Optimizing the Labor Supply Chain

Part 2

You Cant Manage What You Cant Measure

Prepared by: Peter Schnorbach Vice President Product Marketing Productivity Management Tom Stretar Logistics Consultant Productivity Management

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Table of Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Defining Labor Productivity . . . . . . . . . . . . . . . . . . . . . . . . . . Measuring Productivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Units Per Hour . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Multiple Variable Based . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Discrete Based Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A Roadmap to a High Performance Workforce . . . . . . . . . . . . . . . . . . . . . The Six Step Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Identify . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Engage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Develop . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deploy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Analyze . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3 4 5
5 5 6 7 8 8 9 9 10 11 11 12

Copyright 2004. RedPrairie Corporation. All rights reserved. This publication contains proprietary information of RedPrairie Corporation. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form by any means, electronic, mechanical, photocopying, recording or otherwise without the prior written permission of RedPrairie Corporation.

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Introduction
A study recently reported in ASCET Volume 6 on leveraging the Supply Chain to create and sustain a high performance business noted that high performance businesses are adept at using information to make the right decisions at the right time1. Compared to less effective organizations, they: Gather more and better information about their business and competitive environments Analyze that information more thoroughly and make better decisions based on the results of the analysis Act more quickly and decisively on the acquired information Monitor their performance more closely Improve and innovate continuously

Thus, to achieve the competitive advantage that results from high performance, companies must develop the ability to quickly and effectively gather, analyze and act on information that drives supply chain performance. Yet, while companies spend billions on technology investments aimed at managing and optimizing inventory, they spend significantly less on the performance and measurement of one of the most significant cost elements in their supply chainlabor. Improved labor management provides one of the most significant opportunities for reducing overall supply chain cost. Results of hundreds of implementations show companies can achieve overall labor savings of up to 30 percent using advanced labor productivity solutions. The chart below defines potential savings based on the current state of your labor management practices.

Performance Levels
Labor Incentives with Closed Loop Employee Feedback, Supervisory Alerts

Current Performance Standards

100% Discrete MSD/MCD Key Performance Indicators

3% to 5%

8% to 12%

Closed Loop Employee Feedback, Supervisory Alerts

Limited or Manual Employee Feedback

10% to 20%

20% to 30%

John B. Machette and Dr. Hau L. Lee, Leveraging the Supply Chain to Create and Sustain a High Performance Business, ASCET, Volume 6, Montgomery Research Inc. , San Francisco, CA, 2004

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Defining Labor Productivity

No-one doubts the wisdom of the old management truism You cant manage what you cant measure. However, as this paper will demonstrate, how you measure labor is as important as the fact you are measuring it at all. In fact, using the wrong measurements can provide a distorted view of productivity that leads to incorrect decisions which can put your company at a competitive disadvantage. Most companies measure labor productivity in some manner. Labor productivity, in simple terms, is the rate of output per unit of input. Metrics such as units per hour (UPH), lines per hour (LPH), dollars shipped, and other similar measurements are commonly used to report on productivity. The figure below shows commonly used metrics and frequency of use.

Units per hour Orders per hour Lines per hour Cartons per hour Dollars shipped Moves per hour No measures in place Pounds per hour Other
0 0 10 10 20 20 30 30 40 40

34% 31% 30% 29% 25% 13% 12% 10% 10%

While these metrics provide a useful measure of output relative to a historical benchmark, they fail to accurately report the operations effectiveness in relation to its true potential. For example, if a company has worked at a low percentage of its potential historically, a sizable increase in productivity may still leave it well short of its potential, and at a competitive disadvantage. Conversely, a company that historically performs at or near its true potential, may create competitive advantage with only a small increase in productivity. The key is that there is no way to know where your company falls on this spectrum using the traditional units of measure above. A better measurement methodology is needed that objectively measures performance against each companys true potential so companies can more effectively manage their labor resources. This paper will evaluate various methodologies for measuring labor productivity and will offer a practical solution that has significantly increased productivity at hundreds of sites around the world.

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Measuring Productivity
If the objective is to be a high performance organization, then supervisors and management need the right information at the right time in order to run the business most effectively and efficiently. When it comes to managing labor resources, the right information is an accurate look at performance against the true potential as defined by engineered standards. There are three types of standards commonly developed and implemented for measuring labor productivity: Units per Hour (UPH) Multiple variable based (KVIs) Discrete based includes customer or vendor specific

