In my last article (It’s Technology Acquisition Time) I provided an overview of a tool used to define the potential value of new technology acquisitions to improve operational productivity and effectiveness. We left off with the promise to show how to calculate the full cost of a human worker, and the number of workers that your current technology platform requires to get the work done.
Does the proposed innovative technology provide enough of a productivity gain, viewed as the result of the elimination of worker headcount, to justify acquiring the technology? This is the main reason for the ROI (return on investment) assessment for many companies.
In most cases for which I have done ROI Assessments, there are two types of human labor that should be factored into the assessment: Direct and Indirect Labor. In this article, we dive into the numbers behind the Direct Labor assessment and impact.
Direct labor is defined as the group of workers who are the primary people engaged in executing tasks in the current processes under consideration for the proposed technology “upgrade.” An example of direct labor is the group of people who do the task of order selection in a warehouse or distribution center, going to stocking locations and picking the required number of the items required on the order being fulfilled.
Technology augmentations, such as RF (radio frequency) scanning and voice-directed work processes, have over the years been deployed to make humans more accurate and productive, especially in doing the processes that directly impact on customer satisfaction. Picking and shipping the wrong products has been a sure way to lose customers, whose “brands” are negatively impacted by these errors in their customers’ (the end users’) opinion. Apart from the risk of lost business, there’s a significant cost associated with the correction of these errors, and as you expect, this cost is another significant element of a technology acquisition ROI assessment. We’ll address this cost element in a future article.
Let’s look at Direct Labor inputs and calculations in my ROI Assessment template. Note, this works for my purposes, and your model may require more, or less, data inputs. What is important is for Operations and Finance to be on the same page regarding the data inputs that are needed. Collaboration here is essential; senior executives want to know that a collaborative effort was made before they are presented with an assessment.
Here’s a snapshot from my template for a high-volume warehouse operation:
The objective here was to determine how many direct labor workers are necessary to complete the work annually using the current technology. This is your headcount baseline for the determination of the benefit the proposed innovative technology will potentially bring for direct labor cost reduction annually.
The combination of direct and indirect labor is for many operators of warehouses and distribution centers the largest cost element. If a proposed innovative technology can significantly reduce overall headcount, then not only will the annual labor cost be dramatically lowered but the investment “payback” time, measured in months, will be faster.
In the next article, we will look at Indirect Labor, which is frequently overlooked when calculating the full cost of a process, and may in fact be dramatically lowered or eliminated if the new proposed technology automates what current human labor does manually.
About the Author
Tim Lindner develops multimodal technology solutions (voice / augmented reality / RF scanning) that focus on meeting or exceeding logistics and supply chain customers’ productivity improvement objectives. He can be reached at linkedin.com/in/timlindner.