Transcript The Profit of Efficiency

Improving Production
Efficiency
David Ellings
David Rosebrook
Business Mentors
2006 DKC Conference, Toronto
What’s On Tap
1.
2.
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9.
Industry standards
Efficiency myths and facts
Study profile
A case study
The results
The hidden effect
The bottom line
Simple steps to improve your position
Building the team
Measuring Success?
Employees
Equipment
Building Size
Volume
SALES:
$5,000,000
SALES:
$750,000
EXPENSE:
$4,850,000
EXPENSES:
$600,000
PROFIT:
$150,000 or 3%
PROFIT:
$150,000 or 20%
NAICS Code
Industry Segment
Profit
PROFIT
0 – 22%
15 – 30%
OVERHEAD COSTS
50 – 80%
DIRECT COSTS
Direct Costs
20 – 50% Material/Equipment
50 – 90% Labor
50 – 80%
DIRECT COSTS
50 – 90% Labor
Focus For Efficiency
Top Five Inefficiencies
• Materials
• Buying smarter and using wiser
• Speed of work
• Get your employees to move faster through the assigned tasks
• Amount of management
• Train your staff to function in the field with less management
oversight
• Pricing
• Estimating program pricing problems
• Project size
• Advance to larger projects…they are more substantially more
profitable
Ratio Difference Efficiency
True Inefficiencies
• Scheduling
– Time management and efficient use of resources
• Material procurement
– Multiple trips, retaining stock, price shopping
• Accuracy
– Time card slippage, accountability, management
• Drive time
– Most significant indicator, liability, waste, waste,
waste
Study Profile
Executive Summary
• Productivity trends carry a large impact
on profitability
• Utilize detailed data gathered over three
years to analyze efficiency
• Productivity focused on production
employees and management processes
• Clear conclusions were able to be drawn
by the results
Introduction
• Background
– Productivity is the key factor of economic
health
– Industry productivity is not well defined
– Rely on productivity figures from sources of
questionable credibility
• Exactware, Means etc.
– Ineffective management results
– Need to offset the tightening of profits by the
insurance industry
Introduction
• Objectives
– Study efficiency trends over an extended
period
– Create an awareness
– Counter insurance industry pressure on
margins
– Increase management tools
– Nothing matters unless we increase….
$ NET PROFITS $
Introduction
• Scope
– Defined:
The American Association of Cost Engineers
“Productivity is a relative measure of labor efficiency,
either good or bad, when compared to an
established base or norm”
– Its nature creates difficulties in tracking it as
an absolute value over time.
– Information is gathered against movements
of an established base, or benchmark value
Introduction
• Methodology
– Study detailed movement of 82 production
employees
– Focus on inefficient time and not on production
cycles
– Created buy-in through incentives and selfimprovement
– Used sampling and statistical analysis techniques to
establish and confirm results
– Sampled across all company production areas
– Gathered data very quietly
Affecting Factors
• Project Uniqueness
– Each job is different and unique
• Environmental factors
– Landscape, weather, and physical location
• Aesthetic factors
– Level of quality required, material selection, existing conditions
• Human factors
– Expectations of adjusters, owners, managers etc.
– Uniqueness requires modification of the
process…creating an inefficient learning curve at
the beginning stages of each project activity
Affecting Factors
• Technology
– Hugh effect on overall productivity
– Modify skill requirements
– Create difficulties in separating contributions of
technology, management and labor to the efficiency
– Less motivation to add technological changes
when the associated labor is not expensive
– Sometimes expensive and only a temporary
strategic advantage
Affecting Factors
• Personnel
– Management
• Level of training, accountability, and knowledge
• Documented studies – poor management activities account for over
50% of the inefficiencies
– Production
• Cross training, flexible contract increase efficiency
• The fall of “real wages” within the industry
– Old skills retire...young talent goes else ware
– Industry tends to retire or fall off at an earlier age
• Lack of formal training
– Lowest of any formal sector of the economy
– Workforce tends to be transient, causing a reluctance to invest capital
to train
Case Study Assumptions
Employee
• Carpenter
– Generalist to handle multiple tasks
• Wage: $25/hour
• Burden: 50%
• Total cost to employee: $37.50/hour
• Work year available: 1960 hours/year
– 2080 hours minus 3 weeks for holidays,
vacation and sick time.
