Regardless of the nature of your operation, there are two major pacesetters: Demand and Bottlenecks. Demand is self explanatory: the operation has to adjust to sales or service market demand. In the case where demand is not limiting, bottlenecks set the pace and restrict potential of your entire organization. If you are molding parts and can only mold 20 key parts per hour, that is all the plant can produce. Any increase in the number of molded parts will yield an increase in the output of the entire plant. So all efforts become focused on relieving the flow constraint, or bottleneck. The most common reaction to limited capacity in one area is to work overtime. Overtime can be switched on and off as the need arises, and many workforces relish overtime opportunities, but overtime comes with a steep price.
The High Cost of Overtime
Overtime is the quick response to bottlenecks, but not being very judicious with OT can have a rapid and disastrous effect on the bottom line and ware out your workforce. Here is a calculation of average unit cost using overtime:
Working Saturdays alone and assuming no decrease in output per day per person, average part cost increases by 8%. Working both Saturdays and Sundays increases average part costs for all units by 21%.
Applying this increase to an accounting model, with direct labor at 20% of costs, shows a % profit reduction of 17% for working Saturdays and profit erosion of 43% working both Saturdays and Sundays:
Working Saturdays and Sundays may also be accompanied by lower productivity. Either the team is worn out, missing a few key members, or supervision is lax, so productivity suffers on the weekend. In addition, people are worn out or the queue of parts is eaten up with extended use of overtime, so productivity suffers on the following Monday due to lack of parts or personnel. If so, we can expect the average cost of overtime to be calculated as follows, with up to 25% increase in overall labor costs:
Applying this to the accounting model as before cuts profits in half:
Overtime is a great tool to balance plant flows – use it for that. If a new process still has some kinks, or we are training some new personnel or on a new process, or even to meet some strict deadlines, OT may maker perfect sense. But overtime should be reserved for extreme situations, and only for bottlenecks or make-or-break scenarios. It should always be carefully monitored. As labor content is increased, the effects on profit is magnified – if labor is 40% of sales all profits are consumed by working weekends.
Other Ways to Relieve Bottlenecks
- ensure quality is high so the bottleneck is not driven by a “factory within the factory”
- split shift – staggered hours in department
- second shift on certain machines or departments
- split shift – covering lunch and breaks
- improve setup times
- expand setup crew
- increase equipment or machinery
- fastest operators
- direct traffic – make sure limiting resource always busy
- break task down into smaller steps – pre-do or post-do some work (may include vendors)
- off load some processes that can be done by other machines
We need to adjust our thinking and improve the processes or balance the labor force. Overtime should be a last resort: working Saturdays and Sundays is not the answer. At the very minimum, OT just be justified and pre-approved, with an estimate up front of cost and benefit.
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