1. Improving Production Efficiency David Ellings David Rosebrook Business Mentors 2006 DKC Conference, Toronto

2. What’s On Tap 1.Industry standards 2.Efficiency myths and facts 3.Study profile 4.A case study 5.The results 6.The hidden effect 7.The bottom line 8.Simple steps to improve your position 9.Building the team

3. Measuring Success? Employees Equipment Building Size Volume

4. SALES:$5,000,000EXPENSE:$4,850,000PROFIT: $150,000 or 3% SALES:$750,000EXPENSES:$600,000PROFIT: $150,000 or 20%

6. NAICS Code Industry Segment Profit

7. PROFIT DIRECT COSTS OVERHEAD COSTS 0 – 22% 15 – 30%50 – 80%

8. DIRECT COSTS 50 – 80% Direct Costs 20 – 50% Material/Equipment 50 – 90% Labor

9. Focus For Efficiency

10. Top Five Inefficiencies Materials Buying smarter and using wiser Speed of work Get your employees to move faster through the assigned tasks Amount of management Train your staff to function in the field with less management oversight Pricing Estimating program pricing problems Project size Advance to larger projects…they are more substantially more profitable

11. Ratio Difference Efficiency

12. True Inefficiencies Scheduling –Time management and efficient use of resources Material procurement –Multiple trips, retaining stock, price shopping Accuracy –Time card slippage, accountability, management Drive time –Most significant indicator, liability, waste, waste, waste

13. Study Profile Executive Summary Productivity trends carry a large impact on profitability Utilize detailed data gathered over three years to analyze efficiency Productivity focused on production employees and management processes Clear conclusions were able to be drawn by the results

14. Introduction Background –Productivity is the key factor of economic health –Industry productivity is not well defined –Rely on productivity figures from sources of questionable credibility Exactware, Means etc. –Ineffective management results –Need to offset the tightening of profits by the insurance industry

15. Introduction Objectives –Study efficiency trends over an extended period –Create an awareness –Counter insurance industry pressure on margins –Increase management tools –Nothing matters unless we increase…. $ NET PROFITS $

16. Introduction Scope –Defined: The American Association of Cost Engineers “Productivity is a relative measure of labor efficiency, either good or bad, when compared to an established base or norm” –Its nature creates difficulties in tracking it as an absolute value over time. –Information is gathered against movements of an established base, or benchmark value

17. Introduction Methodology –Study detailed movement of 82 production employees –Focus on inefficient time and not on production cycles –Created buy-in through incentives and self- improvement –Used sampling and statistical analysis techniques to establish and confirm results –Sampled across all company production areas –Gathered data very quietly

18. Affecting Factors Project Uniqueness –Each job is different and unique Environmental factors –Landscape, weather, and physical location Aesthetic factors –Level of quality required, material selection, existing conditions Human factors –Expectations of adjusters, owners, managers etc. –Uniqueness requires modification of the process…creating an inefficient learning curve at the beginning stages of each project activity

19. Affecting Factors Technology –Hugh effect on overall productivity –Modify skill requirements –Create difficulties in separating contributions of technology, management and labor to the efficiency –Less motivation to add technological changes when the associated labor is not expensive –Sometimes expensive and only a temporary strategic advantage

20. Affecting Factors Personnel –Management Level of training, accountability, and knowledge Documented studies – poor management activities account for over 50% of the inefficiencies –Production Cross training, flexible contract increase efficiency The fall of “real wages” within the industry –Old skills retire...young talent goes else ware –Industry tends to retire or fall off at an earlier age Lack of formal training –Lowest of any formal sector of the economy –Workforce tends to be transient, causing a reluctance to invest capital to train

21. Case Study Assumptions Employee Carpenter –Generalist to handle multiple tasks Wage: $25/hour Burden: 50% Total cost to employee: $37.50/hour Work year available: 1960 hours/year –2080 hours minus 3 weeks for holidays, vacation and sick time. Expected production: $100/hour

22. Scenario One 7:00 AM arrive at your facility to get assignment and supplies 7:00 – 7:30 drive to work site 7:30 – 9:30 install trim (productive work) 9:30 – 9:45 break (paid) 9:45 – 11:30 finish trim and paint (productive work) 11:30 – 12:00 lunch (unpaid) 12:00 – 1:45 install interior doors (productive work) 1:45 – 2:00 break ( paid) 2:00 – 3:00 install door hardware (productive work) 3:00 – 3:30 drive back and unload items and paperwork

23. Scenario One Results 8 hours worked and paid $200 wages + $100 burden = $300 cost 6.5 hours productive revenue generation 1.5 hours unproductive time paid 19% of paid time unproductive