Units per Hour Units per hour standards are typically based on historical trends or industry averages for the process being measured. An example of a UPH standard is cases picked per hour (CPH) or average handle duration (AHD). Advantages of UPH based standards are that they are easily understood by employees, are easy to develop, and require a low level of investment. But like most things in business, the overall return from an operational improvement is often directly related to the time and effort involved in its implementation. In the case of UPH, the return is very low because the ability to achieve the standards is highly affected by order density (lines per order and units per line), seasonality, and product mix issues. Thus, performance is more closely tied to conditions than to the effort applied. In addition, the historical performance the standards are based on are often inefficient to begin with. UPH standards are the least accurate measurement and tend to be loose to compensate for the large variances in the above variables. This, coupled with the fact that UPH standards typically do not set the bar at the level of true operational potential, results in much smaller increases in productivity than other standards can provide. Multiple Variable Based A Key Volume Indicator (KVI) is a variable to which an engineered standard time can be applied. An engineered productivity standard often has multiple variables used in determining the overall time required to complete a process. The number of times the variable, or KVI, occurs within a process directly influences the overall standard time. Unlike UPH standards, Multi Variable based standards compensates for variances in order density, and are thus more accurate than UPH based standards. KVI standards can be used to hold an employee accountable for their performance to a very specific degree of accuracy. While this type of standard is more difficult to establish, requires periodic maintenance and is subject to seasonality, it will provide greater visibility into individual employee performance than UPH. The weakness in KVI standards is they are based on averages rather than the specific components of each task. This makes them less accurate and equitable.

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Discrete Based Standards Discrete based standards are characterized by the elimination of averaging of data that occurs in the development of UPH and KVI based standards. Each task is defined and measured based on the unique characteristics of the task, including such factors as weight, location, distance traveled, and equipment used. These standards are highly accurate and can deliver significant productivity gains, in excess of 30 percent, resulting in substantial labor savings. Discrete based standards are required for accurate and fair incentive pay calculations. They are more accurate than UPH or KVI standards, are generally accepted by unions, are not affected by seasonality or work mix, and provide the highest threshold for employee accountability. Establishing discrete standards requires industrial engineering expertise and is not always applicable within every operation. However, the higher initial investment is offset by increased productivity gains, lower long-term maintenance costs, and a return on investment that is typically very rapid. Given the objective is to be a high performing organization, which requires real-time access to accurate information on supply chain performance, and that discrete-based standards provide the best source of measuring employee performance, the question becomes: how do we use this information to build a high performance workforce?

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A Roadmap to a High Performance Workforce

A recent article by AMR Research noted the superior performance of companies such as Dell Computer, Southwest Airlines, Toyota, UPS, and Wal-Mart2. The article pointed out that their productivity performance is undisputable, and has given these companies a distinct competitive advantage. What makes these companies the productivity leaders, and how can companies take advantage of their approach to build a high performance workforce? All of these companies focus intensely on creating rigid, consistent operating procedures augmented with flexible, real-time control systems. The standardized work procedures reduce costs and improve quality, while the flexible, real-time control systems enable these companies to react to unanticipated disruptions faster than their competition. Advanced productivity management solutions provide similar benefits. Preferred methods and discrete standards development provide the rigid, consistent operating procedures for how employees should do their work using the most productive methods. This reduces labor costs and ensures consistent quality and delivery. The productivity management software provides the real-time view of work being performed to give supervisors immediate notification when problems arise. This gives them the flexibility to react quickly to correct problems before they degrade performance and service. To better understand the impact of productivity management solutions, it is important to know why employees, and consequently organizations, dont perform at their full potential. The five key reasons employees do not meet expectations are:3 They dont know what is expected of them. People need goals. If they dont know what is considered a job well done, they will be unlikely to meet expectations. They dont know how. Poor training is the main reason employees lack the know-how to perform their jobs. The majority of lost time in most operations is directly attributable to insufficient or inappropriate training. They cant do the job. This usually results from either poorly defined jobs or from procedures or methods that do not accurately reflect the optimal way to perform the job. There are barriers beyond the employees control. The most common barriers to productivity are organizational. Employees do not have the proper equipment, the work environment has not been set up or stocked properly, inventory or information is not available when needed, etc. They dont want to do the job. In any company there are employees who simply dont want to do the job. Take care of the top four reasons and this one should take care of itself.

The bottom line is that most employees want to do a good job. And given proper training, suitable job design and work environment, and specific goals and objectives for
2 3

Bob Parker, Lessons From the Productivity Leaders, AMR Research Alert, April 15, 2004. Gene Gagnon, Gagnon and Associates

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performing their jobs, most employees will succeed. This is the central principal on which advanced labor productivity management solutions are based.

The Six Step Methodology

Implementing an advanced productivity management solution is significantly different than most other implementations because it is not software focused. Productivity management solutions must consider the interplay of people, process and technology. RedPrairies implementation strategy for its productivity management solution combines process knowledge, people and technology within a six step delivery methodology that encompasses the training, job design and discrete goal definition required for employees, and thus organizations, to succeed. By following this six step methodology, any company can create a high performance workforce.