• Expected production: $100/hour
Scenario One
7:00 AM arrive at your facility to get assignment and supplies
7:00 – 7:30 drive to work site
7:30 – 9:30 install trim (productive work)
9:30 – 9:45 break (paid)
9:45 – 11:30 finish trim and paint (productive work)
11:30 – 12:00 lunch (unpaid)
12:00 – 1:45 install interior doors (productive work)
1:45 – 2:00 break ( paid)
2:00 – 3:00 install door hardware (productive work)
3:00 – 3:30 drive back and unload items and paperwork
Scenario One
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•
•
•
Results
8 hours worked and paid
$200 wages + $100 burden = $300 cost
6.5 hours productive revenue generation
1.5 hours unproductive time paid
19% of paid time unproductive
Scenario Two
7:00 AM arrive at your facility to get assignment and supplies
7:00 – 7:30 drive to work site
7:30 – 7:45 get coffee then discuss project, activities last evening
and other personal items with the rest of the production crew
7:45 – 8:00 unload supplies and tools from truck and set-up to
work
8:00 – 9:00 install trim (productive work)
9:00 – 9:15 break (paid)
9:15 – 9:20 put away coffee, doughnuts and items from break
Scenario Two
9:20 – 10:00 install trim but a scope clarification problem
arises (productive work)
10:00 – 10:15 discuss project with home owner and/or call
project manager for clarification
10:15 – 10:30 install trim (productive work)
10:30 – 10:40 at 10:20 the carpenter realized that there
wasn’t enough trim to complete the work, so a
discussion about this issue occurs with the crew and the
carpenter winds down his activities to get ready to leave
for a store
10:40 – 11:00 drive to Home Depot (even though there was
another lumber yard 5 min away but was unknown to
the carpenter)
Scenario Two
11:00 – 11:30 locate trim in store, pick-up a couple of
other supplies on your account, look at a the new
compound miter saw, look at bath fixtures for a home
remodel or side job, go to pro-desk to check out,
converse with pro-desk manager about the weather or
sports, load items into truck and leave
11:30 – 11:40 stop for gas and snacks
11:40 – 12-00 drive back to project
12:00 – 12:30 lunch (unpaid)
12:30 – 12:40 conclude lunch and put away lunch
supplies, clean-up and use restroom
Scenario Two
12:40 – 1:00 install last piece of trim ( project completed
for the day, other supplies to arrive tomorrow)
1:00 – 1:15 wind down from activities and load vehicle
1:15 – 1:30 drive to a different work site
1:30 – 1:45 set-up tools and work at new site, also greet
and discuss things with crew/homeowner
1:45 – 2:15 install windows (productive work)
2:15 – 2:30 break (paid)
2:30 – 2:35 put away coffee, doughnuts and items from
break
Scenario Two
2:35 – 2:50 install insulation (productive work)
2:50 – 3:00 wind down for day, load truck and leave
3:00 – 3:30 return to facility, drop of time
sheet/paperwork and unload supplies and debris
Scenario Two
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Results
8 hours worked and paid
$200 wages + $100 burden = $300 cost
3.0 hours productive revenue generation
5.0 hours unproductive time paid
63% of paid time unproductive
The Cost of Inefficiency
Scenario One
1.5 hrs = $56.25/person/day = $13, 781/year
Scenario Two
5.0 hrs = $187.50/person/day = $45,937/year
Industry Average
2.6 hrs =
$99.00/person/day = $24,255/year
Is this it….
No, it is
just the tip
of the ice
berg!
What about the revenue
that should have been
earned during the
inefficient time spend….
Lost Revenue
• 2080 hrs in a work year = $208,000
– 3 weeks removed for vacation, holidays, etc.
