Where to Focus

Part 4 of a five-part series on performance measurement.
by Glenn Felix

With several core measures in an organization’s sights, the task of focusing attention on the greatest opportunities amongst those key indicators is best driven by savings potential.  Which measure has the potential to return the MOST value by improving it ... which is the second most worth going after, the third most ... and so forth.

Three factors determine savings priority — VQR:

• Value — The unit cost of the resource being consumed . . . or the increased sales value that would be realized through higher-priced output.
• Quantity — The volume of activity underlying the measure.
• Reach — The distance from baseline performance to what we’ve identified as possible . . . to targeted performance.

In the measurement platform described two articles ago seven measures were identified.  Those seven, with baselines and targets noted are:

• Pounds Produced Per Labor Hour    300            400
• Percent Overtime Worked                 15%            5%
• Raw Product Recovery                      55%          65%
• Packaging Materials Waste                 6%            0%
• Premium Grade                                 80%          96%
• Pounds per Gallon of Water                2               3
• BTUs per Pound Produced                500           600    

Along with the above information, all that’s needed to calculate and prioritize opportunity (using some sample numbers) is:

• Monthly Pounds Produced              2,500,000
• Monthly Units of Film Consumed    2,250,000
• Loaded Labor Rate                              $15.00
• Raw Product Cost Per Pound                $0.12
• Packaging Film Cost Per Unit                $0.06
• Premium Grade Value Increment           $0.04
• Cost per Gallon of Water                      $0.003
• Cost per BTU of energy                $0.0000123

With the above information, potential savings are calculated for each opportunity measure.  We’ll use monthly numbers.

Pounds Per Labor Hour Savings
Labor savings are based on lower unit labor costs.  More output per hour results in fewer labor hours (minutes) per unit and less cost per unit.  Potential labor savings are:

                    Units                
                   Per Hr    Inverted          Hrs Per Unit
Baseline        300       1 / 300       =    0.00333333
Target            400       1 / 400       =    0.00250000
Difference    (100)                        =    0.00083333


Hours Saved        Loaded           Monthly     Potential Savings
    Per Unit         Hourly Rate     Production        Per Month  
0.00083333     x    $15.00    x    2,500,000    =    $31,250

NOTE: Even though we’re after labor hours (or cost) per unit, we measure and share with employees the inverse of that because output per labor hour is much more friendly a measure.

Overtime Savings
Here we are capturing the premium portion of paid hours plus payroll taxes on that premium.  Keeping things simple for our example — using an average hourly rate of $12.00, and a payroll tax load factor of 10 percent, potential overtime savings are:

   Overtime           Hours    OT (15% – 5%)    Potential Savings
Cost ($6 x 1.1)    Worked    Opportunity             Per Month  
      $6.60      x      8,333     x     10%          =         $5,500

Recovery Savings
Increased recovery means less raw product is processed to produce the same output, thereby reducing material costs per unit.  Potential material-cost savings are:
                                                              Raw Pounds
                  Recovery    Inverted    Per Finished Pound
Baseline        0.550        1 / .55        =        1.5385
Target            0.650        1 / .65        =        1.8182
Difference    (0.100)                         =       (0.2797)

Raw Pounds Saved     Raw Cost        Monthly     Potential Savings
Per Finished Pound    Per Pound    Production        Per Month  
              0.2797        x       $0.15    x    2,500,000     =     $83,916

Packaging Savings
How much film is wasted, and how much does each unit of film cost?

  Film              Units       Waste (6% – 0%)   Potential Savings
 Cost              Used           Opportunity             Per Month  
$0.06    x    2,250,000      x      6%           =           $8,100

Less Than Premium Grade Savings
This might be non-grade A product, or some similar lower-value output:

Lost Value       Pounds   Grade (96% –80%)   Potential Savings
Per Pound     Produced      Opportunity              Per Month  
    $0.04    x    2,500,000      x      16%          =          $16,000

Pounds Per Gallon of Water
More output per gallon of water results in less water used per unit:

            Pounds Per            
                Gallon    Inverted   Gallons Per Unit
Baseline        2          1 / 2      =      0.5000
Target            3          1 / 3      =      0.3333
Difference    (1)                      =      0.1667

Gallons Saved   Cost Per         Monthly      Potential Savings
     Per Unit          Gallon         Production        Per Month  
       0.1667     x    $0.003    x    2,500,000    =    $1,250

BTUs Per Pound
BTUs are a way to combine Natural Gas and Electricity consumption.  Savings are based on lower unit energy costs.  More output per KWH or Therm results in fewer BTUs per unit.   Potential BTU cost savings are:

      BTU                   Units         BTU (600 – 500)   Potential Savings
      Cost                Produced       Opportunity             Per Month  
$0.0000123     x     2,250,000     x     100           =           $3,076

Summarizing . . . clearly recovery is where the greatest opportunity lies  — 2.7 times the potential savings associated with labor efficiency — which clearly suggests a wise focus first on that measure, then labor, then grade, and so forth.  In practice, all measures should continue to receive attention, but the differences in possibilities suggest some possible tradeoffs in resource usage...

                                                                      Potential
            Measure                                            Savings    

• Pounds Produced Per Labor Hour     $31,250    
• Percent Overtime Worked                    $5,500    
• Raw Product Recovery                       $83,916    
• Packaging Materials Waste                  $8,100    
• Premium Grade                                  $16,000    
• Pounds per Gallon of Water                 $1,250    
• BTUs per Pound Produced                  $3,076

            TOTAL                                              $149,092    

Next month we’ll pull everything together and conclude this five-part series on measurement.

Drop me a line if you have questions or want to explore more.