Adopting Operational Benchmarks For Long Term Success

Adopting Operational Benchmarks

For Long Term Success

2009 OFA ShortCourse

Credits

New York Greenhouse Business Summary and Financial Analysis. Pub. EB-2002-03

Wen-Fei Uva and Steve Richards, 2002

How many weeks does your operation do business?

1 2 3 4 5

0% 0% 0%0%0%

Answer Number

1. 11 (Spring Only)

2. 22 (Spring/Fall)

3. 52 (Full Year)

4. 26 (Half Year)

5. 44 (Eleven Mo.)

How many full time employees do you have?

1 2 3 4 5

0% 0% 0%0%0%

Answer Number

1. One

2. 6

3. 12

4. 24

5. Over 24

How many supervisors manage those employees?

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0% 0% 0%0%0%

Answer Number

1. One

2. Two

3. Three

4. Four to Five

5. Over 5

How do you pay your worker bees ?

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0% 0% 0%0%0%

Answer Number

1. Hourly Wage

2. Piece Work

3. Task Unit

4. Sub-Contract

5. Familial Slavery

Small Changes Add Up!

As we saw in Charlie’s profit analysis, even small changes can add up to significant increases in profit!

Making management and procedural changes to your production operation is no different. Several simple changes may bring you back to profitability.

Sensitivity of Changes in Profit to a 1% Increase:

Price Per Plant

Yeild

Production Increase

Labor Hours

Labor Cost (Wage)

Equipment Investment

Management Cost

Packaging Costs

Fuel

Interest Rate

Change + 26.90 %

+ 24.63 %

- 7.17 %

- 5.25 %

- 4.18 %

- 3.93 %

- 2.28 %

- 2.18 %

- 0.97 %

Source: Kirschling and Jensen, 1974

Benchmarking Operational Metrics

Each operational metric is based on, and will tie into, the financial metrics to be used by the company.

Labor metrics are assessed by work unit / process

Benchmarking Operational Metrics

External benchmark metrics are useful for establishing comparisons, if you can find benchmarks for a industry segment similar to yours.

Internal or “historic” metrics are the most useful guides for assessing improvements to efficiency, organization, production flow and marketing.

Example: Ask Yourself....

• Is my transplant line managed effectively?

• Is my shipping department efficient?

• Is my sales team meeting goals?

• Am I meeting company conservation goals?

• How much room do I have for improvement?

Example: Transplant Line MetricsWhat Do I Need to Know?

• Line production per day or per hour.

• Productivity per person, per day or per hour.

• Overall labor hourly cost

• Number of labor hours utilized crop.

• Loss (shrinkage) at transplant line by crop.

Productivity Assessment

020406080

100

Pos 1 Pos 2 Pos 3 Pos 4

Line 1

Line 2

Line 3

Line 1

Line 2

Line 3

In-Series Task Process

How many employees work for you?

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0% 0% 0%0%0%

1. One – Three

2. Four – Six

3. Seven- Nine

4. Ten to Fifteen

5. Over 15

Answer Number


76 75 74 66

020406080

100


Line 1

Line 2

Line 3

Line 1

Line 2

Line 3


Poor Pace Setter

Poor Line Manager62%

52%

28%


020406080

100


Line 1

Line 2

Line 3

Line 1

Line 2

Line 3

Independent Task Process


1 2 3 4 5

0% 0% 0%0%0%

1. One – Three

2. Four – Six

3. Seven- Nine

4. Ten to Fifteen

5. Over 15

Answer Number


020406080

100


Line 1

Line 2

Line 3

Line 1

Line 2

Line 3


Profit Killers

Best Employee!Horrid Placement !

So What?

Let’s assume we have a production goal of 12,000 units / day. (4000 units per line…or 500 units / hour) Hourly wages are paid @ $10.50 per hour.

