How to boost productivity through labour efficiency

How to boost productivity through labour efficiency

New Zealand has one of the OECD’s lowest levels of productivity and to stand alone in an uncoupled world this is something we need to improve – and a very practical way to start that improvement is by understanding your businesses labour efficiency. 

In his book Simple Numbers, Greg Crabtree details what he refers to as the Labour Efficiency Ratio or LER.

It is a simple calculation as follows:

Sales – Cost of Sales = Gross Profit before Direct Labour.

If you then divide your direct labour costs into the gross profit before direct labour, it tells you how many times direct labour is covered. Generally, a score of anything less than two is problematic with the goal set above three.

Let’s look at some examples where direct labour has been managed differently using automation, more flexible staffing and other approaches. Notice the correlation between the LER and percentage net profit before tax.

Note: it is important to ensure all direct costs are captured in your cost of sales. Too often equipment hire, project travel and accommodation and other direct costs are shown in overhead expenses. These should be recoded as COS to give a true contribution margin. Similarly, direct labour needs to incorporate all those in the making of products or delivery of a service. If supervisors spend more than 50% of their time on the job, then include them as direct labour, otherwise show them as indirect labour as an overhead expense.

As you can see from the examples above, getting productivity up impacts on your bottom line.

So how can the LER be improved? Here are some ideas;

  • Staffing levels
    • Use subcontractors until there is sufficient business to support a full time equivalent
    • Employ more part time staff and map them to periods of demand
  • Staffing effectiveness
    • Ensure people know what is expected of them
    • Remove obstructions to production
    • Employ supervisors who are independent and capable of effective supervision
  • Eliminate Rework
    • Know your error rate – DIFOT (Delivery In Full On Time) for products or IFOTIS (In Form, On Time, In Specification) for service delivery. Target 98% or better
    • Follow up on all complaints and respond with a ‘Correction Action Process’
  • Post Audit Quotes & Estimates
    • Conduct post audits on project work
    • Review and recalibrate processes from findings
    • Constantly incorporate learnings into Standard Operating Procedures (SOPs)
    • Regularly debrief and reset SOPs – again, people need to know what is expected
  • Equipment
    • Look at using machinery to do the mundane
    • Look to introduce robotics to significantly increase throughputs
    • Use systems to capture any manual processes like books or paperwork showing units input, outputs, labour hours etc. Electronically capture and utilise API’s etc to put directly into the system.
  • Proactive Equipment Maintenance
    • Ensure your equipment is always functioning at full capacity
    • Monitor equipment downtime within
    • Have planned back up processes when failure occurs

Although not related to staffing, the following will favourably affect your LER.

  • Increase sales
    • Price increases – when was the last time you put them up?
    • Tighter terms of trade – stop discounting and provide transparent terms based on volumes and true costs to serve
    • Improved account management to increase sales
  • Improved or increased effective marketing
  • Improved buying
    • Look at your main basket of goods and get people to bid and achieve EDLP (Every Day Low Pricing)
    • Ask your suppliers for improved terms – you will be surprised
  • Know your costings
    • Forensically cost all your product lines and or services – the devil is in the detail
    • Know what margins each of your products and services deliver
    • Re-engineer unprofitable lines or services or delete them

Following all or some of these will improve your business performance.

A guide to Net Profit before Tax

Less than 5% and your business needs life support – meaning its dying.

Between 5 – 10% you are on your way to recovery, but you have a way to go.

Between 10 – 15% you are running a good business, retaining sufficient profit to manage growth and any business shocks.

15% plus puts you in a good niche but keep an eye on your competition. Unless you are nicely niched, over time, you may be seen as too pricey which will encourage new players to enter your market.

These are volatile times, and it is important we have balance sheet strength to help us get through. What is good is different for each business but as a rule of thumb, if you can access resources to sustain you for three months of overheads without any sales, then you will be better off than many others.

Simple Numbers by Greg Crabtree is available on Amazon.

We’ve Done It Before – We Can Do It Again

We’ve Done It Before – We Can Do It Again

A sudden slip into Alert Level Three, the blast of the emergency ‘COVID’ warning through our phones and once again we’re into the balancing act of keeping our businesses moving in exceptional circumstances.

Last month our Pulse Check results told us how adaptable and flexible New Zealand’s small business are, with business owners altering operations and changing practice in order to survive the challenges that 2020 has thrown at us all. Just as we have rolled out our August Pulse Check – which you can access here if you would like to participate – the beat has changed again and, in Auckland, we are facing at least three days at Level 3, probably more, with the rest of New Zealand parked up at Level 2 for the time being.

We asked our Auckland team for their thoughts on the current situation and their advice was simple — we’ve been here before, rely on past experience and know that it will pass.

The Alternative Board’s managing director Stephen James said: “Knowing it will pass, spend some time addressing a few scenarios. For example, if Level 3 lasts, as announced, for three days what do you need to do? Or, if it remains in place for two weeks or if Level 4 is declared and we have full lockdown for an indefinite period — what then? Develop plans of action for each scenario and communicate these to your staff and stakeholders.”

Scenarios are very helpful when it comes to managing uncertainty as Alfredo Puche explained in his recent blog post. Other helpful advice is to be found in Gordon Stuart’s tips on surviving a recession and Karen Van Eden’s thought-provoking piece on thriving in times of uncertainty.

Whatever your approach, remember that The Alternative Board is here to help you, the business owner, manage and grow your business regardless of circumstances — and we are all here, ready to help you.

As Karen says: “We’ve done this before – together we can do it again. Stay safe, stay well.”

How Do We Survive – And Even Thrive – In Times of Uncertainty?

