How to Reduce Labor-to-Sales Ratios and Remakes and Increase Productivity
Posted Oct 25, 2012, Published 2009-04-01
The cost of labor can constitute as much as 50% of production costs in some laboratories, making it a key factor in determining the success of the business. One of the fairest and most effective ways management can reduce labor-to-sales ratios and remakes, as well as increase productivity is to implement a productivity incentive plan that financially rewards employees for their efforts to achieve these goals.
In many laboratories, profit sharing is either nonexistent or handled in an inconsistent manner. But when you have an established bonus plan that incorporates quality control measures into each production step and involves both technical and administrative personnel, it motivates employees, breaks down animosity between departments and promotes teamwork, and instills a sense of employee accountability and responsibility.
Productivity incentive plans should be predicated on two figures only: - Cost of Labor - Total Sales/Cases Produced and Invoiced
The differential between these two figures is the labor-to-sales ratio. As labor costs decrease, the differential widens to create additional revenue that can be shared with the employees.
Daily production norms and productivity targets must be clearly defined so each department can meet its established level of billable labor dollars each day in order to maintain a productive labor-to-sales ratio. Managers have to control overtime and cross-train technicians to achieve better productivity. They also have to reduce internal remakes through better quality control, technical training, technician accountability and programs for quality assurance like DAMAS and ISO 9000.
I recommend distributing bonuses on a quarterly basis. If you do it semi-annually or annually, it can put a big crimp in your cash flow and you lose employee-motivation momentum. Typically, personnel with at least six months of continuous service are included; independent contractors and principal shareholders are excluded.
The plan needs to be clearly explained to the staff members who will benefit from it. A very effective—and motivating—approach is to give the employees their first quarterly check at the end of the explanatory meeting. Another approach I've used is to give each employee another person's bonus check in a sealed envelope and ask him to find the person who has his check and thank him. This drives home the point that they're all helping and depending on each other.
I've outlined two common ways to structure a productivity incentive plan for a hypothetical 21-technician, full service laboratory:
- Plan I is based on calculating labor savings
- Plan II is based on net profits
The choice depends on several factors, including your management style and your labor force. For instance, if you have an open book policy and share your financial data down to the Gross Profit line (see Optimal Operating Ratios chart below) with your employees, Plan I (the labor-to-sales ratio plan) might work better for you. Plan II, based upon net profits, is a more simplistic approach. The most effective way to decide which one is best for you is to look at financial data from at least three consecutive quarters and run the numbers for both plans.
It's important to note that both systems share one primary goal: educating employees about their role in helping to control labor cost, materials usage and internal remakes engenders employee trust and creates a sense of ownership and parternship in the success or failure to achieve profitability.
Also, the success of any productivity-based program is predicated upon management's commitment to the plan via educating and motivating personnel, delegating responsibility to control labor, and empowering technicians to stop production when internal remakes are first observed.
Implementing a Productivity Incentive Plan:
How to get Started
Choose a plan, either based on labor savings or net profits, by running the numbers for both plans for at least three consecutive quarters.
Determine employee eligibility: plans usually include personnel with at least six months of continuous service and exclude independent contractors and principal shareholders. The plan needs to be clearly explained to the staff members who will benefit from it.
Define daily production norms and productivity targets so each department can meet its established level of billable labor dollars each day in order to maintain a productive labor-to-sales ratio.
Implement strategies to control overtime, cross train technicians, reduce internal and external remakes and enhance technician accountability to improve quality control.
Distribute bonuses on a quarterly basis to maximize momentum and minimize cash flow impact.
Start simple and keep it flexible. Like any management tool, productivity incentive plans are dynamic and they naturally evolve over time. Don't make the plan too sophisticated in the beginning; keep it simple and let it change as your business needs shift.
Robert Gitman is the company administrator of Thayer Dental Laboratory, Inc., a full service laboratory specializing in cosmetic and implant restorations located in Mechanicsburg, Pennsylvania. In the dental field for nearly 30 years, Gitman has been a consultant throughout North America and in Western Europe. He served as executive director of the Dental Laboratory Conference; on the ADA's Council on Dental Practice; as an advisory committee member for the National Foundation of Dentistry for the Handicapped; and an ex-officio trustee advisor to Oral Health 2000, America's Fund for Dental Health.
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Rayne Verity · Marketing & Finance Manager at Evident, Inc.
I always get annoyed with articles or posts that say you need an incentive program to boost production and improve quality control and then leave it at that. Thank you for providing the structure for implementation.