O&P By the Numbers

Knowing the cost of O&P processes will put the industry on top for the economic rebound.

It feels like the global economic crisis is parked at our front door. The good news is O&P is still a strong industry and when we have been confronted with issues like this before we have emerged stronger, more organized and more efficient than ever.

To ensure that O&P rebounds on top, we have to ask certain questions. How are we going to raise the bar? How are we, as an industry, going to provide our customers with a more accurate, effective and efficient product?

To do this we are going to have to think about what we do every day. We are going to have to be more thoughtful in our approach to process and production. The first step to meet these goals is to develop metrics, or numerical guidelines to ensure that we are always improving upon our processes.

Cost of labor

One of the most important figures you can extrapolate is your labor cost per hour. Simply put, how much do you really pay for each hour of labor that you or your employees work? It is easy to think about how much you pay each employee or how much you take home, as the cost of labor, but in most companies that rate is a fraction of the actual cost of labor. You will need to dig deep into the actual numbers. If you have never done this exercise, or if you have not done it in some time, you may be surprised at best or shocked at worst.

To get to the real number you will have to add up some figures.Take the aforementioned labor rate (the actual hourly wage) then add in the employers portion of Social Security and Medicare, the cost of vacation and sick time actually used, the cost of benefits including insurance, bonuses, continuing education, licensing, workers’ compensation insurance, unemployment insurance and any other perks or benefits derived from the enterprise, for each employee.

I like to annualize these numbers by using the actual cost per year. Once you have the annual total you can divide it by the actual number of hours each person works. This will give you a good approximation of what it actually costs for an hour’s worth of work. This is the number you will use to counterbalance all of the figures we will discuss in the rest of the article.

Labor hours billed

© 2008 iStock International Inc. /Brandon Rose

Without understanding all of the numbers, none of them made sense. Then I found a number that could give real power to our technical staff. It is a number I call the labor hours billed. In reality what we are looking for is the actual amount of time each person spends during the day making money.

Now before we get too far into this I should point out that not everyone in your facility is actively involved in making money so this metric is really only effective for technical staff and in some cases clinical staff. It is also important to realize that it is unrealistic to shoot for 100% billable hours from your entire staff. Instead you need to pick a number with which you are comfortable, usually somewhere between 75% and 90%. The actual number is not that critical because what you really want to track is not the number, but the trend.

To develop this number you need to do some homework. In our facility, what we have done is taken the wholesale price for which we sell each of our end products then we back out the material costs. We take what is left over and divide it by our labor cost. What this should leave you with is the labor hours it should take to complete a given task. It is not that important to get to the number to the seventh decimal place, you just want an estimate.

In short, if you have a part that sells for $100 and you have $10 in materials, you have $90 in labor. If your labor cost is $90 per hour then you have to be able to complete this task in 1 hour. If you can do it in 45 minutes – great. If you have already chosen 90% as your target labor hours per day then each of your producers will have to make 7.2 of these units per day. Remember this process starts with an arbitrary assumption so do not become frustrated if you do not meet your goals right away.

Share information

Now here is the really important part and one that most managers overlook. Knowledge is power for everyone. Most people who work for a living, like their job and want to do it as well as they possibly can. If you can give employees an honest metric that they can use to improve the job they do, they will use it to their advantage and step up their game.

Share this number with them every day. It does not have to be a fancy display. A flip chart with the days marked out and the goals indicated will do. Post the number daily so that they know how well or poorly they did the previous day. We go one step further and track it on a second chart that shows the monthly average. If you want to, you can easily put the numbers into a quick spreadsheet and graph it on an ongoing basis.

Now that everyone can see this number, discuss it with your technical staff. Ask questions. What did we do yesterday that caused the number to jump? Why did we work hard all day yesterday only to see terrible numbers today? All of these questions should be presented in the spirit of discovery. This process should be about you helping each other do a better job. If it becomes a method for you to criticize or condemn no one will follow your lead.

Tony Wickman, RTOP is the chief executive officer of Freedom Fabrication and treasurer of the Orthotic and Prosthetic Technological Association.

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