Everyone knows that labor costs show up on the income statement, but the same workforce can’t be found on the balance sheet. It’s considered an intangible asset and does not earn a line on the balance sheet. Did you know that there is another intangible asset that has similar qualities?
It’s the data your company collects every day. Each time an employee fills out or edits a form on a mobile device, laptop, desktop or kiosk, it’s adding to the quantity of data your company owns. This collection of data is relatively expensive and is represented as either a Cost of Goods Sold or an Operating Expense on the income statement chewing away at your profits. Similar to employees it too has no quantified asset value.
CFO’s understand both are extraordinarily valuable but also have a difficult time articulating it as anything more specific than goodwill.
What I have seen in the last year however is that an increasing number of companies are putting these two intangible assets together and finding million dollar insights about their businesses. I am specifically differentiating from companies who have business analysts hard at work tearing apart their data and those companies that are empowering a broader population of employees with increasing amounts of information.
The reason that this is important is that business analysts are relatively few and far between. When the broader workforce can begin making data-driven decisions on a daily basis and view situations with perspective and context based on facts rather than relying on their instincts and week old reports, the value creation is exponential.
Why are some doing better than others in capitalizing on this opportunity? Analytics and Big Data are a frequent topic of discussion with every company I visit. Everyone recognizes the potential. But as with most emerging opportunities, most are talking about it and formulating plans. The successful ones are diving in, learning and profiting. Companies that have accelerated their labor analytics journey are finding they can…
- Identify who is not regularly following the corporate policies put in place from clocking, to editing time sheets to aligning a schedule to demand
- Identify employees that have figured out manipulate the data they enter into so they can game controls and metrics in a way that current reports can’t identify. This results in either fraudulent behavior or boosting performance metrics at someone else’s expense.
- Identify employees who are not following policy and outperforming others resulting in new best practices.
- Identify employees who are overwhelmed with manual production and employee scheduling edits due to smaller batches and increases in product mix. This change in production speeds and patterns with no accompanying improvements in scheduling techniques is resulting in more unplanned Saturday shifts and overtime to accommodate less than optimal schedules
- Locate where cost accountants have made mis-allocations of labor costs due to a lack of visibility to where and when the costs actually occurred.
- Rank employees who are receiving volatile schedules from week to week that can result in increased fatigue and turnover.
I didn’t recognize how big this was becoming until I noticed a trend in the conversations I have been having with companies that provide strategic consulting. Some of these consultants are telling me their jobs are getting harder and in some cases their revenue is falling. Why? One of their bread and butter techniques of identifying opportunities is by interviewing multiple employees from different departments and then aggregating data from different systems. What they are experiencing is that the “low hanging fruit” they could always depend on is gone. Customers have already figured it out. The Aha! moments consultants are famous for are getting harder to find with their traditional techniques. They must evolve too.
Where is your company in maximizing its ROIA (Return On Intangible Assets)? The following list highlights some of what the companies that I visit with were experiencing before they changed tactics. To see how you relate, take a survey of your spreadsheets and business analysts to see if you can identify these situations:
- Is there so much data available that the reports are now being heavily summarized, and detailed and history is not being carried along?
- Is there significant manual massaging, data wrangling to use a fancy term, to reconcile data from different systems…is this causing latency in delivering the information?
- Are different functional areas frustrated with the lack of support in getting at data and beginning to start reporting processes of their own, especially as you move to middle management ranks?
- Have intrepid employees begun adding thousands of lines of macros to spreadsheets to make them automated and interactive to the point that the spreadsheets themselves are unstable?
- Do spreadsheets going to front line managers have hundreds of rows or more and multiple tabs to make sure they have all the information they need?
- Do your spreadsheets analyze mainly the data that users enter on forms or through hardware but ignore the data that the hardware and software generates itself in logs and audit trails?
- Are people frustrated by the fact that they know the data they need is resting on servers within your organization but even your best report writers are not able to put it together to answer the questions and hypotheses posed?
If you see signs of this in your organization, then a review of your reporting processes, skills and tools is in order. You have an opportunity to change the way you think about math.
