Tag: Productivity

Improve Productivity

Improve Productivity

An organization becomes more productive if it succeeds in increasing its output while either keeping the input the same or, even better, reducing it. In the post “Profitability“, the measurement of productivity ratios was explained. These entail dividing output by the inputs consumed;the change in these ratios over time should be tracked. In the example of the mentioned post, a labor productivity increase of 11.11% was calculated by dividing the units sold (units of output) by the complete labor hours used by the company (hours of input). However, this ratio is of limited use for planning and controlling the company as it does not indicate which processes have become more productive and by how much. Productivity metrics are needed at the cost centers and process level as many sub-processes need to be continuously improved.

It is difficult to measure productivity development in smaller units, e.g. individual cost centers or processes. This is because improvements are to be achieved there first. In manufacturing it is possible to see whether processing times for a particular item in a cost center are decreasing over time by evaluating order-related activity recording. But to measure productivity improvements in internal processes and cost centers is tricky as often the output measure cannot be clearly delineated, because the activities of different cost centers contribute to the output and because their work effort is not (or cannot be) measured.

Example 1: Ticket answering in IT

Many data centers have set up ticket systems to process and respond to error messages or requests from system users. The output of such ticket systems is answered requests from system users. In order to measure output, it is necessary to define what is to be considered as a response and thus as an output (i.e. problem solved, systems running again or only the explanation of why the error occurred and how it can be avoided in the future).

The input measurement requires further determinations:

    • What work times to fix the error are to be measured? (The processing time of the assigned IT employee, of all parties involved, or even that for external support?)
    • Are the speed of response and the time to complete problem resolution also to be measured? If so, how are they weighted?
    • Are financial inputs also to be included, such as invoices from third parties, higher royalties, or depreciation? If so, the inputs must be equated, which can only be done using monetary values.

Example 2: Productivity in personnel administration

It is possible to determine whether the average number of hours required for the salary administration of an employee decreases over time: output = 1,000 salary receivers, input 30,000 hours p.a., i.e. 30 hours per person per annum. If an employee of the warehouse retires and is not replaced, 30 hours should be saved in the HR department per year. Only if in HR less than 29,970 hours are consumed has productivity of salary administration increased.

This means that the outputs and the inputs of the personnel department are to be differentiated, in order to gain deeper insight into the changes in productivity of their processes. How much working time is used for:

    • Recruiting and hiring employees
    • Recording and maintaining employee data including performance appraisal documentation
    • Payroll accounting, social insurances, settlements with third parties
    • Supervision of internal and external training and further education
    • Planning and execution of internal training events Coordination with works council and trade unions?

Example 3: Recording of sales order data and packaging for delivery

In the example company Ringbook Ltd. the productivity of sales order processing and of collecting and packaging the delivery for the customers should be increased. The costs of transporting the goods to the customer are not taken into account, since the delivery is carried out by external companies (post office, delivery service, transporting company) and invoiced to the customers according to the transportation price list. Only the personnel costs for these operations are considered. The analysis resulted in the following values:

Improve Productivity
Improve Productivity

In fiscal year 2021, 293 customer orders were processed with a total of 471 order positions. According to service recording (recording of hours used for internal tasks), see the post on internal tasks , 2,250 hours were worked in the sales department and 2,355 hours in the warehouse for the preparing and packaging of the positions sold. These hours were multiplied by the weighted hourly presence rate of the employees involved. This resulted in the personnel costs of the packaging, shipping and invoicing process of 333,140 EUR. On average, the processing of a sales order consumes 4,605 hours divided by 293 orders = 15.72 hours, resulting in personnel costs of 1,137 EUR.

The productivity of the invoicing and delivery process thus improves if the average personnel costs per sales order can be reduced below 1,173 EUR.

Measuring working times for internal tasks

The three examples show that productivity improvements must be sought and identified primarily in the individual cost centers and in cross-cost center processes. To this end, time consumption for processes must be measured first and foremost, which is particularly difficult in areas not directly related to production.

It is necessary to be able to conclusively identify the contents and results encompassed by a process. Additionally the recording of activities must be structured in such a way that the work performed can be recorded according to these delimitations and that linked work steps of other cost centers can also be recorded, e.g., the working time of the production data management in order to be able to trigger and track a production order.

