Optimizing the Labor Supply Chain
Part 2
You Can’t Manage What You Can’t Measure
Prepared by:
Peter Schnorbach
Vice President
Product Marketing
Productivity Management
Tom Stretar
Logistics Consultant
Productivity Management
October 19, 2004
Optimizing the Labor Supply Chain
Page 1 of 13
Table of Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
Defining Labor Productivity . . . . . . . . . . . . . . . . . . . . . . . . . .
4
Measuring Productivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5
Units Per Hour . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5
Multiple Variable Based . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5
Discrete Based Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6
A Roadmap to a High Performance Workforce . . . . . . . . . . . . . . . . . . . . .
7
The Six Step Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8
Identify . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8
Engage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9
Develop . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9
Deploy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10
Analyze . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11
Reward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12
Copyright © 2004. RedPrairie Corporation. All rights reserved. This publication contains proprietary information of
RedPrairie Corporation. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any
form by any means, electronic, mechanical, photocopying, recording or otherwise without the prior written permission of
RedPrairie Corporation.
October 19, 2004
Optimizing the Labor Supply Chain
Page 2 of 13
Introduction
A study recently reported in ASCET Volume 6 on leveraging the Supply Chain to create
and sustain a high performance business noted that high performance businesses are
adept at using information to make the right decisions at the right time1. Compared to
less effective organizations, they:
•
•
•
•
•
Gather more and better information about their business and competitive
environments
Analyze that information more thoroughly and make better decisions based
on the results of the analysis
Act more quickly and decisively on the acquired information
Monitor their performance more closely
Improve and innovate continuously
Thus, to achieve the competitive advantage that results from high performance,
companies must develop the ability to quickly and effectively gather, analyze and act on
information that drives supply chain performance. Yet, while companies spend billions
on technology investments aimed at managing and optimizing inventory, they spend
significantly less on the performance and measurement of one of the most significant
cost elements in their supply chain…labor. Improved labor management provides one of
the most significant opportunities for reducing overall supply chain cost. Results of
hundreds of implementations show companies can achieve overall labor savings of up to
30 percent using advanced labor productivity solutions. The chart below defines
potential savings based on the current state of your labor management practices.
Performance
Levels
Labor Incentives with
Closed Loop Employee
Feedback, Supervisory
Alerts
Current Performance Standards
100% Discrete MSD/MCD
Key Performance Indicators
3% to 5%
8% to 12%
10% to 20%
20% to 30%
Closed Loop Employee
Feedback, Supervisory
Alerts
Limited or Manual
Employee Feedback
1
John B. Machette and Dr. Hau L. Lee, “Leveraging the Supply Chain to Create and Sustain a High
Performance Business,” ASCET, Volume 6, Montgomery Research Inc. , San Francisco, CA, 2004
October 19, 2004
Optimizing the Labor Supply Chain
Page 3 of 13
Defining Labor Productivity
No-one doubts the wisdom of the old management truism – “You can’t manage what you
can’t measure.” However, as this paper will demonstrate, how you measure labor is as
important as the fact you are measuring it at all. In fact, using the wrong measurements
can provide a distorted view of productivity that leads to incorrect decisions which can
put your company at a competitive disadvantage.
Most companies measure labor productivity in some manner. Labor productivity, in
simple terms, is the rate of output per unit of input. Metrics such as units per hour
(UPH), lines per hour (LPH), dollars shipped, and other similar measurements are
commonly used to report on productivity. The figure below shows commonly used
metrics and frequency of use.
Units per hour
34%
Orders per hour
31%
Lines per hour
30%
Cartons per hour
29%
Dollars shipped
25%
Moves per hour
13%
No measures in place
12%
Pounds per hour
10%
Other
10%
00
10
10
20
20
30
30
40
40
While these metrics provide a useful measure of output relative to a historical
benchmark, they fail to accurately report the operation’s effectiveness in relation to its
true potential. For example, if a company has worked at a low percentage of its potential
historically, a sizable increase in productivity may still leave it well short of its potential,
and at a competitive disadvantage. Conversely, a company that historically performs at
or near its true potential, may create competitive advantage with only a small increase in
productivity. The key is that there is no way to know where your company falls on this
spectrum using the traditional units of measure above. A better measurement
methodology is needed that objectively measures performance against each company’s
true potential so companies can more effectively manage their labor resources.
