– Dispose of extras– Look critically at what you stock– Keep production from material procurement

at all costs

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Material Handling

• Don’t return unused commodity stock to your warehouse– Dispose on site– Give to property owner

• Production personnel should produce and not purchase

• Avoid the temptation to stock most supplies. – The savings on most bulk purchases are far offset by

the cost of storage and delivery– Utilize suppliers that will deliver even for a fee

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Strategies For Corrections

• Material Handling– Dispose of extras– Look critically at what you stock– Keep production from material procurement

at all costs

• Add technology– Computer, faxes, PDA’s– GPS, Nextel systems

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Technology

• Cost vs. benefit– Make sure it makes sense financially and

logistically

• Keep production staff out of office– Use faxes or computers to send daily time

sheets– Enter time data in real time through PDA’s or

phones

• Use GPS to track assets, both organic and inorganic

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Strategies For Corrections

• Increase management– Accountability– Direction

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Management

• Scheduling– MS Project– CDCI– Virtual Boss (PDA

software)– Primavera

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Management

• Budgets– Everyone should understand the financial

expectations of a project before it begins

• Communications– Improve management/worker

communications to reduce the “assumption” factor

– Use technology: emails, text messages, etrace, etc.

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Strategies For Corrections

• Increase management– Accountability– Direction

• Improve job costing– Review results as projects are ongoing– Measure, measure, measure

Where profit is, loss is hidden near by

– Japanse Proverb

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Job Costing

To contrive is nothing! To produce is something! To measure is everything!

Unknown

• All produced work must be measured against a financial standard

• Incentive plan based on margins

• Accountability for all project phases based on budget

• Good financial accounting software

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Challenges of having a mobile workforce

• No visibility into your team

• High overtime costs• Manual timecard

processing• High mileage costs• Can’t allocate your

resources effectively• Difficult to communicate

with your team• Manual dispatching• Manual paperwork chaos

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Mobile Technology

Productivity

People

Value:–Track and dispatch people and teams–Right person for the job–Increase T&M accuracy and records–Know how time is spent–Reduce errors–Manage sales team productivity

Process

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Process

Productivity

People

Value:–Dispatch and track information–Increase customer satisfaction–See work in progress–Reduce errors–Capture and validate data

Mobile Technology

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Process

Productivity

People

Value:–Control overtime–Accountability –Decrease drive time–Reduce errors & rework–Increase communication–Monitor asset usage

Mobile Technology

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System Architecture

Mission ControlMobile Solutions QuickConnect™ Non-Java and Java GPS-enabled Easy to learn and use Configurable to your business Over-the-air administration Peripheral support

View jobs, workers, activities Dispatch and manage jobs Real-time alerts Fleet, job and worker reports

Back-office integration Real-time connection Secure and seamless Supports all applications

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1) All landmarks and jobs are geo-coded & labeled by stop name.

2) A configurable Workzone surrounds each stop to define its boundaries for GPS collection

3) When a vehicle enters the Workzone, etrace starts to monitor the duration to determine if it should record this as a stop

4) When a vehicle is in a Workzone for a specified duration, etrace marks this as a stop and records details, such as distance traveled and time of entry.

5) If a vehicle is stopped in a Workzone that does not correspond to a landmark or job, the stop is logged as an “unscheduled” stop..”

Stop is Recorded

Potential Stop

Workzone

etrace Workzones

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Worker Map Display of Exception Time

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Summary

• Ability to transform the mobile workforce for the field service industry.

• Eliminate manual processes increasing accuracy and costs.

• Increase customer response times

• Decrease mileage and overtime costs

• Leverage your IT and backend system investment

• Fast return on investment