The Courage to Reduce Controllable Costs – The Wisdom to Do It Right

Sitting in the boardroom of a major global food manufacturing company, the CEO was meeting with the senior members of operations. As the room settled down, she stood to address the team, “Grant us the ability to accept the things we cannot change, the courage to change the things we can, and the wisdom to know the difference.”

The COO remembered this mantra from several self-help groups, but was hesitant to comment. The whole team looked confused, not sure where the meeting was headed.

The CEO continued, “There are things happening in our industry we can’t control. The cost of raw materials is skyrocketing; transportation costs and energy prices are at record highs. Yes, they all impact our business, but we have almost zero control over these costs, so those are the challenges we need to accept as reality, at least for now. Today, we need to focus on what we can change.”

“Now comes the wisdom part. Where are our major controllable costs?” It didn’t take long for the group’s spirited brainstorming to produce the biggest opportunity for change they could own. Labor effectiveness just jumped out. However, labor issues, particularly the change management aspects, were always the most sensitive. The CEO pressed the group to create a “Top 5” list of controllable cost reduction categories directly tied to labor effectiveness and ideas on how to motivate the plant management teams to take action. This is the list of opportunities they came up with:

1. Seasonal and Variable Demand – Workload Fluctuations
a. Reducing idle time
b. Reducing overtime
c. Minimizing inventory/maximizing freshness
2. Low Cost Sanitation Practices
3. Improve Uptime with Better Maintenance Schedules
4. Low Productivity from Afternoon and Night Shifts
5. Turnover, Training, and Hiring Costs

This boardroom exchange, a typical last resort effort to capture cost savings during economic downturns, is commonplace in today’s world. Management teams wait until all other options have been exhausted before talking seriously about effective labor strategies. Labor strategy discussions can be difficult due to the change management required to implement these types of initiatives. However, with annualized savings from full labor optimization projects ranging from 12 -17% of total payroll, delaying evaluation of your largest controllable cost is very expensive. Although not exclusive to the food industry, companies in this sector are being hit the hardest due to the rising costs of raw materials.

The group reached out to Ethan Franklin, Managing Partner of Core Practice Partners for insight. They needed someone who had been through this exercise before and could comfortably fill in the blanks about what they were about to undertake. He spent a few hours in a workshop format sharing case studies of clients with similar challenges. Then he told the group the following:

“Exploring this “Top 5” list seriously and in detail with real data may encourage management teams to make the right cost savings decisions now. Knowing where opportunities exist is the first step in the process to achieve these savings. Actually capturing them is the most difficult step.”

Next, he broke the areas out in more detail. This is a summary of his feedback.

Seasonal and Variable Demand – Workload Fluctuations

Before designing the right scheduling systems for your facility, a lot of homework must be done. What does the seasonal demand curve look like? How high or low can demand go? Should overtime be built into the base schedule, making it easier to flex down? The specific needs of the business should always dictate the scheduling systems. Unfortunately, many companies take schedules from one facility and implement them in another. This simplistic approach usually results in hundreds of thousands, if not millions of wasted labor dollars each year the wrong scheduling system is in place.

When you look at specific plant demand profiles, which requirements best suit your needs? Do you need to be able to flex vertically (more hours on short notice each day), horizontally (flexing out at the end of the week), or have the ability to increase workforce density (more employees during the currently scheduled base hours)? The typical client challenge is that traditional schedules don’t get them where they needed to go. 8 hour shifts, including 3 shifts each day, are probably the least flexible and understanding the financial implications of the current scheduling system is critical.

The Cost of Time analysis is a strategic tool for identifying savings opportunities. The goal of staffing any operation is to match perfectly the workforce (the available labor hours to complete the work) with the workload (the number of people required to meet production demand). It is highly unlikely that any schedule will exactly match the workload. Adverse costs result from a mismatch between the two. In an understaffed situation (more work than people scheduled), overtime must be used. The Adverse Cost of Overtime is the difference between an hour of overtime and an hour of straight time. If staffing levels are higher than the workload, then people are being paid, although no work is accomplished. This Adverse Cost of Idle Time is the fully loaded cost of a straight time hour of labor – very expensive.