This paper will evaluate various methodologies for measuring labor productivity and will
offer a practical solution that has significantly increased productivity at hundreds of sites
around the world.
October 19, 2004
Optimizing the Labor Supply Chain
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Measuring Productivity
If the objective is to be a high performance organization, then supervisors and
management need the right information at the right time in order to run the business
most effectively and efficiently. When it comes to managing labor resources, the right
information is an accurate look at performance against the true potential as defined by
engineered standards.
There are three types of standards commonly developed and implemented for
measuring labor productivity:
•
•
•
Units per Hour (UPH)
Multiple variable based (KVIs)
Discrete based – includes customer or vendor specific
Units per Hour
Units per hour standards are typically based on historical trends or industry averages for
the process being measured. An example of a UPH standard is cases picked per hour
(CPH) or average handle duration (AHD). Advantages of UPH based standards are that
they are easily understood by employees, are easy to develop, and require a low level of
investment. But like most things in business, the overall return from an operational
improvement is often directly related to the time and effort involved in its implementation.
In the case of UPH, the return is very low because the ability to achieve the standards is
highly affected by order density (lines per order and units per line), seasonality, and
product mix issues. Thus, performance is more closely tied to conditions than to the
effort applied. In addition, the historical performance the standards are based on are
often inefficient to begin with.
UPH standards are the least accurate measurement and tend to be “loose” to
compensate for the large variances in the above variables. This, coupled with the fact
that UPH standards typically do not set the bar at the level of true operational potential,
results in much smaller increases in productivity than other standards can provide.
Multiple Variable Based
A Key Volume Indicator (KVI) is a variable to which an engineered standard time can be
applied. An engineered productivity standard often has multiple variables used in
determining the overall time required to complete a process. The number of times the
variable, or KVI, occurs within a process directly influences the overall standard time.
Unlike UPH standards, Multi Variable based standards compensates for variances in
order density, and are thus more accurate than UPH based standards. KVI standards
can be used to hold an employee accountable for their performance to a very specific
degree of accuracy. While this type of standard is more difficult to establish, requires
periodic maintenance and is subject to seasonality, it will provide greater visibility into
individual employee performance than UPH.
The weakness in KVI standards is they are based on averages rather than the specific
components of each task. This makes them less accurate and equitable.
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Discrete Based Standards
Discrete based standards are characterized by the elimination of averaging of data that
occurs in the development of UPH and KVI based standards. Each task is defined and
measured based on the unique characteristics of the task, including such factors as
weight, location, distance traveled, and equipment used. These standards are highly
accurate and can deliver significant productivity gains, in excess of 30 percent, resulting
in substantial labor savings.
Discrete based standards are required for accurate and fair incentive pay calculations.
They are more accurate than UPH or KVI standards, are generally accepted by unions,
are not affected by seasonality or work mix, and provide the highest threshold for
employee accountability. Establishing discrete standards requires industrial engineering
expertise and is not always applicable within every operation. However, the higher initial
investment is offset by increased productivity gains, lower long-term maintenance costs,
and a return on investment that is typically very rapid.
Given the objective is to be a high performing organization, which requires real-time
access to accurate information on supply chain performance, and that discrete-based
standards provide the best source of measuring employee performance, the question
becomes: how do we use this information to build a high performance workforce?
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A Roadmap to a High Performance Workforce
A recent article by AMR Research noted the superior performance of companies such as
Dell Computer, Southwest Airlines, Toyota, UPS, and Wal-Mart2. The article pointed out
that their productivity performance is undisputable, and has given these companies a
distinct competitive advantage. What makes these companies the productivity leaders,
and how can companies take advantage of their approach to build a high performance
workforce?
All of these companies focus intensely on creating rigid, consistent operating procedures
augmented with flexible, real-time control systems. The standardized work procedures
reduce costs and improve quality, while the flexible, real-time control systems enable
these companies to react to unanticipated disruptions faster than their competition.
