Labor productivity measures the number of goods and services produced by one hour of labor.
Let’s say your business has a gross profit of $300,000 per year, and you have 9 staff working for you.
So that is 10 people working 40 hour weeks (full time, not part-time), which is 40 x 50 = 2,000 hours per person per year = 20,000 hours for your business. Your labor productivity is the gross profit (business value added) divided by the number of hours or $300,000 divided by 20,000 which is $15 per hour.
Is that good or bad?
There are lots of answers to that question because it depends.
- If your rate last year was $12 then it’s great, because it shows your business productivity growth rate has improved by 25%. A typical national figure for productivity improvement is usually around 3 or 4%, but it varies by industry. In Indonesia in 2012, pharmacies improved by 13% and clothing by nearly 5%.
- If your industry rate is $27 then your business $15 is bad because you are either less innovative or pay higher wages. You are certainly less competitive.
What Levers Affect Labor Productivity?
There are four elements in the equation – the selling price and the cost of sales in the output side, and the efficiency cost of labor and the quantity of labor on the input side. Therefore you can improve your labor productivity by:
- Increasing your selling price
- Reducing your cost of sales
- Increasing labor efficiency per unit rate
- Reducing the amount of labor required.
1. How to Increase Your Selling Price
I’m really tired of people telling me they can’t increase their prices because of competition. People are prepared to pay a premium if you help them get their job done more effectively than your competition.
Gillette sells a standard disposable razor for Rp 10,000 and a Mach 3 blade for four times that price. They sell so many Mach 3 blades because they are superior at helping people get the job done.
In my younger home handyman days when the time was scarce on weekends, I was quite happy to pay a premium price at the well-signposted hardware store where I could be in and out in 10 minutes, compared with its disorganized and grubby old competition.
2.How to Minimize Your Cost of Sales
If you have a manufacturing business you can reduce your costs by reducing your product lines – as a rule of thumb, every additional routing increases your overheads by 30%, according to Harvard School of Management. You can also invest in better, more efficient machinery, or reduce material wastage, or minimize setup idle time of people and machinery. You can improve the working environment to reduce safety hazards.
In a service business, direct costs include direct labor (tradespeople, consultants), sales commissions, shipping costs, any parts and supplies used to provide the service. Transportation businesses have fuel, maintenance, and drivers.
3.How to Increase Labor Efficiency
- Train your people to be more productive. This can often result in reducing the need for supervisory middle management.
- Multiply the 2,000 hours a year by a person’s hourly rate. Now consider the investment in a course to improve efficiency. What is the cost of the course compared to the expected efficiency increase?
- Treat people with respect, and be amazed as you watch work team output soar.
- Can you split job functions so that you can have fewer higher wage staff focused on key decision-making tasks, and replace their work on more routine functions with lesser wage level people?
- Can you increase the value of what you are producing so that the relative value of your staff inputs are less?
- This has been the case in the US where real wages stayed almost constant for 30 years from the mid-1970’s, while productivity doubled in the same period.
Pit Crew Case Study
In Formula 1 racing the pit crew efficiency has evolved to the stage where they can refuel a car and change tires in about 2.4 seconds. Just utilizing a swiveling car jack handle made a 0.4-second improvement. With some crews taking 4 seconds, that difference can be significant in race outcomes, where the lap times of drivers may vary by only tenths of a second.
Retail Staffing Case Study
For a retail store, we added one staff member to be responsible for stock replenishment, cleaning, and sales bin tidying tasks. This left the other, better-trained sales staff more time to focus on customers. We found that gross margin increased by 19%, meaning an additional Rp 40 million per month. The gross cost of the additional person was Rp 2.5 million, so the return on that investment was a huge boost in productivity.
- How to Reduce the Amount of Labor Used
Examine your standard processes involving transactions. Determine how productive your staff are during those 2,000 hours a year.
Materials Handling Case Study
- We measured the amount of time a person took to pick a bunch of items for an order in a range of warehouses, to come up with an average rate. The typical rate was 60 picks per hour.
- We also broke the task down into its components – walking between locations, checking the paperwork, picking the item, putting it into a bin or onto a pallet, and so on.
- We found that 70% of the time was spent walking between locations. That’s a lot of non-productive labor. In one warehouse we had 40 people order picking so in effect you could say 28 of them were non-productive.
- We then used technology to analyze where our items were stored. We found that the most frequently picked item was located over 100 meters away from the packing stations, which meant an awful lot of walking in a day. We did two key things:
- We moved the most frequently picked items close to the packing stations.
- We used high-density storage systems to reduce the width of the location “face” so they were closer together but deeper and loaded from the back.
The end result was that our labor productivity increased by over 300 percent over 3 years – our sales grew in that period by 330% but our labor force hours slightly reduced.
Transaction Processing Case Study
In one business here in Bali, we doubled the number of transactions with no increase in staff, by implementing better systems and automating activities as much as possible.
Take some time to track your business processes that involve recording transactions. Start with the ones that have the highest volume. First look to see if you can eliminate any delays caused by nit-picking approvals. Delegate approvals wherever possible to the person doing the job, using standard business rules set by you.
Then measure two things:
- The time required for each step (eg how long on average to post a transaction into the computer.)
- The number of transactions per day.
- The possible number of transactions per hour
- The number of hours required to do the job.
Then ask yourself, and your staff:
- What else is that person doing during the day?
- What are the causes of delays that person has in not being able to complete each transaction independently?
- What tools or other information to hand could help that person do their transaction posting more efficiently?
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