I’ve been a big fan of Mark Graban’s for years, but only just had the opportunity to work with him. About 2 weeks ago we delivered a webinar focused on Lean in hospitals. If you haven’t heard of Mark, he’s a highly respected Lean expert and author of Lean Hospitals among other books on the subject.
Mark provided several examples of how Lean techniques can be used to improve operations and steps ensure that a hospital’s staff is respected and supported.
If you haven’t had a chance to hear Mark speak about Lean, this is a great opportunity. He shares specific examples and outlines a process that everyone can use to improve outcomes.
Becker’s Hospital Review hosted it and you can see it here
Additionally Mark will be holding full seminars soon. If you are looking to learn more about Lean in a healthcare environment I would suggest looking into one of these:
Building Successful Lean Teams
Boston, March 31, 2015
Kaizen: On-Site Experience, Franciscan St. Francis
Indianapolis, April 22,23
It’s been a busy couple of months, and I’ve been learning quite a bit about business intelligence, big data and the opportunities and challenges in this space.
One area that has been a frequent topic is predictive analytics. As a lean guy, anything that promises improved business results by predicting the future immediately makes me suspect. I’ve been indoctrinated by the Lean philosophy to depend less on forecasts and more on the ability to observe and react to current demand and disruptions in a process.
That being said, I really depend on weather forecasts to get my kids dressed in the morning, so maybe I need to keep an open mind.
Predictive analytics is the next evolution in a long history of forecasting solutions that technology providers offer. For example, Kronos provides a labor forecast for retailers to help them in creating a labor schedule for the next week. This can be really helpful in supporting store managers in that it is really difficult to aggregate all the different patterns and unique events that are significant in scheduling a store. For example, day of the week is a fairly repeatable pattern and can be predicted fairly easily. Black Friday is also consistent. So rather than force the store manager to figure it out on her own, why not automate that in a forecast.
But ask a store manage if they completely rely on that forecast (or any other vendors forecast for that matter) and they will tell you that they use it for guidance. The reason for this is that there are many factors that affect a local store that aren’t used as drivers in creating the forecast. For example, if there is construction in the area that makes it more difficult for customers to get to the store or if a product is out of stock that week, the local manager will know that sales will not meet the forecast. This is why it’s so important to have someone knowledgeable about the local practice with the ability to react quickly to changing conditions.
Predicting levels of absence at a store or plant level is significantly easier that predicting individual absence. Make sure you understand the probability of success in a prediction. If you are providing guidance at the individual level, and the probability of a correct prediction is 60% then that means you are wrong 40% of the time. What actions are you asking managers to take based on this prediction and what’s the impact financially and in terms of system trust if it’s wrong?
A slight improvement over the status quo is good enough if a manager is already making the same decision frequently at an individual level. Hiring guidance for a similar job that has high turnover is a great example of an area where this works. Infrequent decisions are or if you are asking someone to take an action based on a predictive result is a different story. If it’s only a couple of percent better than the current method, internal customers are going to not understand the nuance of improvement and the project will be difficult to sustain.
When someone is having difficulty at home, it is likely their work will suffer. How is this behavior measured? While there are some outcomes that are measured like increases in absenteeism, these can also be attributed to difficulty with a supervisor or co-worker or a health issue.
Behavior is an area where correlation and causation can easily be confused. While we sense through data that something is wrong, it’s still going to take personal discussion to find out what the cause is. If you try and let software predict what the cause is and the manager takes a wrong action, it won’t be too long before the software isn’t trusted.
It’s very tempting to look for patterns in the data we already have. And no doubt there is lots of value hidden away in there that we have yet to mine. But we need to be careful to not try and solve every problem we have with existing data. In many cases, new data will be required to capture the true drivers of an event or behavior. This is a much more difficult endeavor.
So is there a future for predictive analytics? Absolutely. We just need to treat it like any other tool in our bag and not go around thinking that every employee problem we face is now a nail for predictive analytics to hammer.
Where are areas where predictive analytics excels?
Are there significant consequences for missing something?