To evaluate ideas for productivity improvement, it is necessary to be able to measure or at least estimate consumption, especially of employee hours. With this in mind, planning and recording consumption for internal tasks will be covered in more depth later in this blog.

Investments for productivity increases

When looking for productivity improvements, often the question arises as to whether individual tasks should be outsourced to another company or whether investments in hardware, software or automation might be worthwhile. In such cases, Dynamic Capital Budgeting proves to be an effective means of quantifying process-related changes. This is because it can also include investments and changes in consumption of material and worktime. Cost savings are compared with the investment amounts and the expenditures for external services, and their effects are quantified for the planned useful life of the project.

More details in the post “Dynamic Capital Budgeting”  (will be published Jan.3rd 2023)

Origins of the actual BSC-data

Only the comparison of the achieved results with the decided objectives enables the assessment of success and thus the application of the Balanced Scorecard. It is therefore necessary to check whether the data generated in the applications of the management control system can also enable the evaluations required for a BSC.

Origins of the actual BSC-data

We divide this examination into five areas:

    • Projects
    • Products
    • Support processes
    • Sales process
    • Integration with contribution margin and profitability accounting.
Products

Process improvements are expressed by the fact that the output can be achieved with less input. This is true both in the medium-term and in the year-by-year view.

Process improvement is mainly a technical consideration: Can one product unit be produced with less material and external activity input and/or with less labor input in the cost centers, and is investment in equipment required to achieve the process improvements?

The data required for this are contained in the bills of material and in the routings of the ERP system as planned quantities and times to be achieved. The investments are recorded in the corresponding investment calculation.

In the management accounting system, the material and the consumptions of external activities  are valued using standard value approaches and the work activities in the cost centers are valued using proportional planned cost rates. This results in the proportional standard cost of goods sold. All variances from the standards are shown in the final costing for each production order according to the cause of the variance (purchase price, material quantity, yield, scrap, lot size variance). The consumption variances arise in the target to actual comparison per cost center.

This description also applies analogously to directly customer-oriented service areas and to research and development areas.

In management accounting, the focus is on the target-oriented control of products, production orders and cost centers. To measure improvements in the process- and financial perspective, this actual data is condensed differently in the BSC depending on the issue. Consequently, the data used in a BSC is more highly aggregated than in management accounting.

Example: A productivity improvement target is included in the process perspective of a BSC:

The output/input ratio of a cost center is to be improved, the average costs per unit are to be reduced. Because in this cost center different products are manufactured on the same equipment, the different items must first have the same denominator. To do this, the costs of the products under consideration are divided by the quantities manufactured and the resulting value is transferred to the BSC.

However, to plan and control the improvements, the cost center manager needs data of the individual products and of the engaged cost center. This data is only available in the ERP and in the management accounting system. Additionally, he must know which costs are directly caused by the produced quantities (proportional costs) and which are the consequences of the capacity and the readiness to perform of his cost center (fixed costs). This is another reason why we recommended splitting costs into proportional and fixed when planning a cost center.

Supporting Processes

Support processes have to ensure that R+D, production and sales as well as management tasks can work properly. These tasks mainly concern the BSC perspectives of potentials and processes.

Support processes are mainly carried out in the cost centers of the functional areas:

    • IT
    • Maintenance / repairs / energy supply
    • Plant management
    • Purchasing / Warehouse
    • Personnel administration
    • Internal training and education
    • Controller
    • Finance / Legal Service

These areas ensure that the organization is ready to perform. In part, the service recipients (cost centers) can determine which and how much services they want to receive. This is largely the case for IT, maintenance, energy supply and workshop areas. In asset management, the purchases of buildings, machines and equipment are recorded and charged to the using cost centers on an accrual basis by means of imputed depreciation.

All other support processes are compulsory consumption from the recipient’s point of view and consequently cannot be charged to the users according to their cause (for example, software usage licenses that have to be paid for the entire company regardless of the number of users).

Insofar as services of the maintenance-, workshop-, energy- and IT-areas are the direct result of internal orders of the receiving cost centers or their performance, the proportional costs of the corresponding services can be charged to the recipients and appear there also as controllable costs. In management accounting, this requires the charging of internal services (ISP) at the proportional planned cost rate in plan and actual.