• 1960 possible productive hours in a year
• At $100/hr = $196,000/person/year of
revenue generation
Lost Revenue
Scenarios
1. $36,750/yr of lost revenue per person
1. 367.5 hrs unproductive = 1592.5 hrs productive
2. $122,500/yr of lost revenue per person
–
1225 hrs unproductive = 735 hrs productive
Avg. $64,680/yr of lost revenue per person
–
646.8 hrs unproductive = 1313.2 hrs productive
What Does All of This Mean?
Company Assumption
• 1,000,000 revenue for year
– 60% direct costs = $600,000
• 25% materials/equipment = $150,000
• 75% direct labor = $450,000
– 25% overhead = $250,000
– 15% profit = $150,000
What Does All of This Mean?
Company Assumption
• We will use the average efficiency to test
1/3 of production day is inefficient
2 hours 38 minutes non-productive
5 hours 22 minutes productive time
Small Increase, Big Gain
5% increase = 25% more profit
• Productive time
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5hr 22min to 5hr 37min…..or only 15 min/day
12,000 hrs of labor in our example
1,500 personnel days per year
1,500/days X .25hrs X $100 =
$37,500 increase in PROFITS
Results
5% increase = 25% more profit
• 1,000,000 revenue increased to 1,037,500
– 60% direct costs = $600,000
• 25% materials/equipment = $150,000
• 75% direct labor = $450,000
– 25% overhead = $250,000
– 18% profit = $187,500
Results
5% increase = 25% more profit
Therefore with the exact same costs the company
was able to produce an increase of $37,500 of
additional revenue which increased the profit
by the expected 25% from $150,000 to
$187,500 with only 15 min of increased
production per person each day.
Results
5% increase = 25% more profit
In addition, in order to capture the same profit of
$187,500 without increasing the efficiency
would require a 25% increase in the revenue
or an additional $250,000 of sales….
Which is the easier improvement?
Actual Results
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History
62% increase in employee retention
With incentives wages increased 6½ X greater
then rate of inflation
18% increase in margins
76% decrease in paid none revenue travel time
36% decrease in management related
inefficiencies
54% reduction in production inefficiencies
Actual Results
42.4%
Break Time
10 Minutes
Recap
• Direct costs represent 50% to 80% of the
companies total expenditures
• Labor represents 50% to 90% of the total
job costs on a project
Recap
• Direct costs represent 50% to 80% of the
companies total expenditures
• Labor represents 50% to 90% of the total
job costs on a project
True Inefficiencies According to Dave
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•
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Scheduling
Materials procurement
Accountability of employees
Travel time
A Solution
• Build a construction team that is
accountable for the outcome of the
project from the time the first call is
received until the final check is cashed
• Proactively plan the project and then
execute the plan
• Measure your progress and outcome
Contents
• Building the construction team
• Planning the project
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Estimating
Budgeting
Scheduling
Materials
• Measuring our progress
Building the construction team
Two different models for production
• Production manager
• Construction team
Production Manager
PROS
• Specialized sales
team
• Specialized
construction team
CONS
• Poor communication
• Lack of
accountability
• Us against them
mentality
Construction Team
PROS
CONS
• Team environment
• Improved
communication
• One person accountable
for the entire project
from start to finish
• Easy to duplicate
• Potentially uneven sales
from month to month
• Potential for poor or
slow production
Progression of a Construction Team
• Project manager – sell, write, run
• Project manager and coordinator or
superintendent
• Project manager, coordinator and
superintendent
Project Manager
• Responsible for everything
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Sales
Marketing
Estimating
Production
Collections
• Limited by time and energy
• Typically will produce from $500,000 to
$1,000,000 per year
Project Manager and Coordinator or
Superintendent
• Project manager is responsible for
everything
• Hires to compliment his/her strengths
• Delegates responsibilities to the
coordinator or superintendent
• Needs to produce from $1,250,000 to
$1,750,000 per year
Project Manager, Coordinator and
Superintendent
• Project manager is responsible for
everything
• Delegates responsibilities to the
coordinator and superintendent
• Needs to produce $1,750,000 or more
each year
• Top dollar amount depends on project
size and location
Building the Construction Team
• The players
• Their responsibilities
The Players
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Project manager
Coordinator
Superintendent
Lead carpenters or lead technicians
Field staff
Temporary employees
Subcontractors
Project Manager Responsibilities
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Sales, Sales, Sales
Marketing
Managing the construction team
Accountable for the teams outcomes
Coordinator Responsibilities
• Administrative assistant for the team
• Budgeting
• Communications with adjuster and
homeowners
• Assemble project books
• Keeping computer software up to date
• Helping with collections
• Make the project manager look good!
