Phil Sunley, business manager at Newton Europe, blogs on the challenges facing manufacturers with its labour forces and why this needn't be a costly process.
Approaching a cost reduction or labour control programme can often be viewed as challenging and costly for both build and refit companies.
Traditionally, a significant proportion of a business’ labour is planned and managed using a “level of effort” or “bums on seats” approach. However, this approach is generally only used across those non-production departments, for instance support functions such as planning.
By contrast, production activities are often planned in much greater detail, with a focus on improving efficiencies, increasing output and maximizing bottom line. Production departments often produce formal resource plans, using norms and a number of activities to determine the overall resource requirement and to manage the department on a day to day basis.
Within any department that plans using a level of effort approach, team size is usually based on past experience. During busy periods when demand exceeds capacity, resource levels are increased. However, due to a lack of visibility of future demand, it is difficult to realign resource levels once the demand reduces. This drives team size to cope with peak demand.
The problem with this type of planning is an inability to control cost growth when programme schedules are made shorter or longer and deadlines become tighter. It also makes it difficult to challenge cost growth on a day to day basis, as it is difficult to assess current labour utilisation and progress.
One solution to this problem is to plan the work within all areas of the business to the same level of detail as seen in the production areas. However, there is a significant cost associated with this, which could erode and possibly exceed the benefits of matching capacity to demand.
In an increasingly difficult operating climate, with much greater focus on costs, optimising labour is often vital to the continued viability of a business. With this in mind, an increasing number of companies are taking an innovative approach to labour cost control, undertaking business wide assessments that enable capacity to be matched to demand without a significant investment in planning.
It sounds easy in theory, however the practicalities and complexities of implementing such a process can often end up taking a significant amount of time and cost. From the outset it is important to identify how each of the areas of the business’ labour is being planned and managed. A further assessment can then establish what else could be linked directly to a specific scope and therefore planned in some way.
In addition, investigating potential solutions to allow the use of such visibility on a day to day basis to manage resource must be undertaken. Following this, studies should be conducted to establish the level of unutilised labour in each area, which allows the opportunity to estimate potential efficiency savings.
In a recent client assessment across one of its departments, the studies highlighted 39 per cent unutilised time, with the main issue being a lack of work available for the team to complete. This confirmed that team sizes were greater than required and that the programme should be capable of delivering significant savings.
As well as assessing the level of opportunity available within any department, understanding current planning techniques and labour deployment methods is a must. This can highlight a number of issues including activities not being linked to production events (unplanned work); no program resource profile by contract (insufficient detail in the resource plan); inability to challenge the resource profile (over resourcing) and no flexibility between contracts (any other causes of inflexible resourcing).
These identified problems make it impossible to smooth individual peaks and troughs in the labour requirements and make it harder to measure actual resource level.
Finding a fix
To fix these problems, a sensible first step is demand modelling. This helps understand what labour capacity the departments have. This is calculated by reviewing the hours booked to a particular part of the contact over a period of time – normally 12 months, but enough to understand the current labour and planning situation.
Developing the demand picture can be more complicated. First, a map of all activities must be undertaken, including non-value-adding activities such as meetings. You then need to work with the in-house departments to derive target times against each scope-based activity.
This is a critical activity as the target times need to be realistic to generate a useful plan and most importantly they must be seen as achievable by the in-house team. Without this, getting buy-in and sustainability is almost impossible and a significant investment of time at this stage required.
Establishing a target time for each activity and knowing the numbers of activities that can be completed only provides half of the demand picture – you also need to know when these activities require completing. Detailed planning of these tasks requires a significant investment in both time and cost and it is easy to underestimate the value of this.
Developing demand through historical data
An alternative is to use historical data from previous contracts and programmes to develop a demand profile for carrying out these activities. This enables the development of future profiles for all future contracts.
Using a demand model also allows the incorporation of an efficiency factor to provide a level of security to accommodate unforeseen events and efficiency losses. Having a demand model with norms and a demand profile allows the development of scope-related budgets and full earned value tracking.
This will highlight any areas which has excess labour capacity, and in the case mentioned earlier this profiling identified a 35 per cent improvement in labour efficiency.
At this stage, run a short pilot with the predicted resource levels to ensure the model is correctly calculating resource requirement. Following a successful pilot period, the labour hours will reduce through natural attrition, contractor removal and overtime controls, removing redundancy costs, satisfying the unions and allowing for gradual adoption of the new processes and systems.
New scope-related budget and budget control processes should then be developed and implemented to ensure adoption of the new methodology is as quick as possible. As previously mentioned, in any labour cost control programme, it is vital that the improvements are sustainable. An Earned-Value Management (EVM) tool is often a good way to measure success and ensure longevity of the savings.
This type of tool can use data from the demand model and combine it with the actual bookings made against each stage to enable a “burnt” and “earned” figure to be calculated. This provides an on-going assessment of labour effectiveness without the need for planning all activities.
Reviewing EVM curves
Historically a department may have only measured burnt hours with no visibility of how much progress was being made, meaning cost growth is only visible when most of the hours are burnt and the contract is not complete.
By reviewing these EVM curves it is possible to establish which teams are incorrectly sized and to take corrective action. For example, if burnt hours are exceeding earned hours, then the team size is often too large.
Of course there may be a number of reasons for burnt hours exceeding earned hours, not just the team size being too large. Other reasons may include incorrect norms, general team inefficiency or incorrect planning – for instance doing activities out of sequence – and so on.
The improvement is made more challenging as the benefit is only realised when you have total visibility of both value adding and non-value adding hours. The visibility of non-value adding hours provides the ability to confidently flex labour to meet future demand, as well as accurately costing any further scope increase or decrease.
This type of programme has the potential to not only control and cut costs, but also to improve the service levels provided by different departments, as peaks in demand can be identified early and the planned resource increased or redistributed across contracts to mitigate the short term spikes.
As each contract progresses, it will also be possible to refine budgets based on the latest performance metrics to ensure continuous improvement from contract to contract.