6red prairie optimizing labor part 2

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Optimizing the Labor Supply ChainPart 2

You Cant Manage What You Cant Measure

Prepared by:

Peter Schnorbach

Vice President

Product MarketingProductivity Management

Tom Stretar

Logistics Consultant

Productivity Management

October 19, 2004 Optimizing the Labor Supply Chain Page 1 of 13


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Table of Contents

Introduct ion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Defining Labor Productivity . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Measuring Productivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Units Per Hour . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Multiple Variab le Based . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Discrete Based Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

A Roadmap to a High Performance Workfo rce . . . . . . . . . . . . . . . . . . . . . 7

The Six Step Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Identi fy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Engage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Develop . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Deploy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Analyze . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Reward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

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



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Introduction

A study recently reported in ASCET Volume 6 on leveraging the Supply Chain to createand sustain a high performance business noted that high performance businesses areadept 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 competitiveenvironments

Analyze that information more thoroughly and make better decisions basedon 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 billionson technology investments aimed at managing and optimizing inventory, they spendsignificantly less on the performance and measurement of one of the most significantcost elements in their supply chainlabor. Improved labor management provides one ofthe most significant opportunities for reducing overall supply chain cost. Results ofhundreds of implementations show companies can achieve overall labor savings of up to30 percent using advanced labor productivity solutions. The chart below definespotential savings based on the current state of your labor management practices.

1John 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

20% to 30%0% to 20%

8% to 12%% to 5%

20% to 30%0% to 20%

8% to 12%% to 5%

Current Performance Standards

100% Discrete MSD/MCD Key Performance Indicators

Current Performance StandardsPerformance

Levels100% Discrete MSD/MCD Key Performance Indicators

Labor Incentives with

Closed Loop Employee

Feedback, Supervisory

Alerts



Alerts

Limited or Manual

Employee Feedback

Performance

Levels




Alerts



Alerts

Limited or Manual

Employee Feedback




Alerts



Alerts

Limited or Manual

Employee Feedback



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Defining Labor ProductivityNo-one doubts the wisdom of the old management truism You cant manage what youcant measure. However, as this paper will demonstrate, how you measure labor is asimportant as the fact you are measuring it at all. In fact, using the wrong measurementscan provide a distorted view of productivity that leads to incorrect decisions which canput your company at a competitive disadvantage.

Most companies measure labor productivity in some manner. Labor productivity, insimple 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 arecommonly used to report on productivity. The figure below shows commonly usedmetrics and frequency of use.

0 10 20 30 400 10 20 30 40

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

34%

31%

30%

29%

25%

13%

12%

10%

10%

While these metrics provide a useful measure of output relative to a historicalbenchmark, they fail to accurately report the operations effectiveness in relation to itstrue potential. For example, if a company has worked at a low percentage of its potentialhistorically, 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 ator near its true potential, may create competitive advantage with only a small increase inproductivity. The key is that there is no way to know where your company falls on thisspectrum using the traditional units of measure above. A better measurementmethodology is needed that objectively measures performance against each companystrue potential so companies can more effectively manage their labor resources.

This paper will evaluate various methodologies for measuring labor productivity and willoffer a practical solution that has significantly increased productivity at hundreds of sitesaround the world.



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Measuring Productivity

If the objective is to be a high performance organization, then supervisors andmanagement need the right information at the right time in order to run the businessmost effectively and efficiently. When it comes to managing labor resources, the rightinformation is an accurate look at performance against the true potential as defined byengineered standards.

There are three types of standards commonly developed and implemented formeasuring 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 forthe 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 thatthey are easily understood by employees, are easy to develop, and require a low level ofinvestment. But like most things in business, the overall return from an operationalimprovement 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 ishighly affected by order density (lines per order and units per line), seasonality, andproduct mix issues. Thus, performance is more closely tied to conditions than to theeffort applied. In addition, the historical performance the standards are based on areoften inefficient to begin with.

UPH standards are the least accurate measurement and tend to be loose tocompensate for the large variances in the above variables. This, coupled with the factthat 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 beapplied. An engineered productivity standard often has multiple variables used indetermining the overall time required to complete a process. The number of times thevariable, or KVI, occurs within a process directly influences the overall standard time.Unlike UPH standards, Multi Variable based standards compensates for variances inorder density, and are thus more accurate than UPH based standards. KVI standardscan be used to hold an employee accountable for their performance to a very specificdegree of accuracy. While this type of standard is more difficult to establish, requiresperiodic maintenance and is subject to seasonality, it will provide greater visibility intoindividual employee performance than UPH.