• 95% of this persons time is spent in the office
• Compensation is around $38,000 per year plus
bonus
Superintendent Responsibilities
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Scheduling
Quality control
Training
Keeping projects on budget and on schedule
Manage subcontractors
Customer selections
Order materials
Manage the homeowners expectations
Safety
95% of this persons time is spent in the field
Compensation is around $45,000 per year plus bonus
Lead Carpenter
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Works on the project
Manages the project
Quality control
Safety
Manages the homeowners expectations
Manages subcontractors
Keeps site documentation up to date
Works on 1 to 3 small projects at a time or one
large project (over $15,000)
• Compensation is in the $18 to $28 per hour
range
Field Staff
• Carpenters, helpers, painters, drywallers,
etc…
• Keep the number of field staff small
• Travel, meetings and other nonproductive times are magnified
• When work is slow they are on “shop
time”
• When work is slow painters are framing!
• Tendency to overstaff jobsites
Temporary Employees
• Labor
– Good source of labor
– There are pros and cons
– They only work when we have jobs
• Skilled labor
– Acceptable source of skilled labor
– You have to be organized
• Some insurance programs are trying to
limit the use of temporary employees
Subcontractors
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Fixed price for work
They need to be managed
You do not pay for inefficiencies
Small subcontractors are better suited for
our margins
A System for Improving Efficiency
• By design
– Keep the system simple and easy to use in
the office or in the field
– Easy to duplicate with different levels of
employee proficiency
– Inexpensive
– Expandable
– Does not break down when project volume
increases
• Could be the most difficult thing you do!
Start With the End in Mind
• What does the lead carpenter need to
successfully complete the project?
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Scope of work
Budget
Schedule
Customer selections
Materials
The Estimate
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Scoping the loss
Sketch
Estimate detail
Estimate timelines
Negotiations
Open items
Scoping the Loss
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Consistent
Accurate
Fair
Detailed
Notes
– For the adjuster and his boss
– For the superintendent and lead carpenter
• Sketch
Estimate Timelines
• Timelines
– 24 hours – under $10,000
– 48 hours – under $50,000
– 72 hours – over $50,000
• Exceptions
– Specialty items
– Subcontractors
– Open items
Open Items
• Line items in the estimate that do not
have firm dollar amounts
• Allow the estimate to be completed and
uploaded on time
• Allow for future supplements
• Strong potential that supporting invoices
and other documentation will be required
Negotiations
• Meet the adjuster at the loss site to scope
the project
• Understand the estimating software
better than the adjuster
• Argue scope not price
The Budget
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Markup vs. Margin
Calculating the sales price
Calculating the budget amount
Different budgeting tools
– Xactimate
– Excel
Definitions
• Direct costs are the actual expenses – labor, materials,
subcontractors and permits that go into each project.
• Markup is the amount added to the direct job costs to
get the selling price – expressed as a percentage of
direct costs.
• Gross profit is the amount of money remaining after
the direct costs have been deducted.
• Gross margin is the difference between direct job costs
and the selling price – it is expressed as a percentage of
the selling price.