Safety is something that comes to mind. If we can improve our ability to predict an increase in safety risk by even a few percent, the savings can be significant both in life, limb and dollars. This is a great area for exploring. Part of the solution needs to include understanding the drivers required to reduce the risk once an increase is predicted.
Will improvements in processing power or improved algorithms provide better insight than before?
This is the case for weather prediction. The data and algorithms were overwhelming the processing capabilities. As capacity to process improved, outcomes improved. This is also the case for customer behavior analysis. With lots of new data and increased granularity lower costs for processing have changed the game. Do you see similar opportunities with respect to labor analytics in your company? This could be a rich area to explore.
Predictive analytics is an interesting area, but let’s balance these efforts with the basics of making information more available and easier to use. Only then will we truly empower our employees’ decision making capabilities.
Brazil is no doubt the best place to enjoy the World Cup this year, but Belgium is definitely celebrating the event with colors, team gear and soccer centric activity everywhere. I had the opportunity to be in Antwerp the night Belgium beat Algeria last week and spirits were running high.
But of course that was not the main reason for my visit last week. Among other things I was there to spend time with a very smart group of folks at BlueGrass Consulting. BlueGrass has a strong legacy in supply chain consulting focused often on inventory, processes and logistics. Over the last couple of years, it has recognized the opportunities for improving the effectiveness of the workforce. I haven’t seen the BlueGrass team in almost a year and they were excited to share with me their work on process improvement within the Quality Control labs at several pharmaceutical companies. These labs face a couple of workforce related challenges. First is that they have several streams of work that flow through their labs. Checking the quality of products throughout the production process, mixing reagents in order to support the testing procedures and running experiments on new products are some of the major ones. Some of these streams are dependent on each other. For example, running more production tests requires more reagents. The second challenge is that they can’t predict with certainty when work will come into the lab. They can generally narrow it down to a thirty day window, but for many types of work that’s about as precise as they can get. Also challenging is that there are certain competencies required to perform certain tasks. So if a critical person is missing or already busy, production is delayed. Additionally, competencies of the employees are constantly changing as people leave the organization and as others complete training.
There are some opportunities to improve throughput as well; Often the same kind of testing will come through in multiples during the same time period. When this happens, the work can be grouped, reducing the number of set-ups required.
The flow of work can be predicted from demand drivers such as the production schedule created in ERP, which has a rough cut version planned out over the next year.
Through their software application BINOCS (Binoculars) BlueGrass has linked the production schedule to the employee schedule and through a heuristic process, optimized the employee schedule around production. This schedule ensures that the work can be processed without delay. As the production schedule is refined, the application can be re-run to ensure the appropriate people with the right skills continue to be available.
Geert VanHove, a principal at BlueGrass, was understandably very happy during my visit when he received the first employee schedule that their customer had created on their own through BINOCS.
Branded pharmaceutical manufacturers continue to become more demand driven and shrink finish good inventories. The ability to remove one more potential production bottleneck without creating excess capacity is obviously extremely valuable. Goooal!
I just returned from Kronos’ first customer conference in Mumbai. It’s an exciting time for the Kronos India team as they now have over 100 customers locally.
During the week Narendra Modi took office as the new Prime Minister. The media and citizens have an optimistic vibe. Modi’s messages include increased transparency, eliminating nepotism and other forms of corruption and improved economic conditions. He has a history of welcoming foreign investment and a take charge attitude. Already there are examples of families of government officials who are now rejecting long time government perks saying to the media that they want to be treated the same as everyone else people. Indians are ready and hopeful for some good news.