Advanced productivity management solutions provide similar benefits. Preferred
methods and discrete standards development provide the rigid, consistent operating
procedures for how employees should do their work using the most productive methods.
This reduces labor costs and ensures consistent quality and delivery.
The productivity management software provides the real-time view of work being
performed to give supervisors immediate notification when problems arise. This gives
them the flexibility to react quickly to correct problems before they degrade performance
and service.
To better understand the impact of productivity management solutions, it is important to
know why employees, and consequently organizations, don’t perform at their full
potential. The five key reasons employees do not meet expectations are:3
•
•
•
•
•
They don’t know what is expected of them. People need goals. If they
don’t know what is considered a job well done, they will be unlikely to meet
expectations.
They don’t know how. Poor training is the main reason employees lack the
know-how to perform their jobs. The majority of lost time in most operations is
directly attributable to insufficient or inappropriate training.
They can’t do the job. This usually results from either poorly defined jobs or
from procedures or methods that do not accurately reflect the optimal way to
perform the job.
There are barriers beyond the employee’s control. The most common
barriers to productivity are organizational. Employees do not have the proper
equipment, the work environment has not been set up or stocked properly,
inventory or information is not available when needed, etc.
They don’t want to do the job. In any company there are employees who
simply don’t want to do the job. Take care of the top four reasons and this one
should take care of itself.
The bottom line is that most employees want to do a good job. And given proper training,
suitable job design and work environment, and specific goals and objectives for
2
3
Bob Parker, Lessons From the Productivity Leaders, AMR Research Alert, April 15, 2004.
Gene Gagnon, Gagnon and Associates
October 19, 2004
Optimizing the Labor Supply Chain
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performing their jobs, most employees will succeed. This is the central principal on which
advanced labor productivity management solutions are based.
The Six Step Methodology
Implementing an advanced productivity management solution is significantly different
than most other implementations because it is not software focused. Productivity
management solutions must consider the interplay of people, process and technology.
RedPrairie‘s implementation strategy for its productivity management solution combines
process knowledge, people and technology within a six step delivery methodology that
encompasses the training, job design and discrete goal definition required for
employees, and thus organizations, to succeed. By following this six step methodology,
any company can create a high performance workforce.
People
Identify
Reward
Engage
Analyze
Process
Develop
Deploy
Technology
Identify
The first step is to define the goals the company is trying to achieve. These goals must
be expressed in measurable criteria, such as cycle time, productivity, or cost per unit, for
each area in the operation to create an objective means for defining success. The goals
must be closely aligned with corporate objectives to ensure workforce success supports
corporate success. These aligned goals set the foundation on which all following steps
are built.
Also during this step, the jobs that will be included in the productivity program must be
identified. Not all jobs are suited for coverage. In general, jobs that are repetitive in
nature, with definable tasks are the best candidates. You might start with core functions
such as order picking in a distribution center or customer service calls in a call center,
and add more job functions over time.
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Engage
Engage is the process of assessing current operations and identifying best practices for
performing the work. Process improvements should seek to leverage human capital and
technology investments to design the most effective and efficient methods for completing
each job within the context of the equipment and environment available. These preferred
methods are the basis for training employees in the proper way to perform their jobs and
are essential for cost reduction.
The Engage step is what is most often missing from other labor management software
implementations. Too many software companies assert that their software is the answer
to improved productivity. But without improved, best practice methodologies, all any
software does is monitor existing unproductive work habits. What’s worse, it can give a
false impression of success when performance levels are measured against historical
UPH standards that are themselves flawed, as described above.
The key to success in the Engage step is to employ industrial engineers experienced in
developing preferred methods and discrete standards for supply chain operations. It is
their responsibility to analyze each job to determine the most efficient method for
performing each task, and then applying master standard data to compute the discrete
engineered standard for the job. This is the only way to ensure employees will be
measured against their true potential effectiveness, and that any incentives offered will
be fair and accurate.
Once developed, the preferred methods and discrete engineered standards are loaded
into the labor management software database to be used for goal calculations and work
performance monitoring.
Develop
Although the Develop step is third in this sequence, it really starts coincident with the
Identify and Engage steps. The Develop step focuses on communication, in its many
forms, of the corporate vision for productivity improvement as an essential process for
corporate competitiveness and success, and how that vision gets translated down to the
shop floor.
