Some of you might ask this question. How come the increament in labor productivity can not be seen in my financial report, meaning no profit or even get lost. Or, you might ask, how to ensure the increament in labor productivity will increase our profit.
Well, it’s not quite easy to explain but it is possible to find a simple approach to understand the situation as I will try to share here.
Well, it’s not quite easy to explain but it is possible to find a simple approach to understand the situation as I will try to share here.
When we are talking about labor productivity, then the first thing we have to do is figure out what is the percentage of labor in your finance report. Usually, direct labor will be reported in labor cost. It is separated with indirect labor that reported in overhead cost.
The next step, you need to set what kind of labor productivity improvement you will focus on. Let say, if you decide to focus on your production operator, then you will link to labor cost in your finance report. If you focus on your warehouse staff, then you will link to overhead cost. If you set the productivity program for your office staff, then it links to operational cost.
Next step, you need to understand how much they contribute to your finance situation. Let say your labor cost is 20%, overhead cost is 10% and operational cost is 10% in your costing unit. Let say your direct labor is 100% of your labor cost, the indirect labor is 50% of your overhead cost and salary of your staff is 20% of your operation cost. Then you can find the contribution of direct labor is 20%, indirect labor is 5% and staff cost is 2% of your costing.
Finally, you need to forecast your expectation with the improvement program. Let say your goal of productivity improvement is 30%. Then, you will have 6% improvement for direct labor, 1.5% for indirect labor and only 0.6% for office staff. In this case, productivity improvement program for direct labor is the best option you can choose. If it is success, you can expect to have 6% more profit in your finance report.
Now the question will be, why after we got success in our labor productivity, the company still get lost?
Well, so far, many factors could be the reasons:
a. Get wrong indicator of productivity ratio. I found, people take the easiest way to measure but do not understand the situation. For instances, you set your labor productivity indicator as pieces per man. It would be okay when the labor fixed, not variable factor, and the hour of your working hour is also fixed, meaning no overtime and holiday that practically is almost impossible. The right ratio should be pieces per manhour to cover turn over and overtime in your operation.
b. Though you get less labor cost due to productivity improvement, there is another cost increase. For instances, you might build some facilities such as training center, workshop, control check point, 5S program, and so on, and get more indirect labor to ensure the facility run well.
c. Most often, people get excited to the program and spend so much money to ensure the program get success and forget about basic need. For instances, you invite consultant to ensure the program success and put it as your investment, but forget to ensure your people have the capability to continue the program when the consultant gone.
The next step, you need to set what kind of labor productivity improvement you will focus on. Let say, if you decide to focus on your production operator, then you will link to labor cost in your finance report. If you focus on your warehouse staff, then you will link to overhead cost. If you set the productivity program for your office staff, then it links to operational cost.
Next step, you need to understand how much they contribute to your finance situation. Let say your labor cost is 20%, overhead cost is 10% and operational cost is 10% in your costing unit. Let say your direct labor is 100% of your labor cost, the indirect labor is 50% of your overhead cost and salary of your staff is 20% of your operation cost. Then you can find the contribution of direct labor is 20%, indirect labor is 5% and staff cost is 2% of your costing.
Finally, you need to forecast your expectation with the improvement program. Let say your goal of productivity improvement is 30%. Then, you will have 6% improvement for direct labor, 1.5% for indirect labor and only 0.6% for office staff. In this case, productivity improvement program for direct labor is the best option you can choose. If it is success, you can expect to have 6% more profit in your finance report.
Now the question will be, why after we got success in our labor productivity, the company still get lost?
Well, so far, many factors could be the reasons:
a. Get wrong indicator of productivity ratio. I found, people take the easiest way to measure but do not understand the situation. For instances, you set your labor productivity indicator as pieces per man. It would be okay when the labor fixed, not variable factor, and the hour of your working hour is also fixed, meaning no overtime and holiday that practically is almost impossible. The right ratio should be pieces per manhour to cover turn over and overtime in your operation.
b. Though you get less labor cost due to productivity improvement, there is another cost increase. For instances, you might build some facilities such as training center, workshop, control check point, 5S program, and so on, and get more indirect labor to ensure the facility run well.
c. Most often, people get excited to the program and spend so much money to ensure the program get success and forget about basic need. For instances, you invite consultant to ensure the program success and put it as your investment, but forget to ensure your people have the capability to continue the program when the consultant gone.