Suppose you want an effective incentive program that improves productivity, saves your company labor cost, and rewards your most valued production crews with additional wages. Perhaps you also want to improve the accuracy of your production scheduling that allows for a proper understanding of manpower and a more reliable completion date. Those two things by themselves would make most leaders feel good. But there is one thing for making greater profits. It adds real dollars every week to the bottom line, and it does it regardless of the project complexity, size of the material, or material cost by optimizing your pricing method compared to the standard markup method. Great news: That is all possible and is built on a foundation of accurate definable time units of man-minutes based on proven time and motion industrial engineering practices.
Flawed Units Measure Example #1 – Board Foot as an example
I have heard the same thing many times over and over in the roof truss manufacturing industry. People want a better method of understanding truss manufacturing labor efficiencies, but they use the same flawed measurement units.
"Todd, I've been in this industry for decades, and we have always used board feet per man-hour."
My reply: "So how does that work out for a low-board-foot project (hip roof) with many setups compared to a high-board-foot (AG trusses), low-setup project?"
The response is never enlightening because BF/Man-Hour simply does not work consistently for every project.
Flawed Units Measure Example #2 – Piece Count as Example
A somewhat newer trend is to use piece count, but this works only for run or assembly time with no setup time estimations. They try to get around the setup time by applying an average setup time to each piece. Using an average setup time for every piece will skew the labor too high or low depending on the piece count.
Five-Blade Component Saw Cutting Lumber
Piece Count Example: Setup saw time = 1 man-minute for a crew of 2
Cut rate time per 2x4x8 piece = 0.17 minute for a crew of 2
Quantity 2 = (1 setup minute) + (0.17 * 2) = 1.34 minutes total = 0.67 each
Quantity 20 = (1 setup minute) + (0.17 * 20) = 4.4 minutes total = 0.22 each
A difference of 3 times! (0.22 * 3.05 = 0.67)
Flawed Units Measure Example #3 – Dollars as an example
Some managers feel that a more consistent method is to use some form of dollars. This dollar method can take the form of material cost, sales dollars, or margin dollars. But unless you have been hiding under a rock the past year, one would have seen the flaws using the dollar method. If material costs (such as lumber) fluctuate or the project has been discounted, does that mean the actual labor to complete the project will coincide with these changes? Of course not. So instead of banging your head against the proverbial wall, why not try something different?
Incentive Program and Scheduling
If you use a labor tracking program, why not use properly developed time units based on proven industrial engineering practices that are far more reliable than BF, piece count, or dollar units? Using time units shown as man-minutes is a far more effective way of estimating expected labor time when applied correctly. (They can be displayed as R.E. or S.U., which are also time elements) However, unless you are like most people who have never had industrial engineering training and understand how to develop and apply proper time units, you are likely unfamiliar with how effective they are.
Many people mistakenly believe they can derive proper time units using past projects tracked labor time to establish man-minutes units and the formulas to calculate the expected man-minutes to input into the estimating programs. But they fail to understand that this is not the proper way to develop efficiency rates, nor will it provide the logic the estimating software needs to calculate the efficiency benchmarks. I do have training in appropriate industrial engineering practices. For almost 20 years, I have been developing labor standards using man-minutes and labor factors defined for different equipment and material types for labor estimation programs. Trust me when I say that, if you are going to do it right, the man-minutes units factors need to be time and motioned studied, applied correctly, and understood to get it right. It is not a simple process, so using already developed and tested man-minute units and labor factors is highly recommended.
Pricing: If you were not selling manufactured components, how would you maximize your gross profit for your manufacturing location? It is pretty simple. You would lease your facility at the maximum dollar rate per time period. Whoever is renting your facility, what they are using your facility for, and the cost of materials they use to manufacture their products is irrelevant to you. You want the most you can possibly get based on market conditions for the lessee's agreed time using your facility.
When you sell a manufactured project to your customers, how is this different from leasing your manufacturing facility? When you manufacture a customer's project, it uses your facility's hourly and daily time periods. It should be common sense that every project should be evaluated as a margin rate per man-hour versus the market markup method. Maximizing the margin dollars earned per shop hour becomes very easy when using man-hour but impossible when using BF, Piece Count, or Dollar units. If you want to make more money, your company needs to be using gross margin per man-minute factors even with your existing customer base. Every company that uses the gross margin per man-minute method improves its profits.
Properly developed time standards using industrial engineering practice can provide your company with the tools for better scheduling, incentive programs, and pricing. It will help your company reduce costs, improve employee and customer relations, and help you make more net profits!
