Free online tool to quantify the financial benefits of people-centric improvement projects with focus on manual work and overall process efficiency (OPE).
Manual work is a major cost driver in many industries, making it a management priority. The Labor Cost Calculator helps you to quantify the financial impact of efficiency improvements and process automation. This short video explains how the calculator works and how to determine labor cost savings and incremental margin from improved process efficiency in manufacturing, service, and administration.
Labor Efficiency Cost Formula and Calculation Method
The financial model works for all types of human labor work, blue and white collar, in manual processing, discovery and development, professional services, and business administration. The overall process efficiency (OPE) is the product of three factors: availability, performance, and output quality. Improving labor process efficiency creates bottom-line value by freeing up work hours (savings), produce more with the same labor hours (throughput), or redeploying those hours where they can create greater value (leverage). For this process efficiency cost simulation, we will focus on the first two cases: use less, make more.
What You Need to Know when Using the OPE Calculator
The financial benefit calculator helps managers, engineers, and controllers to quantify improvement potentials, determine the feasibility of machine-centric improvement projects, and estimate the return of investment (ROI). Please note that these ‘back-of-envelope calculations’ are based on a simplification of reality. The result is illustrative and depends on the completeness and accuracy of the data entered. This cost calculator is for general information purpose only and not intended to provide specific direction or advice. As each situation is unique, there may be conditions that are not factored into the model. Taking into account the limitations, the financial benefit calculations still provide a great starting point to make quality improvement potentials explicit.
Calculate Labor Cost Efficiency in 2 Steps:
Step-1: Input Labor Efficiency Data
- People: enter number of people in scope of the project.
- Salary: enter the median salary of people involved.
- Factor: adjust the burdened labor factor.
- Availability: adjust availability of human resources.
- Performance: adjust average to benchmark speed.
- Quality: adjust first-pass yield or overall quality rate.
- Leverage: adjust value-adding or contribution factor.
- Results: calculate financials for current & future state.
- Benefit: calculate the financial gain = current – future.
Step-2: Calculate Labor Efficiency Savings
The labor cost model is based on the following formulas to calculate the gap between the current state (with losses) and the ideal state (lossless):
- Efficiency = Availability x Performance x Quality
- Loss = Opportunity = 1 – Efficiency
- A) Cost Savings = Opportunity x People x Salary x Factor
- B) Profit Increase = Cost Savings x Leverage
A benefit is created from (A) reducing labor or (B) increasing throughput.
Definitions and Assumptions to Calculate the Benefits of Labor Process Efficiency Improvements
- Overall Process Efficiency (OPE) for manual operations represents the time a person or a team is generating value relative to the time paid.
- Availability is the percentage of time doing work after downtime (not able to perform work) and idle time (waiting for something of someone).
- Speed represents the average performance relative to established benchmarks, the maximum achievable performance under ideal conditions.
- Quality represents the percentage of work that is complete and accurate (C&A), done right first time (RFT), processed first time through (FTT).
- A) Labor Cost Savings is the labor efficiency loss (1 – OPE) multiplied by burdened labor cost, the salary plus expenses for insurance and benefits.
- B) Labor Profit Increase comes from freed labor hours that have been redeployed, generating incremental profits through leveraged labor cost.
- Example: OPE = 51% means 49% labor hours are not productively used; act: (A) reduce resources ‘use less’ or (B) increase throughput ‘make more’.