People

Identify Reward Analyze Engage Develop Deploy

Process
Identify

Technology

The first step is to define the goals the company is trying to achieve. These goals must be expressed in measurable criteria, such as cycle time, productivity, or cost per unit, for each area in the operation to create an objective means for defining success. The goals must be closely aligned with corporate objectives to ensure workforce success supports corporate success. These aligned goals set the foundation on which all following steps are built. Also during this step, the jobs that will be included in the productivity program must be identified. Not all jobs are suited for coverage. In general, jobs that are repetitive in nature, with definable tasks are the best candidates. You might start with core functions such as order picking in a distribution center or customer service calls in a call center, and add more job functions over time.

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Engage Engage is the process of assessing current operations and identifying best practices for performing the work. Process improvements should seek to leverage human capital and technology investments to design the most effective and efficient methods for completing each job within the context of the equipment and environment available. These preferred methods are the basis for training employees in the proper way to perform their jobs and are essential for cost reduction. The Engage step is what is most often missing from other labor management software implementations. Too many software companies assert that their software is the answer to improved productivity. But without improved, best practice methodologies, all any software does is monitor existing unproductive work habits. Whats worse, it can give a false impression of success when performance levels are measured against historical UPH standards that are themselves flawed, as described above. The key to success in the Engage step is to employ industrial engineers experienced in developing preferred methods and discrete standards for supply chain operations. It is their responsibility to analyze each job to determine the most efficient method for performing each task, and then applying master standard data to compute the discrete engineered standard for the job. This is the only way to ensure employees will be measured against their true potential effectiveness, and that any incentives offered will be fair and accurate. Once developed, the preferred methods and discrete engineered standards are loaded into the labor management software database to be used for goal calculations and work performance monitoring. Develop Although the Develop step is third in this sequence, it really starts coincident with the Identify and Engage steps. The Develop step focuses on communication, in its many forms, of the corporate vision for productivity improvement as an essential process for corporate competitiveness and success, and how that vision gets translated down to the shop floor. In that regards, this step is all about change management, getting everyone involved on the same page. As shown earlier, those employees who dont know what is expected of them, dont know how to do their jobs, or dont care will submarine the success of any project. Therefore, a communication plan and strategy must be developed to ensure that all employees understand why changes are being made and how their individual performance impacts the overall operation. The executive vision must be communicated to everyone. Employee buy-in is absolutely essential to the success of a productivity program. What must be developed during this step are: Corporate communication plans that provide both the executive vision and the impact on individuals. The communications must include what the benefits are for the employees, such as introduction of an incentive pay,

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bonus or awards plan, in order for employees to cooperate willingly. In other cases, the employee benefit might be increased job security that will come with the increased competitiveness resulting from improved corporate productivity. Training plans that teach each employee the what, when and why for the new preferred methods and engineered standards. The plans should include multiple repetitions and hands-on practice to ensure all employees understand and are comfortable with the methods before they are rolled out. The lack of attention to this step is the most frequently mentioned lessons learned from productivity program (and most software) implementations. Roll-out plans that define the sequencing and timing of all jobs to be included in the productivity program. As mentioned in the Identify step, not all jobs must be included in the initial go-live of the program. The sequencing and timing must be communicated to all participants to ensure smooth roll-out. The roll-out plan will also define the sequence and timing of program adoption across multiple sites or facilities.

Just as the Engage step is critical for defining the best way to perform each job, the Develop step is crucial in creating a workforce that is willing and able to adapt to the new job methods. Deploy As with any software implementation, the Deploy step is where the rubber meets the road. It includes putting into action all the communication, training and roll-out plans defined earlier in this methodlogy. The communications plan deployment starts early in the process to mentally prepare the organization for adoption of the new program. This is a key element of change management. Training is conducted in sequence with the roll-out plan. It usually occurs just prior to or coincident with roll-out of the software at each location. Frequently there is a ramp-up period during which employees become familiar with the new methods, using any new technology, such as radio frequency (RF) equipment, and gaining speed through repetition. The ramp-up period often covers a few weeks, during which time performance typically rises from an average rate or 60%-70% of standard to 95%-100% of standard. If incentive plans are to be implemented, they normally will not begin until after the ramp-up period. Supervisors also have a ramp-up period during which they become familiar with the new monitoring and reporting tools offered by the labor management software. They will begin to quickly recognize developing problems and take action to remove barriers to performance before results deteriorate. Monitoring employee performance without getting in their way, especially when operations are spread across the globe, takes a constant flow of information. The flow of information must be available to all levels within the organization, from employees and supervisors on the floor to the CEO. The labor management system becomes the conduit for that information exchange.

