fenvessy on personnel

Productivity Improvement and Cost Reduction The overall goals of the executive in charge of fulfillment should be three-fold:

- provide fast order turnaround;

- perform it competently and accurately; and

- produce the results economically.

This final chapter brings into focus the last goal. Specifically, this involves increasing the productivity of labor and reducing the costs of the non-labor aspects of the fulfillment function. In early sections of the book cost savings and productivity improvement suggestions were offered in the various functional discussions. To achieve the full perspective of what can be accomplished, it is recommended that the following references be re-read in concert with this chapter:

OVERALL PROGRAM TO IMPROVE PRODUCTIVITY Q. Our fulfillment staff now exceeds in number all other aspects of our business - management, marketing, buying, and accounting. What can we do to raise the productivity of that large group?

A. No subject is capturing the interest of the direct marketing and retailing industries to a greater extent. Increasing productivity is being looked upon as the answer to improvement in both service and profits. In fact, there are those who believe that raising productivity is the key to survival.

In an attempt to solve the serious problem of declining productivity in industry in general, a number of broad-based surveys have been conducted among business executives and workers. The following is a synthesis of eight major recommendations reported in those surveys appropriate to the fulfillment function.

1. Offer financial rewards for productivity gains. This should take one of two forms: (a) incentive payments to individuals or groups of clerical and warehouse workers for production above specific work standards, and/or (b) distribution of bonuses to all workers based upon the rise in the company's profits. More on this below.

2. Involve employees in decisions that directly affect them. This could include such elements as new methods, equipment, and working hours. Have employees and supervisors meet regularly to discuss problems and to explore new ideas. Use of quality circles is one technique now being put to use in many companies.

3. Introduce better equipment and systems. Examples in fulfillment would be: (a) increased application of the computer to eliminate repetitive clerical chores (such as typing, editing and totaling), and to simplify picking and assembling orders; (b) installation of conveyors and other automated transport and storage methods to quickly deliver and take away work and to store and retrieve products; and (c) use of CRTs to expedite access to inventory and customer records.

4. Hire an industrial engineer to undertake a work-simplification program. A careful in-depth review of each clerical and material handling function usually produces evidence of duplication and unnecessary tasks that when eliminated result in substantial savings. Questions such as the following should be asked with respect to each processing step.

- Is each task necessary?

- Can it be done easier?

- Are the processing steps being performed in the right order?

- Can the work of one individual be combined with another, thereby eliminating passing?

5. Maintain workflow planning. To achieve high productivity, there must be adequate work flowing to each individual. This requires establishment of work-control records, incoming work-volume forecasts, and personnel scheduling techniques.

6. Provide pleasant and stimulating physical surroundings. Tests have shown that working conditions can have a major impact on productivity. This includes: clean and orderly premises; adequate lighting; proper ventilation; a sound-absorbent environment; adequate space between desks and workstations to inhibit visiting; and enough walls or other barriers, plus close visitor control to minimize visual interruptions.

7. Improve relations between management and workers. This is a factor that both executives and employees agree could have a material effect on increasing overall productivity. In particular, this refers to: (a) greater opportunities for employee recognition and promotion; (b) more and better communications from management about decisions that affect employees; and (c) employees being treated with more respect by supervisors.

8. Intensify employee training. Too frequently employees are left on their own on a job after limited indoctrination by a supervisor. This often results in the employee creating his or her work methods and work pace. To increase productivity, there must be: (a) introductory training programs; (b) written instructions for all major work tasks; and (c) on-the-job training and quality reviews by peer groups or team management.

It is the general consensus that management, employees, and consumers would all benefit substantially from increased productivity. Furthermore, it appears from the surveys that employees are amenable to achieving an overall increase in company productivity. Therefore, it is up to the company to act.

A SELF-PRODUCTIVITY AUDIT Q. My management says that if we improve productivity in the office and warehouse our profit problems will disappear. How do we conduct a self-audit of our productivity?

A. Here is a list of a dozen questions that will help evaluate your productivity efforts. The issues these questions raise should point out how you should proceed to achieve greater efficiency and labor control.

1. Have you sent overall service and cost objectives for each function in your operation?

2. Do you communicate those objectives to managers and workers?

3. Have you highlighted productivity improvement as a company goal?

4. Do you have a specific trained staff or individual assigned to the task of productivity improvement?

5. Do you accurately and formally record the production of individual workers or groups of workers?

6. Have you set standards for individual or group job tasks?

7. Do you compare actual to expected results?

8. Do you know that workers want pay tied directly to performance and if they get such a program, productivity will increase?