I’ve been visiting India for the last seven years. Over that time, economically, there have been significant ups and downs. For many of the companies I’ve been visiting there has been tremendous progress in terms of how they operate including managing their workforce. For retailers, there is an increasing appreciation for larger chain stores as compared to the small stalls that line the streets each specializing in just a handful of products. While retail chains and larger grocers are still in the minority they are leaping forward in their thinking. Last week I spoke with the Head of Operations, Hemant, for a retailer of electronic and electrical consumer products that has over 100 locations across India. It has just completed the transformation from a push to a pull strategy with respect to moving their inventory from DC’s to the store. As a result of this strategy they are experiencing increases in revenue as stock-outs are reduced. Margins are improving due to the reduction of discounts of excess inventory. The return trips of unsold inventory to the DC has more than paid for the incremental expense of smaller, more frequent shipments. Hemant is now moving his sights onto the workforce. He recognizes that pursuing a low-cost labor strategy won’t work. “How do we differentiate our stores when our competitors have the same products with the same types of employees? We need to pay more for highly skilled employees to guide our customers to the product that is right for them.” To pay for this increase in skill, Hemant is looking to make sure the staff is scheduled when the customers are there. This is more difficult than for most retailers in the U.S. as its employees are all full-time. Increased utilization isn’t even the main priority. Hemant continues…”During slow periods when employees have completed some training and refreshed inventory and still have time on their hands they become bored and sluggish. It’s tough for them to get their energy back when customers begin entering the store again. It’s important to make sure they stay busy and energized throughout the day.”
I visited with a number of manufacturers and there is a widening gap in their approach to labor. The head of HR at one large exporter of textiles felt very strongly that there is no place for technology in managing people. Their supervisors manage the 17,000 people at one plant just fine according to this executive. If there is a problem, adding a couple of extra people is no issue because their wages are low. He did however acknowledge a machine utilization problem. This is being addressed by adding sensors to the machine to let management know when it the machine goes down. I’m looking forward to visiting him in the future to see if his perspective changes.
Diametrically opposed to that perspective is a manufacturer of cellular phones who uses technology to analyze the behaviors of supervisors to understand if they are favoring one gender over the other in scheduling overtime or if they are showing favoritism in granting leave requests. This company has also identified 250 out of 20,000 employees who are critical to keeping the lines moving and know instantly if they are late for work so management can begin reacting right away.
There is no shortage of talent in India, let’s hope Prime Minister Modi is successful in his efforts so that India’s talent can be converted to economic success.
I was pleasantly surprised during my time at the Governing Leadership conference in Maryland held last week.
First was the energy and diligence expended by the elected and appointed officials in attendance to continue to work through the challenges they face. It was a refreshing change from the articles frequently found in the media about less than stellar government performance.
Secondly, I was impressed by the prevalence of Lean methodology in place within different areas of government. As I told the attendees during my panel discussion on performance budgeting; the good news is that organizations in the private sector have been through this transformation and survived. Examples of how to use Lean are readily available, it continues to get easier to implement Lean as the number of successes grow and are publicized.
What struck me during the day was the complexity of planning and operations. While there are several examples, the one that hit home for me was the impact many small decisions have on a government’s finances. For example, a simple choice between who works an overtime shift and who doesn’t can have a decades long financial implication that far outweighs any wage difference or even premium pay difference. But this cost implication is hidden from the decision makers and is often never connected.
It becomes easy to see how governments can get a poor reputation for managing its finances over the years because of what in hindsight look like obviously poor financial decisions.
When labor makes up to 90% of a municipal government’s labor budget (their stat not mine). It would seem like there would be more visibility and control over the decision-making process. The challenge for governments is that an hour worked today is impacted by benefit rules that take into account many years previously worked and then generates many years of commitment ahead. The supervisor making the daily decision has no visibility to this and therefore cannot take it into account.
If we could provide the information that shows the real cost of an hour of labor, supervisors would be enabled to make better decisions and I would bet that government would see immediate benefits from improved use of tax dollars without having to resort to tax increases or layoffs.
Consider these easily measurable areas of influence on the cost of an incremental hour :
- First is the cost of the wage paid. This is the easiest to measure and is often what is used in labor reporting and decision-making.
- Will this have an impact on benefit costs? (If the employee is classified as part-time, will they now be eligible for benefits under the Affordable Care Act? Do they generate any additional vacation, comp time or paid sick/personal time?)
- Are they now eligible for overtime? It could be 1.5 or higher based on negotiated contracts
- Will this hour impact their pension? Depending on pension rules, this incremental hour of work could increase their pension. Depending on the contract, it’s not just the last couple of years of a person’s wages that are used, but, for example, the highest average pay during a continuous 60 month span, whenever that occurs in a person’s career. This incremental hour of time could have an impact on government cost that lasts for 20 or more years!
