Are you using the correct labor cost metric...?

Throughout the evolution of modern business companies have been using standard financial metrics to track, and hopefully control, the necessary costs associated with creating and selling their goods and services. These metrics typically take the form of Cost of Goods Sold (COGS), Cost of Labor (COL), Semi-Variable Costs, and so on. For the purposes of this article, let's talk about the Labor metric, as this is one, if not the, highest cost component affecting most companies.

The vast majority of businesses use Gross or Net Sales as the standard denominator to arrive at a targeted labor cost percent, and then use this data point to make "informed" decisions about whether or not their organization is operating efficiently. Additionally, other Functional decisions like compensation, staffing, benefits, pricing, advertising, et al also become dependent upon this same labor cost percentage. Unfortunately, this method of labor cost analysis provides about half of the information necessary to draw truly informed conclusions, and by extension, operational efficiency decisions.

The secret to understanding your companies cost of labor and operational efficiency is tied to using the number of independent transactions as the denominator, instead of Gross or Net Sales. Sales / Revenue data can be easily manipulated via pricing, promotions, discounts, theft, waste, hours of operations, et al. Additionally, labor dollars can be manipulated via hourly pay rates, management salaries, overtime, benefit participation, scheduling, staffing, et al. So stripping away everything except the total transactions and the total labor dollars spent will give you the labor cost per transaction efficiency metric. It is this metric that is necessary to truly understand the operational efficiency of your business. Now, what is the appropriate labor cost per transaction metric for your company? I don't know, as this is a project that would also involve a Time & Motion study, and we can discuss what that process looks like next time.

Please let me know if you need any help with a better understanding of your Labor model and by extension the efficiency of your organization. Tom Harper Consulting will analyze your businesses Labor model and make the necessary recommendations that will allow you to better compete in today's marketplace. https://tomharperconsulting.com