9. Do you reward workers for performance over reasonable standards with merit increases or incentive payments?

10. Do you measure the efficiency of staff personnel using budgets or performance goals?

11. Do reports on effectiveness and productivity performance reach top management?

12. Do you have an overall top management commitment to improving productivity?

Direct marketers that provide the fastest and best service and have the lowest costs will answer affirmatively to each of the above questions. If you can't, there is a genuine opportunity to improve your bottom line.

RATIO ANALYSIS TECHNIQUE Q. We have heard about a cost-reduction technique called ratio analysis. How does it work and is it applicable to our fulfillment functions?

A. Ratio analysis is a technique to isolate and rectify the operating areas of your business that are not functioning on an economical basis. These are the steps involved:

1. Accumulate on a worksheet detailed departmental operating ratios for the past several years by year or period, showing labor and other costs as a percentage of net sales.

2. Highlight the years and/or periods that have the lowest ratios. The best ratios will not necessarily occur in the same year.

3. Compare the best ratios to current performance to highlight departments where costs are now higher than they have been in the past. Frequently, this approach isolates operations that are now overstaffed or have not maintained adequate cost controls.

4. Request that appropriate managers bring their costs in line with the best ratios, or explain why they can't.

This ratio-analysis technique has been used successfully in reviewing mail opening, keying, warehousing, picking, packing, and customer service operations. In those functions, unit costs, for the most part, do not change, and therefore should maintain a constant percentage to net sales as the business either expands or contracts.

IMPACT OF NEAR-ZERO BACKLOG ON PRODUCTIVITY Q. I have been told that using part-timers throughout the fulfillment operation is the most important labor-saving technique. What is second in importance?

A. Maintaining a near-zero backlog is the second most important factor in reducing costs. It is also a major factor in providing fast order turnaround.

The most efficient fulfillment operations operate under this principle: keeping current daily is a desired interim goal, but weekly currency is mandatory. Currency means that, except for the small amount of work carried over from the previous day to get the operation started in the morning, there is no work in the unit other than that which came in today.

Of course, to match this standard, there must be sufficient personnel to process the work. This requires accurate forecasting of incoming orders and the use of part-time personnel to handle spurts resulting from seasonal and marketing peaks.

When the near-zero backlog approach is adhered to, an interesting phenomenon occurs. Productivity increases up to 40%. Personnel work faster in order to maintain the established standards of work currency.

Val Olson, vice president of Sentry Insurance Company, in an article in Chief Executive magazine, compares the zero-backlog management method with the Japanese management technique kanban. In the kanban approach, the Japanese plan for supplies to arrive at the plant just in time for production. The Japanese "run without the security blanket of an inventory," said Olsen. In the zero-backlog technique, an office or warehouse runs without the security of a work backlog. In both approaches, according to Olson, management and the workforce are forced to provide a high level of service or they are faced with giving no service at all.

The near zero-backlog technique is precisely executed by such direct marketers as Quill Corporation and Inmac (office and computer supplies), Brookstone (tools and gifts), and General Nutrition (vitamins and health foods), each of which ships about 75% of orders the day of receipt.

SHORT-INTERVAL SCHEDULING Q. There is a great deal of controversy about a cost-reduction technique, called short-interval scheduling, that I understand originated in the mail order industry many years ago. How does the system work, and what are its strengths and pitfalls?

A. Short-interval scheduling (SIS) is a method of controlling labor expenditures. It is an element of a control system, not the system, as claimed by many of its proponents. More accurately, it is a method for dispatching (rather than scheduling) work assignments to individual (or groups of) employees in sequence.

Here are the basic principles of the technique. First, a job is broken down into various components. Then, the time needed (often estimated) to complete each component is determined. Next, the job is scheduled according to the sum of the individual component times. Finally, it is assigned to the worker.

The assignment of jobs makes SIS different. Instead of assigning the whole job at once, work is allotted in short segments (or intervals), ideally single person hours. Hence, the source of its name.

Typically, it works as follows: A batch of work is given to an employee with a statement of how long it should take to complete. If the task was estimated at one hour and the employee took longer to complete the task, the supervisor can inquire why. In other words, the technique focuses attention of supervision on a specific employee (or group of employees) and the work assigned. Implementation may vary, but that is the essence of SIS.