All remaining (fixed) costs in the support areas cannot be allocated to either products or customers on the basis of causation. They are to be covered by the contribution margins generated in the sales process. In the Balanced Scorecard these fixed costs of processes and potentials can partly be allocated to the perspectives but not to customers or products.

Sales process

Gross revenue from sales may be interesting for the calculation of market shares. Internally, however, and thus also with regard to their presentation in the BSC, the net revenue is relevant as this amount has to cover the total company costs and the profit. With net revenue all proportional costs of the sold units, the total fixed costs, all variances and the target profit are to be covered.

It is common that market cultivation is carried out in different dimensions. To generate sales, advertising is carried out for the entire range of products and special offers are published for various customer groups. For conversion:

    • Salespersons are employed, who look after specified sales areas,
    • Sales promotions are carried out for various product or customer groups,
    • Resellers are supported in their sales channels, and
    • Sales intermediaries (architects, engineers, medical doctors, journalists, scientists, and influencers in general) are coached to promote sales.

These efforts may be specific to different countries or territories and may relate to all or part of the product range offered.

The lowest common denominator is the billing line It shows which item was sold to which customer at what gross price and at what net revenue. This means that management accounting must structure the planning and recording of sales in such a way that both the planned and the realized net revenues can be evaluated according to the dimensions listed. The evaluation dimensions relevant to management accounting thus determine which data is to be recorded when an offer is prepared or on the occasion of invoicing. This information is relevant for salespeople,  product and channel managers as well as marketing and advertising managers.

Balanced scorecards can also be created for sales areas or product groups, but we mostly observe that the BSC is set up for the company as a whole. But the data base for the net revenue analysis in the BSC is created when invoices are issued to individual customers.

In order to assess the effect of sales promotion and other marketing or advertising measures, the controllable costs of these cost centers must be compared with the contribution margins generated. The costs of these measures are planned and recorded in management accounting. Care must be taken to ensure that no fixed cost allocations are built into the system. This is because the sales and marketing specialists can only be responsible for those costs that they themselves directly cause. At the BSC level, the development of the share of marketing and sales costs as a percentage of sales must be tracked if the effectivity of the use of resources is to be improved (% share of total direct marketing and sales costs, excluding allocations, in net revenue).

Many other factors decisive for sales success cannot be depicted in management accounting but are considered important in the BSC. Mainly through customer and prospect surveys, developments can be determined for the following sample topics:

    • Shopping experience, cleanliness, appearance, user-friendliness
    • Ease of use
    • Delivery on time
    • Accessibility and waiting queue of the hotline
    • Addressing customer complaints.
Projects

Creating the prerequisites for the realization of strategies largely requires the execution of projects. Projects are initiated because several people from different areas of the company are to work together to develop new solutions to handle processes. The first difficulty is the formulation of the assignment and the definition of the results the project members should produce. The clear task must be formulated first. This also includes deadlines to be met, the determination of the project budget and the formulation of the expected results. This is the responsibility of the ordering party. To do so they need a quantitative estimate of the achievable project benefits, a schedule and the project budget as a basis for decision-making. To prepare this budget the project planner must estimate:

    • what personnel costs will be incurred for inhouse staff and for external project staff brought in,
    • which material withdrawals are to be expected from the warehouse for the company’s own tests,
    • which services will be required from internal service areas (e.g. workshops, maintenance areas, production cost centers, information technology, legal services), and
    • whether investments in fixed assets will be necessary for project evaluation.

These estimates add up to the project budget, which is presented for decision. The corresponding services and values are to be stored as planned values in the ERP system or in the management accounting system, similar to a production order (see the post “Project Cost Planning”).

If management decides to have the project implemented, the actual consumption of the project must also be recorded in the ERP and in management accounting for the purpose of target to actual comparison. This is because management must decide at each project milestone whether the project should be continued or terminated (go/no-go decision).

Once a project has been successfully completed and released for implementation, the resulting changes in the bills of materials, work plans and cost center plans and (fixed) asset accounting must be tracked in the annual plan so that it can be measured whether the implemented project is developing successfully and the targeted improvements are actually being achieved. These changes are also to be recorded in the ERP and in management accounting so that plan to actual comparisons are possible and efficiency improvements can be measured.