The #1 financial mistake companies make is to believe that a reduction in overtime will save money. The financial reality of overtime is that even after adding in the time and one half premium, overtime is often less expensive than straight time since there are no additional benefits or other costs, including vacations, that are included only in the first 40 hours. Overtime numbers stand out on financial reports and cause management to overlook the real opportunity to reduce idle labor costs – the number one labor cost hurting American manufacturers.

Idle time is the real profit killer. Idle time can originate from equipment downtime, overstaffing, poor relief staffing and seasonality. Whatever the cause of idle time, it is a cost with no benefit. All benefits and wages are still a cost to the company during this period of no productivity. Companies pay full benefits and full wages with no return on the investment. On the other hand, overtime is a flexible tool that allows management teams to capture swings in workload. Overtime is only used when workers are needed. Therefore idle time during these periods is highly unlikely. A slight additional cost is counterbalanced by fully utilized employees. However, as with every strategic scheduling tool, there are limits, so your decision to use overtime strategically, must be made by weighing carefully every possible operational scenario.


Problems arise when schedules are created to handle what is happening today with little or no thought for what will happen tomorrow, next month, or next year. A review of past practices is required to help build forecast models, which are critical to the development of the right scheduling system. Consider future changes, such as product lines that are being phased out in the next 12 months or consolidation of products and services. Although forecasting will never be 100% accurate, one must understand the magnitude of the flexibility required when designing schedules. Different schedule systems have different abilities to flex up and flex down as well as significantly different cost profiles. Before starting to design a schedule system, understand the workload. A carefully planned schedule system should have the flexibility to handle both the foreseeable business changes as well as the unforeseen changes with minimal disruption.

Low Cost Sanitation Practices

Production downtime during sanitation periods limits capital utilization and typically creates idle labor time. Even as a leader in the food manufacturing space, sanitation optimization was overlooked. Current practices are typically seen as not negotiable. Although timely sanitation is required, management teams usually sanitize based on the schedule routine. Often there are opportunities to reduce labor costs and increase uptime, even in situations when sanitation processes are considered “optimized”.

Mr. Franklin remembered that several years ago the business unit manager of a 400 employee subsidiary of this food manufacturer implemented a system change. He thought he had fully optimized the sanitation process. He implemented extended runs to reduce the frequency of sanitation and cut the process to 4-hours. Unfortunately, the production labor schedule was not changed. This meant the production, sanitation and maintenance schedules still were not synchronized. So, while the plant saved a little bit of money, they left an amount six times larger unclaimed. The schedules that Core Practice Partners eventually designed reduced production idle time and cut start-ups and shut-downs in half, while increasing capital utilization by almost 10%. In addition to all the cost savings for the company, employees had more days scheduled off each week and still maintained a 40-hour paycheck with overtime opportunities for those who wanted it. Having continuity between connected groups is critical. Sanitation practices and schedules are at the heart of creating a facility without any unnecessary and costly constraints.

Improve Uptime with Better Maintenance Schedules

Maintenance teams are often the highest skilled employees in any facility, and in order to retain them, most management team compromise effective scheduling practices to keep them happy. The result is that most maintenance teams have schedules that are not conducive to maximizing production uptime. Maintenance teams often work Monday through Friday with a concentration of employees on day shift.

Corrective maintenance and other unplanned challenges are very expensive. Having staff that mirror the production schedules makes sense, but some of the most important maintenance department workload should involve preventive maintenance and tear-down activity. These activities can only take place when production is not running. For companies on a 120 hour production schedule (Monday through Friday with three 8 hour shifts), the only possible time for this work is on the weekends. Companies often absorb maintenance idle time during the week with some overstaffing, and then are forced to have employees come in unscheduled on Saturdays and Sundays to work for time and one half and double time. Some maintenance managers might respond that they can find plenty of things for the mechanics to do during Monday through Friday, 9 to 5, but highest priority preventive maintenance tasks can only be done when the lines are not running. Having a day shift mechanic rebuild the backup motor to the backup motor is not the best use of a scheduled 40-hour week.