SIS is consistent with sound industrial engineering principles and has been installed in many fulfillment operations with positive results in terms of work control and cost reduction. It should not, however, be regarded as a fast and cheap alternative to engineered work measurement and incentives, which are discussed next.

HOW TO INSTALL LABOR INCENTIVES Q. I recently read that "workers want pay tied directly to performance, and if they get such a program, productivity will increase." What are the benefits of such a program and how do we go about installing one?

A. The statement you refer to came from a study conducted by the Public Agenda Foundation of New York entitled, "Putting The Work Ethic To Work: A Public Agenda Report On Restoring America's Competitive Vitality." The study has stimulated a large number of companies to review their compensation programs with an eye to increasing employee productivity.

Most well-run businesses with a high volume of paperwork or material handling employ some form of work measurement. This includes catalog marketers, publishers, insurance companies, credit card firms, banks, and companies operating large distribution centers. Experience shows that their labor costs would be from 20% to 30% higher if they did not use work-measurement techniques. In the catalog industry, less than five percent of the companies are presently using work measurement, but most of the larger concerns do, including the "Big Three" catalog companies, plus Hanover House, Fingerhut, American Express, Arizona Mail Order, and Home Shopping Network.

As a general rule, companies using the technique provide markedly better service and experience substantially lower unit costs. They also achieve these additional benefits:

- Increased productivity. Working under a measurement system, employees realize how they can personally benefit and quickly do chores faster than they thought they could before.

- Improved methods and procedures. The job analysis associated with installing and maintaining the system usually results in elimination of unnecessary tasks and the streamlining of systems.

- Better supervisory control. A measurement system helps make an operation self-supervising, thus giving the manager or supervisor more time to plan, train, and refine existing methods.

- Employee evaluation. Both the company and fellow workers are made aware of an individual employee's contribution, such as by posting performance results.

- Forecast workforce requirements. Using established standards, management is able to convert incoming workload into specific personnel requirements.

- Higher morale. Once a measurement system is in place, employees, almost across the board, like its impartiality and the way it rewards good workers.

- Standard costs. With labor effort now measurable, it is possible to develop meaningful cost data for individual operations or order types.

There are eight fundamental steps involved in installing a work-measurement and incentive-pay system.

1. Establish productivity improvement as a company goal. Productivity improvement starts with management's commitment to raise productivity. Management should exude genuine enthusiasm and support for the project and commit the necessary funds and personnel when required.

2. Assign specific staff to accomplish the task. Productivity improvement will not succeed as a spare-time project of a manager or several managers. It requires a full-time engineer or an outside consulting group to initiate the project and then an internal industrial engineer to maintain it.

3. Follow up regularly to ensure that the program produces results. Assign specific projects, goals, and a timetable. Be sure that progress - successes or failures - gets back to top management.

4. Implement work-reporting procedures. Determine the countable and repetitive work output in each area. There should be counts by individual and group and records of hours applied.

5. Install a productivity information system. This should take the form of a weekly report that shows for each activity: service level; pieces per worker hour; and unit operating costs.

6. Establish basic productivity standards. Set standards by: (a) using historical records; (b) employing estimates of time by one familiar with the operation; or (c) conducting engineered time studies.

7. Review actual performance against the standards. Determine the reasons for variances, such as: (a) insufficient work received; (b) different kinds of work performed; (c) changes in work flow due to varying seasonal or marketing patterns; and (d) overstaffing.

8. Recognize outstanding performance. This can be accomplished by either rewarding workers who exceed standard performance with merit increases or by implementing an incentive system.

In sum, when a work measurement program is warranted, properly established, and continually maintained, it is a very effective industrial engineering tool, both in the office and in the warehouse. For more on the subject, obtain a 70-page pamphlet entitled Improving Productivity: A Self-Audit and Guide for Executives and Managers, published by the National Center for Productivity and Quality of Working Life. It is available from the Superintendent of Documents, U.S. Government Printing Office, Washington, D.C. 20402.

WHERE CAN INCENTIVES BE INSTALLED? Q. What kind of work best lends itself to work measurement?

A. Jobs with the following five characteristics are where a work-measurement system should be initiated.

1. The work should be repetitive. The nature of the job should be such that the individual work tasks are relatively simple and are frequently repeated during short intervals.

