Executive summary:
- Utilizing labor standards is a critical part of a successful labor management program.
- Multi-determinant engineered labor standards provide a more accurate performance expectation as compared to reasonable expectancies.
- An LMS is instrumental in developing fair labor standards and managing performance.
In an era of evolving labor demands including protecting employee welfare while still boosting productivity and utilization, organizations need to make informed decisions about which type of labor standards to implement on the path to achieving a best-in-class labor management program.
There are two common approaches to establishing effective performance standards: multi-determinant engineered labor standards and reasonable expectancies. Understanding the differences between these two approaches helps organizations decide which one best suit their unique labor management needs and budget.
Why Labor Standards Matter
Performance standards establish a baseline for minimum performance expectations and are used to assess productivity and utilization levels in key cost areas such as order picking, packing, shipping, receiving and putaway.
Establishing and maintaining effective labor standards is the foundation for maximizing performance, employee trust and employee engagement. Achievable, well-communicated standards support a culture of friendly competition, effective recognition programs and incentive pay based on accurate performance standards.
Engineered Labor Standards vs. Reasonable Expectancies
Understanding the following differences between multi-determinant engineered labor standards and reasonable expectancies will help organizations choose which approach is best for their organization.
Engineered Labor Standards
Engineered labor standards are a systematic approach to developing performance expectations that are ideal for organizations where quantitative precision and consistency are paramount.
An engineered labor standard defines the time necessary for a trained worker, working at a normal pace, including normal fatigue and delays, to do a defined amount of work of specified quality when following the prescribed standard operating procedure (SOP). These standards are multi-determinant, using more than one variable to calculate performance expectations.
For example, a standard for multi-order picking, would typically calculate the expected pick time based on the number of customer orders, the number of line items, the number of pieces and or inner packs, total distance traveled, and the type of material handling equipment used. Advantages of this multi-determinant engineered standards approach include:
- Organizations that deploy engineered labor standards typically boost productivity by 15% to 25%.
- The time allotted in a dynamic standard is based on the actual work content completed, virtually eliminating the problem of “good orders” versus “bad orders” as order mix changes throughout the year.
- The “performance period,” defined as the accountability or incentive pay period, when using a multi-determinant engineered standard is much shorter than when using a reasonable expectancy approach.
- Real-time and accurate performance monitoring allows for more timely movement of personnel resulting in lower overtime and higher utilization levels.
- Utilizing the most accurate performance standards possible promotes associate buy-in resulting in an easier path to improvement.
- Multi-determinant engineered standards best support incentive pay and recognition programs. This ensures that recognition and incentive pay are both attainable and fair to both the employee and the company, which results in a healthy culture.
- Real-time and accurate performance data allows for effective performance coaching.
- Using engineered labor standards supports a continuous improvement program by accurately detailing the performance and cost impact a change to the work process or environment would have. Knowing the specific time associated with each step of the process allows an organization to easily determine the impact a given change will have.
Reasonable Expectancies
Reasonable expectancies are developed using hundreds, if not thousands, of assignment level production rates across many employees over a defined period to create a one-determinant average (or slightly higher) performance expectation. A one-determinant reasonable expectancy is typically reported as lines per hour, cases per hour or the like. The logic of this approach is using thousands of assignments to develop the average one determinant standard considers the current layout and environment, typical process complexities, delays and the volatility in order size and associated effort.
To develop the most accurate reasonable expectancies possible the use of defined standard operating procedures and supporting work tools such as RF guns, gloves, aprons, shrink wrap, material handling equipment, etc. should be used. Unfortunately, often the standard operating procedures have not been developed, making a reasonable expectancy even less accurate than an engineered standard.
Reasonable expectancies are typically 10% to 15% “looser” than multi-determinant engineered standards due to the use of a one-determinant average standard approach, such as cases per hour. A simple example exemplifying the difference between these two approaches is this: Both Picker A and Picker B must pick 50 cases on their respective assignments. Picker A’s assignment requires traveling to one pick location (one line item) to pick all 50 cases. Picker B’s assignment requires travel to 10 different pick locations (10-line items) to pick all 50 cases. Which picker will complete their assignment in less time? The answer is Picker A who will have travel time to only one pick location versus 10 for Picker B. Additionally, Picker A will have to look at the RF gun only one time, potentially only scan one bar code, and will have the advantage of stacking the same size case on the pallet resulting in less case re-handling. If the reasonable expectancy is 50 cases per hour for this area, Picker A will likely pick the assignment in 30 minutes or less while Picker B may struggle to complete the order in one hour, depending on the reasonable expectancy’s average order size. In this example, the reasonable expectancy of 50 cases per hour provided too much time for Picker A and too little time for Picker B. It is for this reason that a one-determinant reasonable expectancy is looser than an engineered standard.
Using the same example above and applying the use of a multi-determinant engineered standard approach, a labor management system (LMS) would calculate an extremely specific standard time for each assignment resulting in each picker having a fair performance expectation based on the actual work content of the assignment.
Here are a few good reasons to use reasonable expectancies:
- Reasonable expectancies are less expensive to develop as compared to engineered standards if you have the right tool to complete the analysis. They are often used in dynamic environments where constant layout and process changes happen. An example might be a 3PL with multi-tenant buildings experiencing a lot of client turnover. Remember that each time a new process or layout is used, the assignment data must again accumulate to develop the new reasonable expectancy.
- Though the maintenance of reasonable expectancies can be more time-consuming than engineered standards, as they need to be adjusted to reflect your current work content/mix either monthly or quarterly, they are less technical from a maintenance and adjustment perspective as compared to an engineered labor standard.
- A one-determinant RE is easier to understand than the more complex calculation of an engineered labor standard.
A Tier-1 LMS Supports Effective Labor Standards
Whether an organization uses engineered labor standards or reasonable expectancies, an LMS is vital to effectively develop and calculate performance expectations.
A tier-1 LMS is required to calculate a multi-determinant engineered standard using XYZ mapping capabilities and apply progressive PF&D. The LMS, interfaced with a Warehouse Management System (WMS) and a Time and Attendance System, will also provide real-time performance data for each individual and team in the operation which is a critical component to developing and maintaining a high performing operation.
An LMS with real-time business intelligence (BI) capability provides organizations with a vast amount of operational data and insights needed to develop and maintain reasonable expectancies. In fact, some labor management systems have functionality built in to automatically develop reasonable expectancies.
Beyond the development of performance expectations, an LMS is vital in managing employee performance at a high level. With access to real-time performance data, supervisors can immediately provide accurate and detailed feedback to associates and help guide coaching efforts. Consistent, data-supported engagements between managers and associates create a positive environment, resulting in higher employee morale and retention. Additionally, a tier 1 LMS will provide floor managers with many other management features such as incentive pay, accountability, learning curves and labor planning to name a few.
To learn more about adopting the right labor standards for your organization and or how an LMS can rocket your performance to new heights, contact TZA today.
Author: Richard Knight, Director of Services, TZA
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