A: I would imagine, based on your description, that you have many products that have similarities. This sounds like an excellent opportunity to apply macroscopic standard data. Macroscopic standard data uses these similarities to permit the modeling of time standards based on the similar product and process characteristics. For example, many operations in a given plant have several common elements. The element, “walking,” for example, is a component of many different jobs. Diverse activities such as painting, handling, or working on a site invariably involve an element of “walking.” When these activities are times, the same common element is in fact timed again and again. The job of the work study analyst would therefore be made much easier if he or she had a set of data from which to derive standard times for these common work elements without necessarily going into the process of timing each one.
Macroscopic standard data takes advantages of similarities of activities within like families of operations and uses those similarities to develop standards for related activities. Standard data can reduce the time and labor required to set standards.
Typically, time standards for representative products and processes are made over the entire range of operating conditions. The times for these work elements are then used to develop regression based models for predicting the times required for other similar products produced by those processes.
Larry Aft, P.E.
A: First, the easy answer: The ideal for the direct-to-indirect labor ratio is infinity. If you divide any number by zero, that is what you get. In other words, from your customer’s point of view, you need to have only direct labor. Why would customers be interested in paying the high overhead of a firm if they have the option of buying the same from another firm with no overhead? In reality, there is no ideal number since the way each company defines direct and indirect costs will affect the ratio. For practical purposes, if you create a definition and adhere to it over time to make comparisons whether you are improving the ratio or not, you should be fine. Ultimately, your goal is to reduce waste and spend only on activities and resources that add value from your customer’s view point.
Determining what is direct cost and what is indirect cost is usually done with the premise that if a person or a resource touches a product that is eventually delivered to a customer, the cost of doing so is considered a direct cost. If not, it is an indirect cost. Therefore, management is typically treated as an indirect cost and labor to make sure the product is treated as direct cost.
The need for finding the direct and indirect cost arises from the fact that products need to be costed to determine what to charge customers and eventually whether a particular product made a profit or not. In standard costing practices, a set overhead burden is calculated for the entire manufacturing floor, which is levied on the products in proportion to the direct labor that the shop consumed to produce a product.
For example, if the overhead burden was $4.50 per $1 of direct cost and a product consumed $100 of direct labor, then $450 will be tagged to it as an overhead burden. This method is fine if you have only one or two very similar products, but as the number of products increases, this method underestimates the cost of producing complex products that need more direct labor hours, and it overestimates the cost of producing simpler products. It can result in a company cutting the simpler products that seem to have a high cost and accepting complex products that seem to have a lower cost. Over time, you find that your competition is making all your profitable products, and you’re making your competitors’ complex products. This can be a double whammy to your bottom line, leading to business failure.
Lean companies believe that the right cost of producing a product should be calculated for the benefit of their customers and themselves. Using activity-based costing or lean costing, you can divide an entire value stream into resources that are needed to produce a product. The cost of managing each resource is then calculated and a rate per hour is determined for each resource. All expenses must be allocated completely or partially to resources in the value stream to make this method successful. For example, the supervisor’s or manager’s expenses should be allotted to resources proportional to how they are estimated to be required by the resources. This gives a clearer picture of the costs of the resources to emerge, allowing you to price products better for customers and make higher profits for your company.
Merwan Mehta, Ph.D.
A: This is a challenging problem and one that does not have a cut-and-dried answer. One of the issues is that there is a lot of planning and other cognitive work that is hard to observe. Additionally, there is generally a lot of variability in the time it takes to do lab work. But standards are still good for measuring and managing performance and improvement.
To develop standards for expense and indirect labor, which includes lab work, many companies use work sampling methods and then either apply them directly or use simulation techniques to develop confidence intervals for expected times. If you know how to apply these techniques, you can get started right away. If not, you may want to take a short course or get some professional assistance. You may also be able to get help from a local university with students in need of a project for their work measurement or senior design course.
Marc Resnick, Ph.D.
A: If your company will not gain from having workers exceed their standards (which is the usual way to provide performance incentives),then allowing them to go home early when they reach the standard can be an incentive if you pay them per piece rather than per hour. Conduct a cost/benefit analysis to determine if this will result in financial benefit to the company as well.
This is much less common than providing incentives for producing additional work,and I have never seen comprehensive data published anywhere.
If workers are able to meet their standard in 32 hours, perhaps the standard is too low.It is rare that a worker can keep up 125 percent performance for a full week. Based on my experience, motivated and competent workers can finish in 36 to 38 hours on a pretty regular basis. Many workers will be able to accomplish this only occasionally, however.