Line 1 = 4,000 * 0.28 = 1,120Line 2 = 4,000 * 0.52 = 2,080 5,680 Line 3 = 4,000 * 0.62 = 2,480

12,000 / 5680 = 2.11 days * 8 hr = 16.9 hoursLine efficiency is only 47.3% !!!!!Cost = 12 employees * $10.50 * 16.9 = $2130.00

So What?

…………..5680? Can we do better? Now let’s assume we can impart a 20% increase in productivity

(units) by rearranging personnel in the lines: Yield = 8040 Units

Let’s also assume we can increase productivity by 20% by re-training or replacing poorly performing employees: Yield = 10440 units

12,000 / 10440 = 1.15 * 8 = 9.20 hours

12 employees * $10.50 * 9.20 hours = $1159.00

$2130.00 – $1159.00 = $971.00 savings ….(in one day!)

Where Do Your Place Your Slowest Worker?

A. At the end of the line, with the line manager positioned at the end point.

B. In the front of the line, with the line manager positioned in front of the line.

C. At whatever position has the easiest task.

21 3 4In Out

Are We Done?

• What if I cleaned house and eliminated a transplant line? Can I do the whole job for the same money in the same # of days?

• Could I actually get rid of one supervisor’s salary?

Do you think it would be more efficient to eliminate one

transplant line?

1 2 3

0% 0%0%

Answer Number

1. Yes

2. No

3. Don’t know.


0.0020.0040.0060.0080.00

100.00


Line 1Line 2

Line 3

Line 1

Line 2

Line 3


Positions to be eliminated!


0.0020.0040.0060.0080.00

100.00


Line 1

Line 2

Line 1

Line 2


66%

68%

Reconfigured In-Series Process = 67% average efficiency(assumes training, and effective management implemented)

Eliminating a Transplant Line?

Two lines operating at 67% efficiency yields 8040 units per day.

12,000 / 8040 = 1.49 @ 8 = 11.94 hours

8 Employees * $10.50 * 11.94 hours = $1002.28

Our previous best was $1159.00…We can get the job done for $157.00 less by firing four employees and only running two transplant lines!!!!

……..and we free up a supervisor!

Benchmarks?

Set your benchmark at 67 % efficiency.

Track production (by task) to get perspective.

Reward managers that exceed this benchmark

Troubleshoot if productivity fails to reach this benchmark at any point in the future.

Tracking Benchmarks Visually

0

10

20

30

40

50

60

70

80

90

100

Snaps Pansies Dianth Vinca Salvia Begonia

Line 1

Line 2

Task

Pro

duct

ivity

per

line

Transplant Operations

???

If the production problem cannot be fixed……?

1 2 3 4

0% 0%0%0%

Answer Number

1. Increase assigned cost

2. Decrease # units made

3. Increase # units made

4. Fire the manager

Charlie’s Turn

Crop Production Metrics

• Units Produced / Person, Team, Line

• Units Per Hour / Person, Team, or Line

• Waste Units / Person, Team, or Line______________________________________

• Percent Loss by Crop or “% Shrink”

Number units Invoiced / Number units produced.

45,906 / 58,424 = (1 - 0.786) = 21.4% shrink!

Operations

• Labor As A Percent of Sales Total Labor Cost / Total Variable CostsThis is an indirect measure of labor efficiency and cost efficiency.

$176,322 / $588,037 = 0.315 or 31.5%

• Operating Expense Ratio Total Variable Costs / Total RevenueThe average % of sales price needed to cover direct costs of crop.

$425,562 / $588,037 = 0.762 or 76.2%

Production Efficiency Metrics

• Worker Equivalents.

Total # of labor hours / year divided by 2760 (55h per week)

This accounts for part-time labor and temporary workers.

(8 wkrs x 51wks x 40hr) + (19 ptwr x 36 wks x 20hr) =

(16,320 hours + 13,680 part hours) = 30,000 hours

30,000 hours / 2760 hours = 10.8 worker equivalents!


• Net Income per Worker Equivalent Net Income / Number of Equivalent Workers

This measures how well labor is used to generate net income.