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Analyze A successful strategy takes into account how one persons actions affect another and how an individuals performance can turn the corporate vision into reality. The ability of an enterprise to set clear goals and to track performance against those goals makes the corporate vision tangible. However, although business intelligence tools have gained widespread acceptance in most corporations, they have had very low adoption within fulfillment operations. Many companies today still have no way to track, in real time, how individuals are performing in various facilities, much less how multiple operations are performing across an entire distribution network. Yet, as discussed in the opening section of this white paper, the ability to gather, analyze and act on business performance information is what separates high performance businesses from the pack. Enterprise-wide scorecarding capabilities are needed to collect and analyze performance information so management can effectively manage human capital across the entire corporation. This Analyze step, therefore, closes the loop in creating a high performance workforce, giving management the real-time feedback necessary for continuous improvement. Reward The last step in RedPrairies six step methodology is optional, but experience has shown that fair and accurate incentive programs can significantly increase productivity over what can be attained through adoption of a productivity management solution. Keeping good employees around takes new challenges and greater rewards. Investments in highly productive employees can really pay off. The right compensation plan will keep employees focused on doing the right things, in the right way. Incentives can increase overall productivity by an additional 20-30 percent. Therefore, RedPrairie recommends implementation of incentive or other reward programs as the final step in creating a high performance workforce. However, because of the difficulty companies have historically faced in collecting and synchronizing detailed time and performance data, many have shied away from implementing incentive pay programs. And even those companies that can effectively collect detailed time and performance data often find their payroll systems are not designed to perform the complex incentive calculations required. Therefore, they either expend considerable clerical resources to perform these gross pay calculations, or forgo using incentive programs. RedPrairie has solved this problem by adding the time and attendance capabilities of time clock systems and a rules-based gross pay calculation engine to the productivity tracking, reporting, labor planning and activity-based costing functionality of its Productivity Management solution. The result is a single source solution for time and attendance tracking and incentive pay calculations that makes adoption of incentive programs a natural extension of high performance workforce programs.

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Summary
High performance businesses are those that can effectively gather relevant performance information in real-time, analyze it, and quickly act upon that analysis to continuously improve operations and customer service. However, many companies have not applied this practice to their human resources, even though they account for 50 percent or more of distribution costs. But since you cant manage what you cant measure still holds true, companies striving to be high performance businesses cannot succeed while ignoring this critical component of operations. And as discussed, the way you measure performance is equally important. Only by accurately measuring performance against the true potential of each job can companies determine the effectiveness of their human capital management programs in distribution, call centers and other supply chain operations. The key to successful performance management, as the AMR Research study of Dell, Southwest Airlines, Toyoda and others showed, is to standardize work and to augment the standards with flexible control systems. Implementing discrete engineered standards with productivity monitoring software and incentive programs provides standardized work practices and flexible control systems that enable companies to evaluate performance related to work content and under the control of each individual employee. At this level, companies can collect and analyze meaningful information that provides insight into the people, process and technology affecting overall company performance. In this white paper, RedPrairie has laid out a six step methodology that will enable any company to develop a high performance workforce to support corporate goals. It involves: Identifying the desired goals to be achieved Engaging in an industrial engineering project to define the true potential for each job impacting those goals Developing communications plans to align executive and employee vision, and train employees on new best practice methods Deploying the new methods and monitoring software according to a welldefined roll-out program with appropriate ramp-up periods Analyzing resulting performance on both local and enterprise levels to remove barriers to performance and sustain continuous improvement, and Rewarding top performers to gain additional productivity. Companies that use this six step methodology to implement labor productivity programs focused on analyzing performance against true potential will be well on their way to becoming high performance businesses.

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About RedPrairie Corporation

RedPrairie is a global leader in supply chain technology solutions that enable the transformation and optimization of supply chain networks, driving out costs, improving customer service and creating competitive advantage. RedPrairies supply chain execution solutions provide the industrys leading transportation, productivity, and distribution management capabilities, fully integrated with process management components for real-time visibility and event management, trading partner integration, quality control and performance measurement. Coupled with RedPrairies tactical planning and inventory optimization solutions, RedPrairie provides a single source platform for global supply chain management. RedPrairie provides industry-tailored solutions for many markets, including consumer goods, direct to consumer and traditional retail, food and beverage, high tech / electronics, third party logistics, industrial / wholesale, automotive and service parts, and pharmaceuticals. Customers include Hewlett-Packard, Sony, Thames Water, Procter & Gamble, Nestle, Panasonic, Georgia-Pacific, Eveready, Merck Sharp & Dohme, Unilever, Exel, GE, TNT Logistics, and many others. With offices across the globe, RedPrairie is a true world-wide solution provider. For additional information, call 1.877.733.7724, or access www.RedPrairie.com.
RedPrairie, DigitaLogistix and DLx are registered trademarks of RedPrairie Corporation. 2004 RedPrairie Corporation. All Rights Reserved.

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