Improving Production Efficiency

1. Improving Production Efficiency David Ellings David Rosebrook Business Mentors 2006 DKC Conference, Toronto

2. What’s On Tap • 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

3. Measuring Success? Employees Equipment Building Size Volume

4. SALES: $5,000,000 EXPENSE: $4,850,000 PROFIT: $150,000 or 3% SALES: $750,000 EXPENSES: $600,000 PROFIT: $150,000 or 20%

5. Risk Reward

6. NAICS Code Industry Segment Profit 8%

7. 0 – 22% 15 – 30% 50 – 80%

8. Direct Costs 20 – 50% Material/Equipment 50 – 90% Labor 50 – 80% DIRECT COSTS

9. 50 – 90% Labor Focus For Efficiency

10. 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 Myths

11. Ratio Difference Efficiency 1% increase in efficiency results in a 5% increase in profits

12. 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

13. 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

14. 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

15. 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 $

16. 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

17. Introduction • Methodology • Study detailed movement of 82 production employees • Focus on inefficient time and not on production cycles • Created buy-in through incentives and self-improvement • Used sampling and statistical analysis techniques to establish and confirm results • Sampled across all company production areas • Gathered data very quietly

18. 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

19. 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

20. 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

21. 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

22. 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

23. Scenario One 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

24. 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

25. 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)

26. 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

27. 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

28. 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

29. Scenario Two 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

30. The Cost of Inefficiency Scenario One Scenario Two Industry Average 1.5 hrs = $56.25/person/day = $13, 781/year 5.0 hrs = $187.50/person/day = $45,937/year 2.6 hrs = $99.00/person/day = $24,255/year

31. Is this it….

32. No, it is just the tip of the ice berg!

33. What about the revenue that should have been earned during the inefficient time spend….

34. 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

35. Lost Revenue Scenarios • $36,750/yr of lost revenue per person • 367.5 hrs unproductive = 1592.5 hrs productive • $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

36. 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

37. 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

38. 1% increase in efficiency results in a 5% increase in profits

39. Small Increase, Big Gain 5% increase = 25% more profit • Productive time • 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 = $37,500increase inPROFITS

40. 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

41. 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.

42. 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?

43. Actual Results 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

44. Actual Results NET PROFITS 42.4%

45. Break Time 10 Minutes

46. 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

47. 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

48. True Inefficiencies According to Dave • Scheduling • Materials procurement • Accountability of employees • Travel time

49. 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

50. Contents • Building the construction team • Planning the project • Estimating • Budgeting • Scheduling • Materials • Measuring our progress