In 40 months on the road as a small business consultant, I found numerous clients for whom providing a workflow solution resulted in saving time on a task, which saved money. One of the key things we taught clients was that a dollar saved was a dollar of profit whereas on a sale the profit was what was left after subtracting cost of goods sold and expenses so $1 of profit might mean $10 or even $50 in sales.
At one account, one young supervisor told me about the time wasted every time they needed to pack up product to ship. He even gave me a solution which I passed on to our clients. They explained that the young man's idea wouldn't work at this time. Nevertheless, when they saw the $25,000 savings in my recommendation, my small business client's management team got together with this supervisor and found a different workflow solution.
Formula for Workflow Labor
When trying to calculate the cost of an inefficient workflow, you need to first get the actual time involved in the way things are done now. I used a stopwatch to get the numbers for this calculation. Figure the cost as follows:
- Formula: Burdened labor x time saved x people involved x days worked per year = potential labor savings
- Burdened labor is the true cost of your employees. Labor burden means your expenses above and beyond your basic labor rate. It includes taxes, insurance, Workers Compensation, FICA and Medicare plus benefits and allowances, like uniforms.
Example of How to Calculate the Savings
Here is how the numbers might look in such an example:
Time/person to reorganize the space every time you need to set up to pack for shipping: 15 minutes = .25 hours
Employees doing reconfiguration 5
Reconfigurations per day 4
Man-hours/day on reconfiguration 5
Client's working days/year 306*
(52 weeks x 6 days = 312 // - 6 holidays** // = 306 working days)
Man-hours/year on reconfiguration 306 days x 5 hours per day for the team = 1530
Packing & Shipping Team Fully Burdened Average Hourly Wage $16.43
Annual Cost to Reconfigure Production Area 4 times/day $25,137.90
* Note: While their employees got vacation, someone covered on the packing team because this company's product had to ship every one of those 306 days.
**Christmas, New Years, Memorial Day, July 4th, Labor Day, & Thanksgiving
In my recommendation, I made sure the supervisor got credit for his suggestion. One of the owners made sure he knew that they appreciated his input to us.
Notice how a small amount of time multiplied by several employees several times a day times the number of days worked per year gave a significant savings to this small business. With this one client, finding a workflow solution saved enough time annually to cut $25,000 in burdened labor from their costs. That savings went straight to the bottom line as $25,000 in improved profits.
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