24. Scenario Two 7:00 AM arrive at your facility to get assignment and supplies 7:00 – 7:30 drive to work site 7:30 – 7:45 get coffee then discuss project, activities last evening and other personal items with the rest of the production crew 7:45 – 8:00 unload supplies and tools from truck and set-up to work 8:00 – 9:00 install trim (productive work) 9:00 – 9:15 break (paid) 9:15 – 9:20 put away coffee, doughnuts and items from break

25. Scenario Two 9:20 – 10:00 install trim but a scope clarification problem arises (productive work) 10:00 – 10:15 discuss project with home owner and/or call project manager for clarification 10:15 – 10:30 install trim (productive work) 10:30 – 10:40 at 10:20 the carpenter realized that there wasn’t enough trim to complete the work, so a discussion about this issue occurs with the crew and the carpenter winds down his activities to get ready to leave for a store 10:40 – 11:00 drive to Home Depot (even though there was another lumber yard 5 min away but was unknown to the carpenter)

26. Scenario Two 11:00 – 11:30 locate trim in store, pick-up a couple of other supplies on your account, look at a the new compound miter saw, look at bath fixtures for a home remodel or side job, go to pro-desk to check out, converse with pro-desk manager about the weather or sports, load items into truck and leave 11:30 – 11:40 stop for gas and snacks 11:40 – 12-00 drive back to project 12:00 – 12:30 lunch (unpaid) 12:30 – 12:40 conclude lunch and put away lunch supplies, clean-up and use restroom

27. Scenario Two 12:40 – 1:00 install last piece of trim ( project completed for the day, other supplies to arrive tomorrow) 1:00 – 1:15 wind down from activities and load vehicle 1:15 – 1:30 drive to a different work site 1:30 – 1:45 set-up tools and work at new site, also greet and discuss things with crew/homeowner 1:45 – 2:15 install windows (productive work) 2:15 – 2:30 break (paid) 2:30 – 2:35 put away coffee, doughnuts and items from break

28. Scenario Two 2:35 – 2:50 install insulation (productive work) 2:50 – 3:00 wind down for day, load truck and leave 3:00 – 3:30 return to facility, drop of time sheet/paperwork and unload supplies and debris

29. Scenario Two Results 8 hours worked and paid $200 wages + $100 burden = $300 cost 3.0 hours productive revenue generation 5.0 hours unproductive time paid 63% of paid time unproductive

30. The Cost of Inefficiency Scenario One Scenario Two Industry Average 1.5 hrs =$56.25/person/day =$13, 781/year 5.0 hrs =$187.50/person/day =$45,937/year 2.6 hrs =$99.00/person/day =$24,255/year

31. Is this it….

32. No, it is just the tip of the ice berg!

33. What about the revenue that should have been earned during the inefficient time spend….

34. Lost Revenue 2080 hrs in a work year = $208,000 –3 weeks removed for vacation, holidays, etc. 1960 possible productive hours in a year At $100/hr = $196,000/person/year of revenue generation

35. Lost Revenue Scenarios 1.$36,750/yr of lost revenue per person 1.367.5 hrs unproductive = 1592.5 hrs productive 2.$122,500/yr of lost revenue per person –1225 hrs unproductive = 735 hrs productive Avg. $64,680/yr of lost revenue per person – 646.8 hrs unproductive = 1313.2 hrs productive

36. What Does All of This Mean? Company Assumption 1,000,000 revenue for year –60% direct costs = $600,000 25% materials/equipment = $150,000 75% direct labor = $450,000 –25% overhead = $250,000 –15% profit = $150,000

37. What Does All of This Mean? Company Assumption We will use the average efficiency to test 1/3 of production day is inefficient 2 hours 38 minutes non-productive 5 hours 22 minutes productive time

39. Small Increase, Big Gain 5% increase = 25% more profit Productive time –5hr 22min to 5hr 37min…..or only 15 min/day –12,000 hrs of labor in our example –1,500 personnel days per year –1,500/days X.25hrs X $100 = $37,500 increase in PROFITS

40. Results 5% increase = 25% more profit 1,000,000 revenue increased to 1,037,500 –60% direct costs = $600,000 25% materials/equipment = $150,000 75% direct labor = $450,000 –25% overhead = $250,000 –18% profit = $187,500

41. Results 5% increase = 25% more profit Therefore with the exact same costs the company was able to produce an increase of $37,500 of additional revenue which increased the profit by the expected 25% from $150,000 to $187,500 with only 15 min of increased production per person each day.