The weakness in KVI standards is they are based on averages rather than the specificcomponents 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 thatoccurs in the development of UPH and KVI based standards. Each task is defined andmeasured based on the unique characteristics of the task, including such factors asweight, location, distance traveled, and equipment used. These standards are highly

accurate and can deliver significant productivity gains, in excess of 30 percent, resultingin 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 foremployee accountability. Establishing discrete standards requires industrial engineeringexpertise and is not always applicable within every operation. However, the higher initialinvestment 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-basedstandards provide the best source of measuring employee performance, the questionbecomes: 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 asDell Computer, Southwest Airlines, Toyota, UPS, and Wal-Mart2. The article pointed outthat their productivity performance is undisputable, and has given these companies adistinct competitive advantage. What makes these companies the productivity leaders,and how can companies take advantage of their approach to build a high performanceworkforce?

All of these companies focus intensely on creating rigid, consistent operating proceduresaugmented with flexible, real-time control systems. The standardized work proceduresreduce costs and improve quality, while the flexible, real-time control systems enablethese companies to react to unanticipated disruptions faster than their competition.

Advanced productivity management solutions provide similar benefits. Preferredmethods and discrete standards development provide the rigid, consistent operatingprocedures 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 beingperformed to give supervisors immediate notification when problems arise. This givesthem the flexibility to react quickly to correct problems before they degrade performanceand service.

To better understand the impact of productivity management solutions, it is important toknow why employees, and consequently organizations, dont perform at their fullpotential. 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 meetexpectations.

They dont know how. Poor training is the main reason employees lack theknow-how to perform their jobs. The majority of lost time in most operations isdirectly attributable to insufficient or inappropriate training.

They cant do the job. This usually results from either poorly defined jobs orfrom procedures or methods that do not accurately reflect the optimal way toperform the job.

There are barriers beyond the employees control. The most commonbarriers to productivity are organizational. Employees do not have the properequipment, 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 whosimply dont want to do the job. Take care of the top four reasons and this oneshould 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 Bob Parker, Lessons From the Productivity Leaders, AMR Research Alert, April 15, 2004.3 Gene Gagnon, Gagnon and Associates



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performing their jobs, most employees will succeed. This is the central principal on whichadvanced 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. Productivitymanagement solutions must consider the interplay of people, process and technology.

RedPrairies implementation strategy for its productivity management solution combinesprocess knowledge, people and technology within a six step delivery methodology thatencompasses the training, job design and discrete goal definition required foremployees, and thus organizations, to succeed. By following this six step methodology,any company can create a high performance workforce.

TechnologyProcess

People

TechnologyProcess

People

Analyze

Identify

Engage

Develop

Deploy

Reward

Identify

The first step is to define the goals the company is trying to achieve. These goals mustbe expressed in measurable criteria, such as cycle time, productivity, or cost per unit, foreach area in the operation to create an objective means for defining success. The goalsmust be closely aligned with corporate objectives to ensure workforce success supportscorporate success. These aligned goals set the foundation on which all following stepsare built.

Also during this step, the jobs that will be included in the productivity program must beidentified. Not all jobs are suited for coverage. In general, jobs that are repetitive innature, with definable tasks are the best candidates. You might start with core functionssuch 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 forperforming the work. Process improvements should seek to leverage human capital andtechnology investments to design the most effective and efficient methods for completingeach 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 andare essential for cost reduction.

The Engage step is what is most often missing from other labor management softwareimplementations. Too many software companies assert that their software is the answerto improved productivity. But without improved, best practice methodologies, all anysoftware does is monitor existing unproductive work habits. Whats worse, it can give afalse impression of success when performance levels are measured against historicalUPH standards that are themselves flawed, as described above.

The key to success in the Engage step is to employ industrial engineers experienced indeveloping preferred methods and discrete standards for supply chain operations. It is

their responsibility to analyze each job to determine the most efficient method forperforming each task, and then applying master standard data to compute the discreteengineered standard for the job. This is the only way to ensure employees will bemeasured against their true potential effectiveness, and that any incentives offered willbe fair and accurate.

Once developed, the preferred methods and discrete engineered standards are loadedinto the labor management software database to be used for goal calculations and workperformance monitoring.

Develop

Although the Develop step is third in this sequence, it really starts coincident with theIdentify and Engage steps. The Develop step focuses on communication, in its manyforms, of the corporate vision for productivity improvement as an essential process forcorporate competitiveness and success, and how that vision gets translated down to theshop floor.

In that regards, this step is all about change management, getting everyone involved onthe same page. As shown earlier, those employees who dont know what is expected ofthem, dont know how to do their jobs, or dont care will submarine the success of anyproject.

Therefore, a communication plan and strategy must be developed to ensure that all

employees understand why changes are being made and how their individualperformance impacts the overall operation. The executive vision must be communicatedto everyone. Employee buy-in is absolutely essential to the success of a productivityprogram.

What must be developed during this step are:

Corporate communication plans that provide both the executive vision andthe impact on individuals. The communications must include what thebenefits 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 othercases, the employee benefit might be increased job security that will comewith the increased competitiveness resulting from improved corporateproductivity.

Training plans that teach each employee the what, when and why for the new

preferred methods and engineered standards. The plans should includemultiple repetitions and hands-on practice to ensure all employeesunderstand and are comfortable with the methods before they are rolled out.The lack of attention to this step is the most frequently mentioned lessonslearned from productivity program (and most software) implementations.