Gross Margin
50
45
40
35
33
30
25
20
16.66
Markup
100
82
67
54
50
43
34
25
20 O&P
Using Markup to Find the Sale Price
• Target is a gross profit of 40% no O&P
– Markup direct costs by 67%
– Gross profit equals 40.1%
• Target is a gross profit of 40% with O&P
– Markup direct cost by 40%
– Add overhead and profit 20%
– Gross profit equals 40.5%
• Gross profit = (contract amount – direct costs) -1
contract amount
Calculating the Budget Amount
• With overhead and profit
– Budget = contract * (1-(gross profit))
– Budget = $167 * (1-(40%))
= $167 * (.6)
= $100.20
Other Ways to Calculate the Budget
Amount
• Budgeting the line item before O&P using factors
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1.3 = 36%
1.4 = 40%
1.5 = 45%
1.6 = 48%
• Budget = contract /1.2/1.4 or line item /1.4
= $167 / 1.2
= $139.2 / 1.4
= $99.50
= $139.2 / 1.4
= $99.50
Budgeting Tools
• Xactimate
– Factoring
– Work orders
• Excel spreadsheet
Xactimate Factoring
• Xactimate version 2002
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Create a duplicate estimate
Grouping screen
Highlight all rooms
Pull down the EDIT menu
Go to FACTORING
Highlight activity and change factor
Do this separately for each activity
When complete press OK
Factoring Table for Xactimate
Factor
75
70
50
25
Gross profit
37.5%
42%
58.5%
79%
Xactimate Work Order
• Xactimate Version 2002
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Go to work order
Set up vendor as “ Budget”
Select all categories
Highlight categories and set factor using
factoring table for desired gross profit
– Follow instructions until finshed
Excel Spreadsheet
• Easy to manipulate and change data
• Able to track costs and changes throughout
project
• Can be tailored to your company
• Uses your companies labor and burden rates
• Separates labor, materials, equipment,
subcontractors
• Example of a budgeting spreadsheet
The Schedule
• A schedule is simply a plan for carrying
out a project, indicating when each
operation should begin and when it
should end.
Types of Schedules
• Manual
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Calendar
Scheduling board
Work orders
Spreadsheet (Gant)
• Computer program
– JPP
– Microsoft Project
– Plethora of others options
Rules for a Successful Schedule
1.
2.
3.
4.
5.
“Under promise and over deliver”
List the work trades (from your estimate)
Put the trades in the proper sequence
Find the time allotted for each trade (from
your budget)
Schedule each trade in its proper sequence
showing start and stop dates
Allow plenty of time during the schedule
for unplanned events
Scheduling
• Simple, easy to revise, and take as little
effort as possible
• Tracks what work is complete
• Tracks the start date of upcoming trades
• Sets the completion date for trades,
inspections, materials, selections
• Sets expectations and accountability
• Has solid must hit dates
Materials and Selections
• Making the materials list
• Getting materials to the job site
– At project start up
– While the job is in progress
– When the job is done
• Customer selection process
Making the Materials List
• Print components list from Xactimate
• Site visit
– Good time for project manager to hand-off project
to the superintendent
– List of all homeowner selections prepared in
advance by coordinator
– Confirm lengths, styles, colors of all materials
– Compare actual materials to components list
– Leave site with detailed list of materials to complete
the project
– Use vendors for specialty items such as windows,
cabinets, and doors
Getting the Materials to the Job Site
• Delivery by supplier
– Job site
– Warehouse
• Delivery service
– Good for small pick-ups
– Cost around $25
– Keeps your lead carpenters on the job site
• In-house delivery person
– Job costed
– Needs to have a set schedule for deliveries
• Will-call
While the Job is in Progress
• Large projects
– Order materials by phase and have them delivered
• Small projects
– Order all materials before the project starts and
have them at the site, warehouse or will-call
• Daily phone call by lead carpenter
– Materials for tomorrow
– Ask “ What materials do you need tomorrow, or to
finish out the project”
• Site visit by superintendent
When the Project is Complete
• Leave all project specific materials behind
for the homeowner – paint, trim, scraps
• Throw all scraps and project specific
materials away
• Lead carpenter and superintendent remove
left over materials
– Return to store – superintendent
– Return to warehouse – superintendent
– Take to next project – lead carpenter
Homeowner Selections
• Must be in writing and signed by the
homeowner
• List of selections is generated by the
coordinator using the estimate
• Small project under $25,000 selections
made before work begins
• Large projects selections made by the
time demolition and cleaning is complete
Measurements
• Job cost-outs
• Accountability reports
• Production meetings
Job cost reports
• Manual
– Field report by superintendent or lead
carpenter
– Spreadsheet used by coordinator or project
manager
• Accounting software
Accountability Reports
• Production report
– Budget vs. actual cost
• Project manager efficiency
– Length of time to complete estimate
– Length of time to get contract signed
• Production efficiency
– Measures estimated completion time vs.