- Is this work occurring due to a State or Federal grant? Has the amount from the grant already been used up? If so the department is now responsible for paying the overage must now find those funds from another area of the budget.
Every day the result of these calculations change for each individual, they can even change from one hour to the next!
It’s no wonder that supervisors can unwittingly rack up expensive labor bills at the end of the week when they are doing their best to apply resources to the work at hand. Even worse the may never realize what they have done because some of these costs never show up in their daily or monthly cost reports.
What’s the answer? This same problem is faced by supply chain managers all over the world. The cost of a good is impacted by many different factors during its life from raw material to delivered good. Rather than looking at the cost to manufacture the good (Raw Material + Production Labor + overhead) which often produces an incorrect cost, manufacturers look at the large drivers of cost across the entire supply chain and calculate a “Cost to Serve”. The cost to serve is a very useful calculation when making decisions (e.g. We could get cheaper labor in Vietnam but the lead time, shipping and warehousing costs go up too much.)
This same principle can be applied to an hour of labor. With benefit costs and regulatory compliance becoming a significant part of total wages, it’s time to provide the total labor cost to supervisors so that they can make better decisions about how they use labor or who is assigned the next shift.
The best part of this opportunity is that unlike manufacturing Cost to Serve where data collection costs are high but calculation requirements are low, the total cost of the next hour of government labor is already available, it’s a matter of aggregating that cost into a one simple dollar figure on a daily basis so that a supervisor understands the impact their decisions are having on their organization.
If your organization is having trouble containing its labor costs then it’s time to understand what the next hour of labor is really costing your organization. You have the data, you have the rules, it simply a matter of sharing them with the people who are deciding how much to spend in the next hour.
Is it worth the effort? Considering the 2103 PEW Trusts report found that 39 of 40 of the cities it analyzed do not have fully funded pensions and the amounts are measured in 10’s of millions and even billions, I would say this is an area worth looking into.
It’s been about eight years since I stepped into the manufacturing vertical in Kronos and I’m excited to announce that Kronos has asked me to take what I’ve learned here and apply it to a new initiative. This is a project to demonstrate that labor is not just a cost and compliance burden, but rather a strategic resource that is responsible for differentiating a company.
For those of you who have had a chance to read my book, Lean Labor, you know that I have espoused this proposition for many years. The challenge when I wrote that book is for many companies it is easy to measure the cost and compliance risk of an employee. What’s more challenging is to equate an individual’s effort to more positive outcomes such as higher quality, increased revenue or improved conformance to policies and procedures. The reason is that measuring cost can be recorded easily and accurately down to the minute. Labor’s impact to other factors can often take days or months. Additionally a single or group of employee’s impact is often mingled in with other factors such as weather, sales promotions or the performance of other downstream operations.
As any Lean follower knows, this is very similar to the Lean philosophy and I’m looking forward to sharing what I discover in the future here as well.
This initiative goes outside of Manufacturing. Healthcare organizations are evolving from measuring by activity to improving outcomes. Retailers are working to differentiate by providing the right types and levels of service to their customers just when they need it.
This is potentially valuable work for a company because when the only data driven linkage to labor is around cost, compliance and immediate output, the so called “war on labor” will continue. Once we can link the more positive outcomes experienced by a company to labor, companies will have another option to use in achieving their strategic goals. I would predict that this increases their use of labor because executives will have the metric and proof they need to feel confident in the outcomes.
Why do I have confidence in saying that? Today the only role whose performance is easily measured to a strategic goal, in this case revenue, is sales. Broadly speaking sales is always the role that is first to be grown and last to be cut. They are often the highest paid as well.
Fortunately, I’m not alone in this effort. There are examples already occurring in the market and academics who have already been proposing these ideas. A recent article in the New York Times Thinking Outside the (Big) Box provides some more specifics around the idea.
I look forward to communicating our findings and what others are doing in this area in the near future.