In that regards, this step is all about change management, getting everyone involved on
the same page. As shown earlier, those employees who don’t know what is expected of
them, don’t know how to do their jobs, or don’t care will submarine the success of any
project.
Therefore, a communication plan and strategy must be developed to ensure that all
employees understand why changes are being made and how their individual
performance impacts the overall operation. The executive vision must be communicated
to everyone. Employee buy-in is absolutely essential to the success of a productivity
program.
What must be developed during this step are:
• Corporate communication plans that provide both the executive vision and
the impact on individuals. The communications must include what the
benefits are for the employees, such as introduction of an incentive pay,
October 19, 2004
Optimizing the Labor Supply Chain
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bonus or awards plan, in order for employees to cooperate willingly. In other
cases, the employee benefit might be increased job security that will come
with the increased competitiveness resulting from improved corporate
productivity.
•
Training plans that teach each employee the what, when and why for the new
preferred methods and engineered standards. The plans should include
multiple repetitions and hands-on practice to ensure all employees
understand and are comfortable with the methods before they are rolled out.
The lack of attention to this step is the most frequently mentioned “lessons
learned” from productivity program (and most software) implementations.
•
Roll-out plans that define the sequencing and timing of all jobs to be included
in the productivity program. As mentioned in the Identify step, not all jobs
must be included in the initial go-live of the program. The sequencing and
timing must be communicated to all participants to ensure smooth roll-out.
The roll-out plan will also define the sequence and timing of program
adoption across multiple sites or facilities.
Just as the Engage step is critical for defining the best way to perform each job, the
Develop step is crucial in creating a workforce that is willing and able to adapt to the new
job methods.
Deploy
As with any software implementation, the Deploy step is where the rubber meets the
road. It includes putting into action all the communication, training and roll-out plans
defined earlier in this methodlogy.
The communications plan deployment starts early in the process to mentally prepare the
organization for adoption of the new program. This is a key element of change
management. Training is conducted in sequence with the roll-out plan. It usually occurs
just prior to or coincident with roll-out of the software at each location.
Frequently there is a ramp-up period during which employees become familiar with the
new methods, using any new technology, such as radio frequency (RF) equipment, and
gaining speed through repetition. The ramp-up period often covers a few weeks, during
which time performance typically rises from an average rate or 60%-70% of standard to
95%-100% of standard. If incentive plans are to be implemented, they normally will not
begin until after the ramp-up period.
Supervisors also have a ramp-up period during which they become familiar with the new
monitoring and reporting tools offered by the labor management software. They will
begin to quickly recognize developing problems and take action to remove barriers to
performance before results deteriorate.
Monitoring employee performance without getting in their way, especially when
operations are spread across the globe, takes a constant flow of information. The flow of
information must be available to all levels within the organization, from employees and
supervisors on the floor to the CEO. The labor management system becomes the
conduit for that information exchange.
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Analyze
A successful strategy takes into account how one person’s actions affect another and
how an individual’s performance can turn the corporate vision into reality. The ability of
an enterprise to set clear goals and to track performance against those goals makes the
corporate vision tangible. However, although business intelligence tools have gained
widespread acceptance in most corporations, they have had very low adoption within
fulfillment operations. Many companies today still have no way to track, in real time,
how individuals are performing in various facilities, much less how multiple operations
are performing across an entire distribution network.
Yet, as discussed in the opening section of this white paper, the ability to gather, analyze
and act on business performance information is what separates high performance
businesses from the pack. Enterprise-wide scorecarding capabilities are needed to
collect and analyze performance information so management can effectively manage
human capital across the entire corporation. This Analyze step, therefore, closes the
loop in creating a high performance workforce, giving management the real-time
feedback necessary for continuous improvement.
Reward
The last step in RedPrairie’s six step methodology is optional, but experience has shown
that fair and accurate incentive programs can significantly increase productivity over
what can be attained through adoption of a productivity management solution.
Keeping good employees around takes new challenges and greater rewards.