• Sales per Square Foot Total Sales / Sq. Ft. Production Space

This establishes how well use is used to generate sales

• Sales per Worker Equivalent Sq. Ft. Production Space / Number of Equivalent Workers

This establishes how well use is used to generate sales


• Square Feet per Worker Equivalent Sq. Ft Production / Number of Equivalent Workers

This is an indirect measure of worker efficiency / responsibility.

• Sales Per Square Foot* (This is not net income!) Total Sales / Sq. Ft. Production Space

An indirect measure of how well the greenhouse generates income

Cost Efficiency Metrics

• Overhead Costs per Square Foot Total Overhead Cost / Sq. Ft. Production Space

• An indirect measure of greenhouse operation cost efficiency.

• Overhead Costs per Square Foot per Week Total Overhead Cost / (GH Sq.Ft. x # of Wks in Operation)

• A direct measure of how much overhead cost should be assigned to each square foot production space / week.

Cost Efficiency Metrics

• Total Cost per Square Foot Total Cost / Sq. Ft of Greenhouse Production• This is an indirect measure of operations cost efficiency.

• Total Cost per Square Foot per Week• This is an indirect measure of operations costs spread over

production area for the weeks the greenhouse is in operation…

Operational Profitability

• Net Income per Owner Hours Worked Net Income / Number Hours Worked by Owner

This is an indirect measure of owner’s return on management.

• Net Income per Square Foot. Net Income / Number of Worker Equivalents

Indicate the dollar amount each sq. ft. of production space generates

• Net Income per Square Foot per week Net Income / GH Sq. Ft. X Weeks in Operation

This adjusts income / sq. ft. for different lengths of operations.

Inventory Metrics

• Average Age of Inventory (Can be days, weeks, months, FIFO? LIFO?)

Number of weeks product was stored

• Cost Per Day Per Square Foot Total Warehouse Costs / Sq. Ft Warehouse Space

• Inventory Turnover C.O.G.S. / Average Inventory Age

Cost of Goods Sold …. Guess we better ask Charlie!

Charlie’s Turn

Sales Team Metrics

• Ratio New Customer To Total Customers• Total new customers / Total customer that year This is a direct measure of customer base growth

• Ratio New Customers to Customer Dropped• Total New Customers / Total Dropped Customers

This is a direct measure of customer turnover.

Sales Team Metrics

• New Contacts / Week Total number of new contacts / Number of weeks of sales

event. … or number of sales weeks / year.

This is a direct measure of sales team efficiency.

• Customer Value Ratio Number of Orders / Dollar Value of Orders

This is an indirect assessment of overall customer value. You can also apply this metric on a per customer basis to evaluate customer base.

Remember, we want customers…..not costomers!

Tracking Temporary Effects

0100200300400500600700

Janu

ary

Febr

uary

Mar

ch

April

May

June

July

Augu

st

Sept

embe

r

Oct

ober

Nove

mbe

r

Dece

mbe

r

2007

2006

2005

Tho

usan

ds o

f D

olla

rs

Drought / Watering Bans

Two, Cool, Sunny

Weekends

Three rainy Weekends

Southern Living Promotion*

Sal

es

Rainy Weekends


1 2 3 4 5

0% 0% 0%0%0%

1. One – Three

2. Four – Six

3. Seven- Nine

4. Ten to Fifteen

5. Over 15

Answer Number

Salesperson Performance

0

10

20

30

40

50

60

70

2001 2003 2005

Mike

Roger

Pam

Year

Gen

erat

ed C

onta

cts

Marketing Metrics

• Market Impact (Sales per dollar spent) Total Sales / Market Program Costs

Sum of advertising, sales expenses, etc. divided into total sales generated for that particular program

Remember, a marketing program can be divided by market segment, product line, season or by some other special metric of effort organization.

