Managers-Net

Definition

A period selected as being representative of conditions before implementing changes and used as a datum against which to compare subsequent results.

Use

Besides the estimate of savings which usually accompanies any proposal for introducing an improved method, a further estimate of savings, based on actual figures, is generally required either for record or for information of management.

This estimate is based on actual production costs before and after application.

The period immediately before application is usually selected as the "Reference Period".

The length of the period is generally agreed with management - it may be a week, a month or more, dependent on whether the product is seasonal, length of process, fluctuation in production, etc..

The period should be comparable with the first period of production after application.

The application of a Reference Period was often applied where organisations were due to introduce a 'Payment By Results' Scheme - in the Public Sector in particular, such Reference Period reporting was a pre-requisite to the awarding of a certificate to operate incentive bonus schemes.

Data Required:

Usually the data required is:

1. Output - Record of output and quality;
2. Input - Hours of work including lost time;
3. Cost - Gross payment including overtime allowances, and payment for lost time.

Booking arrangements are made to cover the Reference Period and provide all the required information.

The nature and amount of work done is obtained and the proposed or new values are applied to this in order to obtain the number of Work Units performed during the period. The gross payment for the period is obtained from pay-roll and the direct cost per Work Unit for the Reference Period is compared with the direct cost per Work Unit after application - sometimes this is dealt with in an 'anticipated' results format.

In arriving at the direct cost of a Work Unit, certain items may not be valued: it is the general practice to allow this at time rate (i.e. booked or clocked time) in the Reference Period and include the clocked minutes as direct Work Units.

For the period after application, (the 'nursing' period - so called because it is a period set aside for additional monitoring of the process), the same arrangement is made but payment may be at say one and a quarter times, then cost is inflated due to the cost of this work not accommodated by work values.

Reference Period - (Operators paid on time basis)

1. Measured Work (in Work Units)
2. Unmeasured Work (Clocked Time)
3. Lost Time (Clocked Time)

• Mins. credited = Total Clock Minutes
• Work Units = A + B
• Cost per Work Unit = Direct Wages divided by (A + B)

(where Direct Wages = hours x rate).

Period after Application - (Operators paid on 'Piece-Work' basis)

1. Measured Work (in Work Units)
2. Unmeasured Work (Clocked Time)
3. Allowed Mins. on Unmeasured (Allowed Time)
4. Lost Time (Clocked Time)

• Mins. credited = A + B + C + D
• Work Units = A + B
• Cost per Work Unit = Direct Wages divided by (A + B)

(where Direct Wages = payment for work done, allowed time and lost time).

The work done is analysed to arrive at a cost for direct work which includes any payment for lost time etc..

A separate comparison is generally made for indirect work (i.e supervision, servicing etc.) over the period.

Summary of Results:

A typical example is detailed below:-

For Reference Period: (10 operators working 40 hours per week)

• Average Weekly Output : 16,000 (inc. Unmeasured Units)
• Average Weekly Hours Worked : 400 hours
• Average Weekly Direct Wages : £5000

• Dept. Unit Hour : 16,000 divided by 400 gives 40
• Cost per 1000 Units : 5000 divided by 16 gives £312.50
• Operator Hourly Earnings : 5000 divided by 400 gives £12.50

Period after Application:

• Average Weekly Output : 30,000 (inc. Unmeasured Units)
• Average Weekly Hours Worked : 400 hours
• Average Weekly Direct Wages : £6250

• Dept. Unit Hour : 30,000 divided by 400 gives 75
• Cost per 1000 Units : 6250 divided by 30 gives £208.33
• Operator Hourly Earnings : 6250 divided by 400 gives £15.63

Memoranda Comparison: Results stated as % Change

1. Increase in Performance (40 to 75) = +87.5%
2. Increase in Hourly Earnings (£12.50 to £15.63) = +25%
3. Reduction in Cost per 1000 Units (£312.50 to £208.33) = -33.4%
4. Reduction in Hours (in this case the same hours) = nil

Total weekly savings are anticipated in the cost of producing 30,000 units after application:

5. Total Weekly Saving at new level of production = 30000 x 104.17 divided by 1000 is £3,125.10

An Example of a Local Authority Application - pre Compulsory Competitive Tendering (CCT)

During the late sixties through to the mid seventies, Local Authorities in England and Wales operated Incentive Bonus Schemes for manual workers - these schemes were operated under license from the Ministry of Housing and Local Government and in later times through the respective Provincial Council through which an Authority was required to operate.

These schemes covered all trades and services and were primarily designed to improve productivity (and wages) in an environment typically cast with a low earnings regime. Local Authority Employers operated under Collective Bargaining National Agreements with the Trades Unions of the day, principally the National Union of Public Employees (NUPE) and the Transport & General Workers Union (TGWU).

A whole host of schemes emerged, both innovative and invaluable, and many proved to be the basis on which Compulsory Competitive Tendering was able to be established.

Some Local Authorities used Management Consultants to design and establish their schemes, whilst others preferred to directly employ qualified, trained staff to introduce such systems; the direct employment regimes usually had the benefit of being able to train in-house Worker's Representatives to take on the background fact finding work - i.e. the pre-cursor to the construction of a Reference Period. There were advantages in this since the existing workforce were well able to demonstrate a 'fair days work', set against of course the remuneration that was being received.

All such schemes operated within a framework known as the 'Code of Guiding Principles'; this was part of the National Agreement; it operated satisfactorily most of the time until Local Government Re-Organisation in 1974.

No surprise surely that considerable difficulties would be faced in harmonising schemes which had served their proper purpose - not so much a problem where local boundaries had not changed, but a big issue for some authorities, particularly those in more rural areas where a number of small authorities were grouped together to form a conglomerate. These authorities spent trying times looking to harmonise productivity systems where remuneration had already been established, almost as a right, pre 1974. Here the Consultants had long departed and the locally employed staff made great strides to serve their authorities well, at the same time, mostly, keeping industrial relations to a few minor skirmishes; their reward was to see authorities gleefully grabbing Compulsory Competitive Tendering (CCT) as a panacea for all the authorities ills - the one and only problem with CCT was the compulsory bit. Authorities left themselves badly exposed by paying insufficient attention to 'tender evaluation' processes, opting for the cheapest bids where value for money was often a secondary consideration. Best Value impositions in later years failed to solve this since once again confusion existed between price and value, despite a competent framework for Best Value being espoused.

Local Authority applications pre 1974 were far ranging from Refuse Collection and Building Maintenance to specialised environments like Water Pollution Services and Refuse Incineration, where health standard tolerances and plant maintenance considerations were significant.

One such example was refuse collection in a local authority being formed from four smaller councils (two rural and two urban). Here the service inherited operated twelve rounds and the revised process was to operate 10 harmonised rounds, based on direct work measurement, taking advantage of the economies of scale that the application offered, together with the indirect savings of fewer vehicles operating to disposal points where most of the tyre punctures on the vehicles occurred.

The data emerging from this exercise is set out below:

Cost Comparison Data between Reference Period and Revised Service

This data table represents very clearly the value of determining a revised service on the basis of known, identified Reference Period data; the targets emerging from such a process have a much more significant chance of success over the 'arbitrary' target setting by accountancy based consultants that exist in many sectors of enterprise in the current times, where the most common shortcoming is to fail to take stock of 'capability' - (2009).