42. Results 5% increase = 25% more profit In addition, in order to capture the same profit of $187,500 without increasing the efficiency would require a 25% increase in the revenue or an additional $250,000 of sales…. Which is the easier improvement?

43. Actual Results History 62% increase in employee retention With incentives wages increased 6½ X greater then rate of inflation 18% increase in margins 76% decrease in paid none revenue travel time 36% decrease in management related inefficiencies 54% reduction in production inefficiencies

44. Actual Results 42.4%

45. Break Time 10 Minutes

46. Recap Direct costs represent 50% to 80% of the companies total expenditures Labor represents 50% to 90% of the total job costs on a project

47. Recap Direct costs represent 50% to 80% of the companies total expenditures Labor represents 50% to 90% of the total job costs on a project

48. True Inefficiencies According to Dave Scheduling Materials procurement Accountability of employees Travel time

49. A Solution Build a construction team that is accountable for the outcome of the project from the time the first call is received until the final check is cashed Proactively plan the project and then execute the plan Measure your progress and outcome

50. Contents Building the construction team Planning the project –Estimating –Budgeting –Scheduling –Materials Measuring our progress

51. Building the construction team Two different models for production Production manager Construction team

52. Production Manager PROS Specialized sales team Specialized construction team CONS Poor communication Lack of accountability Us against them mentality

53. Construction Team PROS Team environment Improved communication One person accountable for the entire project from start to finish Easy to duplicate CONS Potentially uneven sales from month to month Potential for poor or slow production

54. Progression of a Construction Team Project manager – sell, write, run Project manager and coordinator or superintendent Project manager, coordinator and superintendent

55. Project Manager Responsible for everything –Sales –Marketing –Estimating –Production –Collections Limited by time and energyLimited by time and energy Typically will produce from $500,000 to $1,000,000 per yearTypically will produce from $500,000 to $1,000,000 per year

56. Project Manager and Coordinator or Superintendent Project manager is responsible for everything Hires to compliment his/her strengths Delegates responsibilities to the coordinator or superintendent Needs to produce from $1,250,000 to $1,750,000 per year

57. Project Manager, Coordinator and Superintendent Project manager is responsible for everything Delegates responsibilities to the coordinator and superintendent Needs to produce $1,750,000 or more each year Top dollar amount depends on project size and location

58. Building the Construction Team The players Their responsibilities

59. The Players Project manager Coordinator Superintendent Lead carpenters or lead technicians Field staff Temporary employees Subcontractors

60. Project Manager Responsibilities Sales, Sales, Sales Marketing Managing the construction team Accountable for the teams outcomes

61. Coordinator Responsibilities Administrative assistant for the team Budgeting Communications with adjuster and homeowners Assemble project books Keeping computer software up to date Helping with collections Make the project manager look good! 95% of this persons time is spent in the office Compensation is around $38,000 per year plus bonus

62. Superintendent Responsibilities Scheduling Quality control Training Keeping projects on budget and on schedule Manage subcontractors Customer selections Order materials Manage the homeowners expectations Safety 95% of this persons time is spent in the field Compensation is around $45,000 per year plus bonus

63. Lead Carpenter Works on the project Manages the project Quality control Safety Manages the homeowners expectations Manages subcontractors Keeps site documentation up to date Works on 1 to 3 small projects at a time or one large project (over $15,000) Compensation is in the $18 to $28 per hour range

64. Field Staff Carpenters, helpers, painters, drywallers, etc… Keep the number of field staff small Travel, meetings and other non- productive times are magnified When work is slow they are on “shop time” When work is slow painters are framing! Tendency to overstaff jobsites

65. Temporary Employees Labor –Good source of labor –There are pros and cons –They only work when we have jobs Skilled labor –Acceptable source of skilled labor –You have to be organized Some insurance programs are trying to limit the use of temporary employees

66. Subcontractors Fixed price for work They need to be managed You do not pay for inefficiencies Small subcontractors are better suited for our margins

67. A System for Improving Efficiency By design –Keep the system simple and easy to use in the office or in the field –Easy to duplicate with different levels of employee proficiency –Inexpensive –Expandable –Does not break down when project volume increases Could be the most difficult thing you do!

