“Peter M.” runs a small manufacturing business in Melbourne’s North East. He has 8 production staff, a production manager, a receptionist, product design technician, two salesmen and himself. He wants to measure the productivity of the production staff.
The example presented here assumes all production staff are working on producing the same product – widget A.
The same approach can be utilised if Peter’s production team was set up to produce three different products, say widget A, Widget B and Widget C. In this scenario he might have two staff working on Widget A, two staff working on Widget B and four staff producing Widget C.
By going through the process and measuring each product as outlined he would soon understand which product is producing the most gross profit for him. Measuring productivity is not always straight forward, however he is making a start by understanding current levels of contribution by his team.
We need to define Peter’s gross profit. We achieve this by obtaining the result of revenue less the cost of goods. In this case it is $2,000,000 less $500,000 or $1,500,000.
This is achieved by working out how many days a year each production employee works, taking into account sick days, annual leave, public holidays etc.
Peter came up with a figure of 220 days. He multiplied this number by the hours per day. To make it easy let’s make that around eight hours a day. So 220 days by eight hours equates to 1,760 hours available per employee, per year.
Next he multiplied that figure by eight (the number of employees in production), and that gave him a grand total of 14,080 hours.
Of course no one works at 100% productivity, not even Peter! So he needed to trim those hours by a factor of somewhere between 20 and 30%. This trimming allows for downtime due to documentation, set up times and general administration.
So if he conservatively takes 30% off the 14,080 hours that gives him 4224 hours to be subtracted from 14,080 hours. That leaves 9,856 hours of available production time.
The final part of the equation is dividing the 9,856 into the $1,500,000 gross profit figure. He ended up with $152.19. This is the average hourly gross profit contribution of each member of the production team.
This figure can be used as an indicator or an index that is sensitive to variances in productivity. If Peter tracks this figure on a weekly basis and it drops, productivity is suffering. If he makes improvements to productivity by reducing the amount of time to build Widget A then this figure will rise. This indicates his teams’ productivity, and therefore, business profitability has improved.
To improve anything in your business you need to first be able to measure it. This is a fairly simple way of measuring productivity in a manufacturing environment. It can be applied to individuals or whole teams.
Once you have measurement in place you can make tweaks to processes or innovate with technology to move your productivity indicators up. Add this to your KPI dashboard under a productivity category and trial it.
The productivity of non production staff would be measured in a different way to this.
Brian helps small business owners win back their time, passion and performance utilizing a proven step by step blueprint for success. A coach and consultant for over 10 years specializing in business growth strategies.