Computing process improvement cost savings can often be a challenge. In my opinion, Total Resource Productivity (TRP) is a great way to compute project savings.
Other methods, such as the Cost of Poor Quality are also great ways to compute projects savings. But, the Cost of Poor Quality requires some accounting maturity to track. It may also need activity based observation for a specific project. When computing the Cost of Poor Quality becomes burdensome, we need an alternative. Total Resource Productivity is one method that helps us compute project savings.
There are several benefits to computing Total Resource Productivity. First of all, the calculations are quite simple. Second, the resource costs are consistent with standard accounting practices. Third, resource costs are consistent with the language of management.
What is Total Resource Productivity?
In a earlier post, we discussed the computations for Individual Resource Productivity. In that post, we analyzed the changes to machinery and manpower. From this we drew interesting conclusions versus production and productivity. But, having an overall measure of productivity is useful. Yet, to compute such a value poses a problem when the individual resources units differ from each other. For example, machinery and manpower are often expressed in units of time. But, material is often expressed in units of weight, volume, or standard units. One way to solve the problem in using different units of measurement is to express the individual resources as a dollar value. Expressing individual resources as a dollar value lets us compute the Total Resource Productivity.
Most organizations know the cost to run their machinery and manpower. So reporting a dollar value for these resources is also straight forward. The same is true for Material. Since we buy material, computing a dollar value for it should also be straight forward. Using the individual resource dollar values, let’s compute the Total Resource Productivity. We’ll use the earlier case study for this exercise.
Pre and Post Improvement in Resource Costs
In the following table, we show the PRE and POST improvement in Total Resource costs.
Having computed the Total Resource costs, we can compute the Total Resource Productivity. Notice the pre and post improvement in Total Resource Productivity is 43.9 and 44.9 units per dollar. This change added 0.6 more units per resource dollar and improved the Total Resource Productivity by 1.37%.
What is the Bottom Line Improvement in Cost?
Recall in the earlier post, manpower productivity improved by almost 40%. But its contribution to reducing the total resource cost was incremental at 1.37%. Now, we could get discouraged by a result that does not seem all that big. But keep in mind that most companies like to see a profit of 8% or more these days. So a Total Resource Productivity improvement of 1.37% isn’t bad at all!
A word of caution, use the same costs when computing Total Resource Productivity. If the costs from one period to another change, you could be comparing apples and oranges. This will skew your analysis and put into question the results.
Going forward, find creative ways to increase productivity. Continue to improve the resources and/or changing the workflow to cut production time. Remember, time is money!