Beyond the Stopwatch: A Smarter Way to Calculate the Total Cost of Handwork in Your Fulfillment Operation
Guest post written by Paul Baker
We all love automation. In a subscription box operation, however, there are many kitting and finishing tasks that are best done by human hands. That’s why most subscription box fulfillment operations have teams of workers assembling boxes on conveyor belts making sure components are kitted just right, according to brand and quality specifications.
Understanding the total costs of your manual processes is important for two reasons:
- Pricing – You want to ensure the price of your box reflects all costs with ample margin to sustain your business model.
- Profitability – You can only improve margins when you know how to control and minimize all your costs.
One popular way to estimate the cost of handwork is by doing time studies. Let’s take a look at why this handwork costing method could fall short and inflate your margin.
Let’s say you fill 5,000 subscription boxes for a customer. Your time study shows that it takes two people each one minute to build the box. The workers are paid $15/hour. Your monthly labor expense would then be:
- 2 workers x $15/hr = $30/ hr
- 1 box takes 1 minute to fill, so you can fill 60 boxes in an hour
- 5,000 boxes will take 83.3 hours to fill
- 3 hours x $30/hr = $2,500
So, based on your time study, your project labor expense looks like it will be $2,500. If you use this method, you could be under-calculating the true cost by as much as 100% because you’ve left out three important variables:
- Non-productive time
- Quality requirements
Because we manage people for handwork and not machines, we must account for non-productive time including:
- Schedule reliability
- Equipment reliability
- Waiting on materials
- Off-spec quality returns
A manufacturing performance study found that labor-based non-productive time can range from 29% for top 10% of companies all the way to 76% for the bottom quartile. The average company has 56% of non-productive time. Therefore, based on non-productive time, the time it will take to fill 5,000 subscription boxes in our example is not 83 hours, but more likely 129 hours and our labor expense would be $3,870.
While it may take two people to fill a box, there is a lot of support and overhead time that go into the work such as:
- Material handling to receive, put away, pick and stage materials
- Supervisor’s time to train, check quality and answer questions
- Material handling to refill materials during the job
- Material handling to palletize, wrap, put away and stage for shipment
- HR time to recruit, onboard and schedule team members
- HR time to compile and take care of payroll
- Project management time to manage orders and communicate to the client
A good rule of thumb to account for overhead is to look at your gross margin percentage. If your COGS (cost of goods) operates at 75%, then adding 25% to your time study will likely cover the overhead costs associated with the handwork. Of course, your gross margin could change depending on the size, frequency and duration of the job.
Finally, to accurately cost your handwork, you’ll want to consider the type of quality requirements. There are two basic types of quality requirements:
- Putting the correct components into the box or pouch
- Tolerance for gluing, taping, affixing or otherwise finishing components
To ensure you have the correct number of components, you may want to use a vision system or weigh scale at the end of the process. To ensure proper finishing, you’ll want to set your line speed to accommodate tolerances. For example, a 1” tolerance may enable speeds of 60 boxes per hour whereas a 3/16” tolerance may slow the line down to only 20 boxes per hour hence increasing your labor costs.
Getting it Right
To recap, if you are using time studies to cost out your handwork in your subscription box fulfillment operation, be sure to add in non-productive time, overhead and quality requirements so that your pricing reflects your total costs.
If you can’t quite get the kitting and handwork to acceptable cost levels, or if you’re looking for ways to further maximize profits, then you may want to consider outsourcing the handwork part of your subscription box fulfillment. Companies like Productiv, Inc. specialize in kitting, assembly, finishing and other types of handwork and offer fixed cost-per-unit pricing. They assume the risk for controlling people variables and overhead, and they use lean engineered lines to warrant the quality your customer requires.
Paul Baker is the CFO at Productiv, Inc. where he works with clients to increase their EBITDA through new approaches to managing labor. Paul is a graduate of The Wharton School, University of Pennsylvania. His latest eBook “A Smarter Way to Manage Labor for Kitting, Assembly and Packaging” is now available for free download.