Marketing Metrics

• Program Contact Efficiency Total Program Costs / # Customers Contacted

• Program Customer Yield Program Costs Per Buying Customer

• Program Product Yield Program Costs / Product Line Units Sold

Customer Metrics

• Units Rejected by Customer / Week

• Customer Complaints / Week

• Follow-up Customer Contacts Made

• Consecutive Years as Customer

• Percent of Total Sales per Customer This is best used by wholesalers who sell to large

clients. More than 35% to any one customer is not good!

Shipping Metrics

• Gallons Fuel Used / Week / Driver

• Miles off Route Distance / Week / Driver

• Percent On-time Delivery / Driver

• Percent Follow Up Orders / Driver

Shipping Metrics

• Route Efficiency

Dollars spent per mile

Dollars spent per unit load value

Load value per mile driven

Load value per hour driven

Number of client visits per day

Dollars spent per number clients on route.


1 2 3 4 5

0% 0% 0%0%0%

Answer Number

1. One

2. Two

3. Three

4. Four to Five

5. Over 5

Conservation Metrics

• Gallons Water Used / Week

• KWH Electricity Used / Week

• KWH Used Per Dollar Gross Income Generated / Week

• Gallons Heating Fuel Used / Week

• Gross Value In Truck per Shipment

• Per Mile Cost per Dollar Gross Revenue

Human Resource Metrics

• Percent Turnover by Unit

• Percent Turnover Company-wide

• Total HR Expense Accrued Per Employee

• Number of Accidents / Injuries / Disciplinaries


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0% 0% 0%0%0%

Answer Number

1. One

2. Two

3. Three

4. Four to Five

5. Over 5

Charlie’s Turn

The Process Required To Improve Benchmarks

• Define• Measure• Analyze• Plan• Improve• Control

Lean Flow, Six Sigma, DMAIC

Photo


• Establish Planners (Teams)• Set Team Leaders• Hold Kick-off Meeting – Define Project• Define Metric Segments and Teams• Set Baseline Goals / Metrics Record Keeping!!!!• Establish Timeline for Reports

Define and Organize


• Document Operations / Product Flow• Define Product to Process Relationships

Transactions, Inventory, Labor, Grow Schedule

• Quantify Scrap, Loss, By Products, Rework• Document Hidden Processes

Approval stops, bottlenecks, paperwork,

• Define customer-driven capacity• Create new SOP’s, Quality Metrics, Output Metrics

Measure & Collect Data


• Identify process cells or families• Calculate resources and time for process• Define working groups by task• Create optimized flow pattern• Validate process design• Review future capacity vs business strategy

Analyze Plan


• Document process, Change layout• Train supervisors working in the process• Implement an employee feedback protocol• Implement employee flexibility & training plan• Create SOP’s and Visual work standards• Verify process meets sales expectations

Improve - Make Physical Changes


• Reinforcement training / certification• Verify SOP’s implemented at ea. cell / station• Establish metric reporting responsibilities• Implement control via Charts / Graphics• Evaluate upper management compliance• Maintain control of daily operations / work

Control and Maintain

Lessons From Lean Flow

AreaScheduling

Production

Lead Time

Batch Size

Inspection

Layout

Empowerment

Inventory Turn

Flexibility

C.O.G.S.

TraditionalForecast - Push

Speculative Stock

Long

Large

Spot Sampling

Functional

Low

3-4

Low

Rising

Lean ProcessCustomer Order - Pull

Customer Order

Product Specific

Small

100% at Source

Continuous Flow

High

5-7

High

Lowering

Virtual Grower

Allows you to estimate energy costs

Allows you to track energy costs

Allows you to play what if on technology upgrades and retrofits.

Allows you to measure / track system efficiencies and weather / cost per hour metrics.

Virtual Grower

Now:

Let’s go to VG example!

Seven Signs A Company (Maybe Yours) Is In Trouble!

• Lower Liquidity

• Low Cash Flow

• Disappearing Profit Margins

• Too Much Debt

• Slow Inventory Turnover

• Slow Paying Customers


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Answer Number

1. One

2. Two

3. Three

4. Four to Five

5. Over 5

Adopting Operational Benchmarks For Long Term Success

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