68. Start With the End in Mind What does the lead carpenter need to successfully complete the project? –Scope of work –Budget –Schedule –Customer selections –Materials

69. The Estimate Scoping the loss Sketch Estimate detail Estimate timelines Negotiations Open items

70. Scoping the Loss Consistent Accurate Fair Detailed Notes –For the adjuster and his boss –For the superintendent and lead carpenter Sketch

71. Estimate Timelines Timelines –24 hours – under $10,000 –48 hours – under $50,000 –72 hours – over $50,000 Exceptions –Specialty items –Subcontractors –Open items

72. Open Items Line items in the estimate that do not have firm dollar amounts Allow the estimate to be completed and uploaded on time Allow for future supplements Strong potential that supporting invoices and other documentation will be required

73. Negotiations Meet the adjuster at the loss site to scope the project Understand the estimating software better than the adjuster Argue scope not price

74. The Budget Markup vs. Margin Calculating the sales price Calculating the budget amount Different budgeting tools –Xactimate –Excel

75. Definitions Direct costs are the actual expenses – labor, materials, subcontractors and permits that go into each project. Markup is the amount added to the direct job costs to get the selling price – expressed as a percentage of direct costs. Gross profit is the amount of money remaining after the direct costs have been deducted. Gross margin is the difference between direct job costs and the selling price – it is expressed as a percentage of the selling price.

76. Gross Margin 50 45 40 35 33 30 25 20 16.66 Markup 100 82 67 54 50 43 34 25 20 O&P

77. Using Markup to Find the Sale Price Target is a gross profit of 40% no O&P –Markup direct costs by 67% –Gross profit equals 40.1% Target is a gross profit of 40% with O&P –Markup direct cost by 40% –Add overhead and profit 20% –Gross profit equals 40.5% Gross profit = (contract amount – direct costs) -1 contract amount

78. Calculating the Budget Amount With overhead and profit –Budget = contract * (1-(gross profit)) –Budget = $167 * (1-(40%)) = $167 * (.6) = $100.20

79. Other Ways to Calculate the Budget Amount Budgeting the line item before O&P using factors –1.3 = 36% –1.4 = 40% –1.5 = 45% –1.6 = 48% Budget = contract /1.2/1.4 or line item /1.4 = $167 / 1.2 = $139.2 / 1.4 = $99.50 = $99.50

80. Budgeting Tools Xactimate –Factoring –Work orders Excel spreadsheet

81. Xactimate Factoring Xactimate version 2002 –Create a duplicate estimate –Grouping screen –Highlight all rooms –Pull down the EDIT menu –Go to FACTORING –Highlight activity and change factor –Do this separately for each activity –When complete press OK

82. Factoring Table for Xactimate Factor 75 70 50 25 Gross profit 37.5% 42% 58.5% 79%

83. Xactimate Work Order Xactimate Version 2002 –Go to work order –Set up vendor as “ Budget” –Select all categories –Highlight categories and set factor using factoring table for desired gross profit –Follow instructions until finshed

84. Excel Spreadsheet Easy to manipulate and change data Able to track costs and changes throughout project Can be tailored to your company Uses your companies labor and burden rates Separates labor, materials, equipment, subcontractors Example of a budgeting spreadsheet

85. The Schedule A schedule is simply a plan for carrying out a project, indicating when each operation should begin and when it should end.

86. Types of Schedules Manual –Calendar –Scheduling board –Work orders –Spreadsheet (Gant) Computer program –JPP –Microsoft Project –Plethora of others options

87. Rules for a Successful Schedule “Under promise and over deliver” 1.List the work trades (from your estimate) 2.Put the trades in the proper sequence 3.Find the time allotted for each trade (from your budget) 4.Schedule each trade in its proper sequence showing start and stop dates 5.Allow plenty of time during the schedule for unplanned events

88. Scheduling Simple, easy to revise, and take as little effort as possible Tracks what work is complete Tracks the start date of upcoming trades Sets the completion date for trades, inspections, materials, selections Sets expectations and accountability Has solid must hit dates

89. Materials and Selections Making the materials list Getting materials to the job site –At project start up –While the job is in progress –When the job is done Customer selection process

90. Making the Materials List Print components list from Xactimate Site visit –Good time for project manager to hand-off project to the superintendent –List of all homeowner selections prepared in advance by coordinator –Confirm lengths, styles, colors of all materials –Compare actual materials to components list –Leave site with detailed list of materials to complete the project –Use vendors for specialty items such as windows, cabinets, and doors

91. Getting the Materials to the Job Site Delivery by supplier –Job site –Warehouse Delivery service –Good for small pick-ups –Cost around $25 –Keeps your lead carpenters on the job site In-house delivery person –Job costed –Needs to have a set schedule for deliveries Will-call

92. While the Job is in Progress Large projects –Order materials by phase and have them delivered Small projects –Order all materials before the project starts and have them at the site, warehouse or will-call Daily phone call by lead carpenter –Materials for tomorrow –Ask “ What materials do you need tomorrow, or to finish out the project” Site visit by superintendent

