Ever wonder how productive your organization is?
We have consulted with many businesses and found that on the average, businesses are less than 50% productive. This usually comes as a surprise to the business owner. After the surprise is digested, the usual follow up question is: How did you come up with that number. Here’s how I did it.
- Determine how billing for revenues works. If it’s by the hour or quoted by the job, ask, how is the price worked out for the work being provided and how many people are needed? I ask this since there are usually 2 major components to a job – Time & Materials.
- Determine what amount of all the revenues are materials and what amount is labour. Here I make an assumption that there is an average of 2,000 hours per person employed (either full time or contract – it does not matter at this time)
- So let’s say that it is determined that there is revenue generation of $1,000,000 per year. Also assume 50% of that is materials and therefore you have $500,000 each in Material and Labour Revenue. (note: each business will be unique, and therefore differing numbers)
- Determine what the billing rate is for their labour. This was identified in step 1 above. So if they are billing $100/hour then $500,000 in labour revenue was delivered through 5,000 hours of billable effort. (emphasis on “billable”) You can calculate that you need 2.5 (5,000/2,000) people to deliver the value-added effort. Note: “Value Add” is what the customer is willing to pay for.
- Next, determine who is on payroll that actually does the work. I eliminate the owner (or only use a percentage of the owners time), the office manager, the accounting staff etc. I am usually left with a number that resembles 6 or 7 employees.
- Taking your 2.5 value-add employees and dividing it by 6 payroll employees gives you a productivity of approximately 42%. This is not a scientific calculation that would be used by an industrial engineer, but it works from a business sense since only 42% of my labour capacity is actually being billed for value-added activities, or as I say – being “Productive”.
This starts a very important conversation. What should that number be? After all there is shop time, travel time, material pickup and delivery and other time elements that the employees need to take into consideration in ‘working’. I call this “busy-time” which is quite different than “productive-time”. The issue here is that 1) the owner is very surprised at the 42% number, and 2) the owner realizes they really do not know what their employees do all the time, or at least 100% of the time.
I have found when taking all the ‘support’ items into consideration a comfortable number for most small business was in the neighborhood of 70% to 80% productivity. What the owner also realized that perhaps they were not pricing profitably; or organizing their schedules accordingly. Here’s an example.
One client received most of their work orders on Friday afternoon, Monday and Tuesdays for delivery later in the week. We determined that working 5 days at 7.5 hours each day was not as productive as 3 days at 12 hours each. Overtime was reduced as well since the extra hours normally worked on Wednesday and Thursday nights was not required. Also, repeat trips to site were reduced as more work was done at each site during the day thereby reducing (but not necessarily eliminating) the number of returns to finish the job the next day. The client also introduced travel time charges that were more in line with their labour rates in addition to their fuel and maintenance costs.
Do the simple 6 steps outlined above to see where you are on the productivity.
Posted by Rudy Fischer. Posted In : Operations