2. Output must be quantifiable. That is, you must be able to count the output - number of orders entered, number of customer service responses handled, number of boxes packed. All work measurement is based on units produced within specific hours worked.

3. The work has to be consistent. During a specified interval, such as a day or week, the mix of work should remain relatively the same. For example, a single worker cannot both enter data using a CRT and also file correspondence, unless each of the differing activities is on a separate standard.

4. Volume of activity must be sufficient. The amount of work must be large enough to permit workers to meet and exceed standards. Otherwise, the application of work measurement is not appropriate.

5. Rate of production should be operator-controlled. Workers' productivity cannot be limited by the speed of a machine or the receipt of work to be handled.

Fulfillment tasks that best meet the above criteria are: order entry; reading, researching, and responding to customer service mail; and picking products and packing shipments.

TYPES OF INCENTIVE PROGRAMS Q. What are the general types of incentive programs employed in fulfillment functions?

A. There are three types of measurement programs for clerical and material handling tasks:

1. Piece work. Here a worker's earnings are directly related to output. For example, an employee would be paid a given amount for each shipping label/letter typed, or order packed. Currently, this approach is applied in direct marketing almost exclusively for cottage industry workers, such as home typists or workers performing alterations.

2. Measured-day work. This is the development of standards for individual jobs or a collection of work tasks. Individual workers or groups of workers are evaluated against those standards. In this approach, the standards are frequently based on either: (a) historical records of daily output; (b) historical averages modified by some intuitive adjustment factor; (c) time studies with a stop watch; or (d) using pre-determined time values for each action/motion and assembling the data into an overall standard in building-block fashion. If the employee does well, he or she receives a merit increase, usually at a regular review period, sometimes in between. What characterizes measured-day work is a formal program with established standards known by the employees and regular, usually weekly, reporting of results. Many companies know what average production rates are, but do not develop expected rates, do not inform employees of what is expected, and do not reward performance (at least in part based on production). These three steps, developing standards, monitoring production, and using results to help determine wage increases, constitute a measured-day work system.

3. Incentive pay system. With an incentive system, the employee's base earnings are guaranteed, but more payment is added to the worker's regular pay when productivity level exceeds a standard. Incentive earnings frequently average 20% to 25% of an employee's base pay; outstanding employees may consistently earn more than that. In fact, a top employee may earn more than 60% of standard - and the employer is better off as a result. Some companies initially introduce measured-day work because it is easier to implement and by so doing obtain meaningful cost savings. Many then convert to an incentive pay system and gain additional savings. A further advantage of incentive pay is that while industrial engineers are conducting time studies, ways are often found to simplify the individual work tasks. This frequently results in additional savings of 10% and sometimes much more.

Regardless of the program, incentive systems are definitely morale boosters. Employees earning incentive pay particularly like the additional income and the impartiality of measurement of their performance. Managers like the way incentives motivate people to perform all day. They also like the way standards identify those who are not as productive. Before any incentive program goes into effect, there are a number of policies and approaches that should be considered and then promulgated. Specifically, it is suggested that workers be informed of the company's policies concerning work measurement. A statement similar to the following should be issued: With respect to our contemplated work measurement program the company agrees to:

- clearly define and explain to each worker all elements of work to be embraced by each incentive standard;

- provide allowances in each standard to take account of unavoidable delays, fatigue, personal time, and other miscellaneous elements;

- revise an incentive standard after it has been put in place only if the work itself has changed, and then only if the change amounts to at least plus or minus five percent of the allowed time;

- modify a standard as soon as practical after it has been determined that the job has changed; and

- employ experienced and trained personnel to install and maintain the standards.

Finally, a productivity improvement system in the form of work measurement needs to be accepted as a way of life. Managers can't just give it lip service. You have to understand its benefits and possible hazards if it fails. Encouragement from the top down is required to motivate improvement. To install any of the foregoing work-measurement systems, it is necessary to hire an experienced industrial engineer or bring in an outside consulting group. Both require considerable investment, but the experience of others shows that the pay-off possibilities are very high. :

The above chapters are excerpted from the book Fenvessy on Fulfillment: The Catalog Executive's Guide, by Stanley J. Fenvessy, published by Catalog Age Publishing Corporation, Stamford, CT, 1988. Specific names, addresses, and contact information mentioned in the text were accurate at the time of publication, but may no longer be so.