93. When the Project is Complete Leave all project specific materials behind for the homeowner – paint, trim, scraps Throw all scraps and project specific materials away Lead carpenter and superintendent remove left over materials –Return to store – superintendent –Return to warehouse – superintendent –Take to next project – lead carpenter

94. Homeowner Selections Must be in writing and signed by the homeowner List of selections is generated by the coordinator using the estimate Small project under $25,000 selections made before work begins Large projects selections made by the time demolition and cleaning is complete

95. Measurements Job cost-outs Accountability reports Production meetings

96. Job cost reports Manual –Field report by superintendent or lead carpenter –Spreadsheet used by coordinator or project manager Accounting software

97. Accountability Reports Production report –Budget vs. actual cost Project manager efficiency –Length of time to complete estimate –Length of time to get contract signed Production efficiency –Measures estimated completion time vs. actual completion time

98. Production Meetings Weekly production meeting Daily team meeting

99. Strategies For Corrections

100. Put production on a pedestal –Plan and use your production staffs 2080 hours as your first priority

101. Production Create and post and organization chart –Make sure each production person know where they lay and who supervises them Emphasis safety and safety training –Let them know you are interested in their well being Create a detailed job description for each employee –Change them as the positions change Create a review form holding them accountable for the items in the job description

102. Production Include them in meetings Offer training incentives Have a clear and concise path for career mobility Remove cancers immediately –Hire tough…fire fast Create and implement an incentive plan –Both personal and team based –Small perks and recognition go a long way

103. Production Remember: You can’t manage what you can’t measure -Jack Welch And Trust but verify -Ronald Regan (with special credit to Phil Rosebrook Sr.)

104. Strategies For Corrections Put production on a pedestal –Plan and use your production staffs 2080 hours as your first priority Monitor and reduce drive time –Monitoring is the blood test of your businesses health check-up –Single most reducible and inefficient time spent

105. Drive Time Start/stop day at job site –Production staff should start and end day for all non-emergency work at the job site –Use technology to monitor the process –Review company vehicle policy –Pay mileage instead of allowance This will allow a tracking mechanism for drive time –Add runner for material delivery Better yet use your suppliers to deliver material –The numbers do not support staff material procurement

106. Strategies For Corrections Material Handling –Dispose of extras –Look critically at what you stock –Keep production from material procurement at all costs

107. Material Handling Don’t return unused commodity stock to your warehouse –Dispose on site –Give to property owner Production personnel should produce and not purchase Avoid the temptation to stock most supplies. –The savings on most bulk purchases are far offset by the cost of storage and delivery –Utilize suppliers that will deliver even for a fee

108. Strategies For Corrections Material Handling –Dispose of extras –Look critically at what you stock –Keep production from material procurement at all costs Add technology –Computer, faxes, PDA’s –GPS, Sprint/Nextel systems

109. Technology Cost vs. benefit –Make sure it makes sense financially and logistically Keep production staff out of office –Use faxes or computers to send daily time sheets –Enter time data in real time through PDA’s or phones Use GPS to track assets, both organic and inorganic

110. Challenges of having a mobile workforce No visibility into your team High overtime costs Manual timecard processing High mileage costs Can’t allocate your resources effectively Difficult to communicate with your team Manual dispatching Manual paperwork chaos

111. Mobile Vendors Gearworks (gearworks.com) –Etrace:Worksmart Aligo (aligo.com) –WorkTrack Portable Internet (portableinternet.com) –GPS Mobile Workforce Management Westlake Software (westlakesoftware.com) –AIR Mobility Time Card (timecard.econz.com) –Time Card (Verizon Wireless)

112. 1)All landmarks and jobs are geo-coded & labeled by stop name. 2)A configurable Workzone surrounds each stop to define its boundaries for GPS collection 3)When a vehicle enters the Workzone, etrace starts to monitor the duration to determine if it should record this as a stop 4)When a vehicle is in a Workzone for a specified duration, etrace marks this as a stop and records details, such as distance traveled and time of entry. 5)If a vehicle is stopped in a Workzone that does not correspond to a landmark or job, the stop is logged as an “unscheduled” stop..” Stop is Recorded Potential Stop Workzone etrace Workzones

113. Worker Map Display of Exception Time

114. Summary Ability to transform the mobile workforce for the field service industry. Eliminate manual processes increasing accuracy and costs. Increase customer response times Decrease mileage and overtime costs Leverage your IT and backend system investment Fast return on investment