The right answer is typically a mix of repairs and preventive maintenance scheduling that regularly schedules employees on weekends at straight time. Also, a better distribution of maintenance employees over each 24 hour period can reduce idle time on day shift and better cover the 2nd and 3rd shifts. Often management teams retort that although that sounds like a good idea, they have no idea how to implement such a perceived radical approach. Innovative scheduling techniques can give employees an additional 91 days off, including an extra 13 weeks of vacation – all for the same pay. Yes, on some of these schedules weekend work is built in, but you get more than half your weekends off. This is one way to balance operational needs with employee quality of life.

In the end, if you can’t get the right maintenance people in the right place at the right time, your production teams (the largest population in your facility) will spend unnecessary time idle, waiting for lines to be fixed and running again.

Lower Productivity Levels from Afternoon and Night Shift

Often management teams look at headcount requirements to make sure lines are staffed properly. Even when each shift has the same number of employees, productivity and quality levels often vary greatly. Have you looked at productivity by shift? Some of these variations have to do with starting up the operation on a Sunday night using the less senior third shift employees. Other scenarios also include lost productivity based on inexperience including inefficient change over activity, start ups and shut downs, and other skilled activities that may be unfamiliar to newer shift workers.

In extreme cases, in industries such as nuclear power plants and refinery operations, skill balance is so important that rotating shift schedules are always used. They are very rare in the food manufacturing business. These schedules require each employee to work all the different schedules over the course of several weeks, so that no shift is preferred over another. One week you may be on day shift, the next week on afternoon and the week after that you may be on nights. Skills on each shift are blended, and no group is left exclusively with new hires. Employees in most cases are not excited about these types of schedules, but understand the requirements that have required them to make adjustments. It is critical in a rotating shift environment to get it right - to include the needs of the employees and to make sure the rotation is both healthy and safe.

For employees who are not on a rotating schedule, it is rare that a new schedule with a rotation can be implemented. One reason to move from a fixed schedule to a rotating schedule is to address critical safety concerns that can’t be solved by training. (This would be in industries such as nuclear power or the refining.) However, as mentioned above, these industries usually start with a rotating schedule. In other industries, starting people on fixed shifts and later having them rotate can start a riot. It would take a massive change management program to move employees from a fixed schedule to a rotating schedule – and unless it is absolutely necessary we advise you to avoid that situation. However scheduling strategies, along with a well designed training program, can deliver the right skill balance without requiring a shift to a rotating schedule.

It is possible to create incentives for employees to work off-shifts. However, paying them more is not a good policy because it doesn’t address the real issue. When shift differentials are part of compensation, they are misused 99% of the time and simply are not effective. When people have low morale due to their schedules, it is the schedules that require fixing, not the pay. Typically, extended shifts allow off shift employees more days off where they can be on the “normal” schedule, one that allows them to spend time with their families and go to sleep during the night hours.

In the end, skill imbalance is a often a less noticeable area of labor cost, but when savings are critical to success, this area cannot be ignored.

Turnover, Training, and Hiring Costs

It isn’t only employee productivity that drives success, but employee retention is also critical. The cost of turnover has many facets. Recruiting, hiring, and training are key categories and can easily range between $2,000 and $5,000 per employee when all costs are included. With the right labor strategies, employees will want to stay and perform. Having schedules that fit in with family and social schedules and provide not only the right time off, but predictable time off can make you the employer of choice. Most management teams aren’t experts in scheduling and end up doing the best they can with the schedule they inherited. Adjusting employee schedules in ways they weren’t designed for can cause real heartache for employees.

Conclusion

Returning to the boardroom, the executives had only accomplished the easiest part of the challenge. Identifying key areas to save money is helpful, but the actual capturing of the cost savings is what matters. Too many companies try to cram in solutions after seeing the big cost saving opportunities. They typically leave their employees in the dark as to the reasons why. Proper education about the business reasons for change needs to be coupled with clear employee feedback so solutions are blended to serve all groups involved. Remember, you may only have one chance to get it right, don’t make mistakes you may not be able to fix later. Have the courage to make the tough changes. Have the wisdom to know the difference between real opportunities and low value changes that will disrupt your workforce.