Roll-out plans that define the sequencing and timing of all jobs to be includedin the productivity program. As mentioned in the Identify step, not all jobsmust be included in the initial go-live of the program. The sequencing andtiming must be communicated to all participants to ensure smooth roll-out.The roll-out plan will also define the sequence and timing of programadoption across multiple sites or facilities.

Just as the Engage step is critical for defining the best way to perform each job, theDevelop 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 theroad. It includes putting into action all the communication, training and roll-out plansdefined 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 changemanagement. 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 thenew methods, using any new technology, such as radio frequency (RF) equipment, andgaining speed through repetition. The ramp-up period often covers a few weeks, duringwhich time performance typically rises from an average rate or 60%-70% of standard to95%-100% of standard. If incentive plans are to be implemented, they normally will notbegin 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 willbegin to quickly recognize developing problems and take action to remove barriers toperformance before results deteriorate.

Monitoring employee performance without getting in their way, especially whenoperations are spread across the globe, takes a constant flow of information. The flow ofinformation must be available to all levels within the organization, from employees andsupervisors on the floor to the CEO. The labor management system becomes theconduit for that information exchange.



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Analyze

A successful strategy takes into account how one persons actions affect another andhow an individuals performance can turn the corporate vision into reality. The ability ofan enterprise to set clear goals and to track performance against those goals makes the

corporate vision tangible. However, although business intelligence tools have gainedwidespread acceptance in most corporations, they have had very low adoption withinfulfillment operations. Many companies today still have no way to track, in real time,how individuals are performing in various facilities, much less how multiple operationsare performing across an entire distribution network.

Yet, as discussed in the opening section of this white paper, the ability to gather, analyzeand act on business performance information is what separates high performancebusinesses from the pack. Enterprise-wide scorecarding capabilities are needed tocollect and analyze performance information so management can effectively managehuman capital across the entire corporation. This Analyze step, therefore, closes theloop 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 shownthat fair and accurate incentive programs can significantly increase productivity overwhat 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 compensationplan will keep employees focused on doing the right things, in the right way. Incentivescan increase overall productivity by an additional 20-30 percent. Therefore, RedPrairie

recommends implementation of incentive or other reward programs as the final step increating a high performance workforce.

However, because of the difficulty companies have historically faced in collecting andsynchronizing detailed time and performance data, many have shied away fromimplementing incentive pay programs. And even those companies that can effectivelycollect detailed time and performance data often find their payroll systems are notdesigned to perform the complex incentive calculations required. Therefore, they eitherexpend considerable clerical resources to perform these gross pay calculations, or forgousing 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 productivitytracking, reporting, labor planning and activity-based costing functionality of itsProductivity Management solution. The result is a single source solution for time andattendance tracking and incentive pay calculations that makes adoption of incentiveprograms a natural extension of high performance workforce programs.



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Summary

High performance businesses are those that can effectively gather relevant performanceinformation in real-time, analyze it, and quickly act upon that analysis to continuouslyimprove operations and customer service. However, many companies have not appliedthis practice to their human resources, even though they account for 50 percent or moreof distribution costs.

But since you cant manage what you cant measure still holds true, companies strivingto be high performance businesses cannot succeed while ignoring this criticalcomponent of operations. And as discussed, the way you measure performance isequally important. Only by accurately measuring performance against the true potentialof each job can companies determine the effectiveness of their human capitalmanagement 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 augmentthe standards with flexible control systems. Implementing discrete engineered standardswith productivity monitoring software and incentive programs provides standardized workpractices and flexible control systems that enable companies to evaluate performancerelated 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 thepeople, process and technology affecting overall company performance.

In this white paper, RedPrairie has laid out a six step methodology that will enable anycompany to develop a high performance workforce to support corporate goals. Itinvolves:

Identifying the desired goals to be achieved

Engaging in an industrial engineering project to define the true potential foreach 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 well-defined roll-out program with appropriate ramp-up periods

Analyzing resulting performance on both local and enterprise levels toremove 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 programsfocused on analyzing performance against true potential will be well on their way tobecoming high performance businesses.



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About RedPrairie Corporat ion

RedPrairie is a global leader in supply chain technology solutions that enable thetransformation and optimization of supply chain networks, driving out costs, improving

customer service and creating competitive advantage. RedPrairies supply chainexecution solutions provide the industrys leading transportation, productivity, anddistribution management capabilities, fully integrated with process managementcomponents for real-time visibility and event management, trading partner integration,quality control and performance measurement. Coupled with RedPrairies tacticalplanning and inventory optimization solutions, RedPrairie provides a single sourceplatform for global supply chain management.RedPrairie provides industry-tailored solutions for many markets, including consumergoods, direct to consumer and traditional retail, food and beverage, high tech /electronics, third party logistics, industrial / wholesale, automotive and service parts, andpharmaceuticals. 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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