How Do We Survive – And Even Thrive – In Times of Uncertainty?

First, we acknowledge that we will face challenges as we navigate our way through this. Expecting to do this with ease is not realistic.

Second, after we get clearer about our path forward, we hold this path lightly – evolving and adapting what we do in response to the changes we see around us.

Third, as we move down this path, we stop and find that place of stillness that exists within us. This supports us to find our true north, our anchor, in challenging and uncertain times.

Fourth, we act as mindfully as we can. Being present to what is happening, being here in this moment – and the next one – enables us to see a more accurate version of the world around us. This helps us to make better decisions, so we swim with the current rather than against it.

And finally, we relate to ourselves, and to other people, with the greatest generosity we are capable of; as we appreciate and open to new and different ways of doing things.

This willingness to see the good in ourselves and others and to appreciate what is – may be the game-changer. For our willingness to do this reflects – and enhances – our belief in our ability to influence the outcomes around us, which is so much harder in times of uncertainty

At The Alternative Board, our business owners meet together regularly. And when we do, we share our best understanding of what is happening. And as we see more, and learn more, we course-correct. And then we course-correct again. And again…

If you are struggling to identify the best path forward, please call us to see how we can help you navigate through these uncertain times.

How do you navigate through these uncertain times?

How do you navigate through these uncertain times?

When our world is predictable, we plan with confidence.

But what do we when our world is not predictable – as it is now?

First, we acknowledge that we are dealing with an unpredictable world.

Why? Because most of us act as if the future is predictable – when it’s not…

Using the Cynefin framework (pronounced kenevin), we divide the world into those things that are predictable (on the right), and those that are not (on the left). Having identified this, we ask: Is the situation we are dealing with simple, complicated, complex, or chaotic?

These definitions are important. Particularly now.

In a simple world, cause and effect can be replicated. You can tell what to do simply by looking at what works and doing it.

In a complicated world, cause and effect are still predictable, but the actions we need to take are less obvious. This means we need to some research or bring in an expert to help us determine the best path forward.

In a complex world, life is unpredictable, and patterns do not repeat. We can only see a cause and effect relationship after we have acted and can look back over time and join the dots.

In a chaotic world, there is no cause and effect relationship.

So how do we chart our path through these uncertain times?

First, we need to accept that what we have learned in the past will not necessarily help us in the future. This can be a hard lesson to learn…

Then, we scan the environment as accurately as we can, to see what is happening. Then we do the next best thing we can – we experiment. Then we learn, and we course correct. Then we look again, learn some more, and course correct again. And again.

As Jean Boulton said,

“Wishing the world was predictable and controllable does not make it so and might make us disregard what is actually happening.”

At The Alternative Board, our business owners meet together regularly. And when we do, we share our best understanding of what is happening. And as we see more, and learn more, we course-correct. And then we course-correct again. And again…

If you are struggling to identify the best path forward, please call us to see how we can help you navigate through these uncertain times.

– Karen Van Eden, TAB Business Owner, Auckland West

Paul Denton

Paul Denton

“You don’t need to go it alone.”

Paul Denton – Scott PHS

“Prior to joining TAB the opportunity to share my ideas and day to day issues was limited to my accountant and some of my senior staff. Having an opportunity to meet with other business owners with remarkably similar issues was empowering.”

“Since joining TAB I have resolved a number of difficult employment-related issues, but more importantly gave me the motivation to step back long enough and complete a Strategic Plan, with the invaluable assistance of Karen Van Eden. Critical for our future growth and longevity.”

“TAB gives me an environment that challenges me as an individual and reminds me of my responsibility to my staff and customers”

“Bruce is a treasure of experience and professional connections of which I have taken advantage. One on One Coaching has help me confirm my thoughts and provided connection with other professionals to help resolve issues that ultimately strengthened my business. I would have no hesitation in recommending Bruce and Karen and TAB to any business owner. You don’t need to go it alone.”

Paul Denton

Managing Director – Scott PHS

Lee Dewerson

Lee Dewerson

Lee Dewerson has put in the hard graft and for many years has worked 60-hour weeks relentlessly, learning all there is to know about the Audio-Visual technology world.  Lee is now a Co-Owner and Operator of Safe N Sound Limited, a high-end retailer and installer of audio-visual systems, which has branches in New Zealand and Australia.

Lee finds value in being involved in The Alternative Board peer group process.

“Despite starting out as an electrician, my true passion was always audio. So about 15 years ago, I worked in the automation side of things for various companies in Auckland.  I wanted to suss out the industry and learn all there is to know about the audio field.  I got to the stage where I was ready to go out on my own. This hard work has led me to where I am today, with my own business.”

Being a Member of TAB has provided Lee with lots of lessons—an important lesson includes being more deliberate and taking the necessary time to do things right.

“I’ve learned to take my time and not to rush things. Things take time. I now make sure that I know exactly what the client wants and the best way to do it. I ensure that I understand all of the products and all of the people involved.  By attending Board Meetings you learn a lot about your own business. You also learn a lot about yourself, especially from different perspectives.”

Lee explains further.

“When you run your own business, you can get narrow minded and tunnel vision can easily set in, especially as there just aren’t enough of you at that one level.  It is good to have everyone’s opinion.  I’ve resolved several issues while sat at the Board table with the other Members.”

Lee’s other tips to business owners are to make sure that capital is available to fund growth, work as much as possible, don’t give in and, most importantly, don’t overspend.  The Alternative Board peer group process provides the support and accountability that allows Lee to stay true to these tips.

The Alternative Board - OwnersAuckland West