actual completion time
Production Meetings
• Weekly production meeting
• Daily team meeting
Strategies For Corrections
Strategies For Corrections
• Put production on a pedestal
– Plan and use your production staffs 2080
hours as your first priority
Production
• Create and post and organization chart
– Make sure each production person know where they
lay and who supervises them
• Emphasis safety and safety training
– Let them know you are interested in their well being
• Create a detailed job description for each
employee
– Change them as the positions change
• Create a review form holding them accountable
for the items in the job description
Production
• Include them in meetings
• Offer training incentives
• Have a clear and concise path for career
mobility
• Remove cancers immediately
– Hire tough…fire fast
• Create and implement an incentive plan
– Both personal and team based
– Small perks and recognition go a long way
Production
• Remember:
You can’t manage what you can’t measure
-Jack Welch
And
Trust but verify
-Ronald Regan (with special credit to Phil Rosebrook Sr.)
Strategies For Corrections
• Put production on a pedestal
– Plan and use your production staffs 2080
hours as your first priority
• Monitor and reduce drive time
– Monitoring is the blood test of your
businesses health check-up
– Single most reducible and inefficient time
spent
Drive Time
• Start/stop day at job site
– Production staff should start and end day for all
non-emergency work at the job site
– Use technology to monitor the process
– Review company vehicle policy
– Pay mileage instead of allowance
• This will allow a tracking mechanism for drive time
– Add runner for material delivery
• Better yet use your suppliers to deliver material
– The numbers do not support staff material procurement
Strategies For Corrections
• Material Handling
– Dispose of extras
– Look critically at what you stock
– Keep production from material procurement
at all costs
Material Handling
• Don’t return unused commodity stock to your
warehouse
– Dispose on site
– Give to property owner
• Production personnel should produce and not
purchase
• Avoid the temptation to stock most supplies.
– The savings on most bulk purchases are far offset by
the cost of storage and delivery
– Utilize suppliers that will deliver even for a fee
Strategies For Corrections
• Material Handling
– Dispose of extras
– Look critically at what you stock
– Keep production from material procurement
at all costs
• Add technology
– Computer, faxes, PDA’s
– GPS, Sprint/Nextel systems
Technology
• Cost vs. benefit
– Make sure it makes sense financially and
logistically
• Keep production staff out of office
– Use faxes or computers to send daily time
sheets
– Enter time data in real time through PDA’s
or phones
• Use GPS to track assets, both organic
and inorganic
Challenges of having a mobile
workforce
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•
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No visibility into your team
High overtime costs
Manual timecard processing
High mileage costs
Can’t allocate your resources
effectively
• Difficult to communicate with
your team
• Manual dispatching
• Manual paperwork chaos
Mobile Vendors
• Gearworks (gearworks.com)
– Etrace:Worksmart
• Aligo (aligo.com)
– WorkTrack
• Portable Internet (portableinternet.com)
– GPS Mobile Workforce Management
• Westlake Software (westlakesoftware.com)
– AIR Mobility
• Time Card (timecard.econz.com)
– Time Card (Verizon Wireless)
etrace Workzones
1)
All landmarks and jobs are geo-coded &
labeled by stop name.
2)
A configurable Workzone surrounds each
stop to define its boundaries for GPS
collection
3)
When a vehicle enters the Workzone, etrace
starts to monitor the duration to determine if
it should record this as a stop
4)
When a vehicle is in a Workzone for a
specified duration, etrace marks this as a
stop and records details, such as distance
traveled and time of entry.
5)
If a vehicle is stopped in a Workzone that
does not correspond to a landmark or job,
the stop is logged as an “unscheduled”
stop..”
Stop is Recorded
Potential Stop
Workzone
Worker Map Display of Exception Time
Summary
• Ability to transform the mobile
workforce for the field service
industry.
• Eliminate manual processes
increasing accuracy and costs.
• Increase customer response times
• Decrease mileage and overtime
costs
• Leverage your IT and backend
system investment
• Fast return on investment