Investments in highly productive employees can really pay off. The right compensation
plan will keep employees focused on doing the right things, in the right way. Incentives
can increase overall productivity by an additional 20-30 percent. Therefore, RedPrairie
recommends implementation of incentive or other reward programs as the final step in
creating a high performance workforce.
However, because of the difficulty companies have historically faced in collecting and
synchronizing detailed time and performance data, many have shied away from
implementing incentive pay programs. And even those companies that can effectively
collect detailed time and performance data often find their payroll systems are not
designed to perform the complex incentive calculations required. Therefore, they either
expend considerable clerical resources to perform these gross pay calculations, or forgo
using incentive programs.
RedPrairie has solved this problem by adding the time and attendance capabilities of
time clock systems and a rules-based gross pay calculation engine to the productivity
tracking, reporting, labor planning and activity-based costing functionality of its
Productivity Management solution. The result is a single source solution for time and
attendance tracking and incentive pay calculations that makes adoption of incentive
programs a natural extension of high performance workforce programs.
October 19, 2004
Optimizing the Labor Supply Chain
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Summary
High performance businesses are those that can effectively gather relevant performance
information in real-time, analyze it, and quickly act upon that analysis to continuously
improve operations and customer service. However, many companies have not applied
this practice to their human resources, even though they account for 50 percent or more
of distribution costs.
But since “you can’t manage what you can’t measure” still holds true, companies striving
to be high performance businesses cannot succeed while ignoring this critical
component of operations. And as discussed, the way you measure performance is
equally important. Only by accurately measuring performance against the true potential
of each job can companies determine the effectiveness of their human capital
management programs in distribution, call centers and other supply chain operations.
The key to successful performance management, as the AMR Research study of Dell,
Southwest Airlines, Toyoda and others showed, is to standardize work and to augment
the standards with flexible control systems. Implementing discrete engineered standards
with productivity monitoring software and incentive programs provides standardized work
practices and flexible control systems that enable companies to evaluate performance
related to work content and under the control of each individual employee. At this level,
companies can collect and analyze meaningful information that provides insight into the
people, process and technology affecting overall company performance.
In this white paper, RedPrairie has laid out a six step methodology that will enable any
company to develop a high performance workforce to support corporate goals. It
involves:
• Identifying the desired goals to be achieved
• Engaging in an industrial engineering project to define the true potential for
each job impacting those goals
• Developing communications plans to align executive and employee vision,
and train employees on new best practice methods
• Deploying the new methods and monitoring software according to a welldefined roll-out program with appropriate ramp-up periods
• Analyzing resulting performance on both local and enterprise levels to
remove barriers to performance and sustain continuous improvement, and
• Rewarding top performers to gain additional productivity.
Companies that use this six step methodology to implement labor productivity programs
focused on analyzing performance against true potential will be well on their way to
becoming high performance businesses.
October 19, 2004
Optimizing the Labor Supply Chain
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About RedPrairie Corporation
RedPrairie is a global leader in supply chain technology solutions that enable the
transformation and optimization of supply chain networks, driving out costs, improving
customer service and creating competitive advantage. RedPrairie’s supply chain
execution solutions provide the industry’s leading transportation, productivity, and
distribution management capabilities, fully integrated with process management
components for real-time visibility and event management, trading partner integration,
quality control and performance measurement. Coupled with RedPrairie’s tactical
planning and inventory optimization solutions, RedPrairie provides a single source
platform for global supply chain management.
RedPrairie provides industry-tailored solutions for many markets, including consumer
goods, direct to consumer and traditional retail, food and beverage, high tech /
electronics, third party logistics, industrial / wholesale, automotive and service parts, and
pharmaceuticals. Customers include Hewlett-Packard, Sony, Thames Water, Procter &
Gamble, Nestle, Panasonic, Georgia-Pacific, Eveready, Merck Sharp & Dohme,
Unilever, Exel, GE, TNT Logistics, and many others. With offices across the globe,
RedPrairie is a true world-wide solution provider.
For additional information, call 1.877.733.7724, or access www.RedPrairie.com.
RedPrairie, DigitaLogistix and DLx are registered trademarks of RedPrairie Corporation.
© 2004 RedPrairie Corporation. All Rights Reserved.
October 19, 2004
Optimizing the Labor Supply Chain
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