Decisions for Quarter One and Quarterly Business Review

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Content

TO:

General Manager FROM:

Henrietta Peoples (Manager - Human Resources)

Labor Costs and Performance

Hire/Fire Costs: Industrial Opportunities handles our labor requirements for a hiring fee and a discharge fee. Our contract will be in effect through 2021. The hiring fee of $2,000 per hire includes preliminary training costs. The discharge fee of $4,000 per individual includes placement and severance costs.

Pay Rates: The average pay rate (Qtr 4-2019) was $85.02 per day. This increased to $86.30 per day in Q2-2020, an increase of 1.5%. The pay rate will continue to increase at this rate semi-annually for the next three years. (Thus, increases will take place in Q4-2020, Q2-2021, etc.).

Effectiveness: We will end this quarter with a direct labor force of 27 employees. New employees can be added to the payroll as needed; however, Industrial Opportunities cautions that, realistically, hiring more than 40 employees in any given quarter may be difficult to achieve. The hiring cost is as noted above. New hires (first time or former employees) are immediately available, but take about five months on the job to become fully effective. In addition, they require 20 hours of basic health and safety training before they are allowed to work with certain paints, solvents, and solders. The overall impact of new hires and the labor-production balance is revealed in "% Effectiveness" and "Idle Time" shown on the Quarterly Operating Report. Effectiveness is the ratio of the planned days required to build a unit to the actual time used. Idle time is time paid for but not used in production. Effectiveness decreases as new hires are added; it increases as these new hires become fully trained. Idle production time increases when production and labor levels are out of balance. Effectiveness also decreases when new inspection equipment is installed at the factory. Experience indicates that a single line installation will reduce the entire assembler workforce effectiveness by 5%. Multiple lines will have more significant impacts to the workforce.

We achieved our target production of 1166 units, the fourth quarter figures were:

% IDLE PRODUCTION TIME 0.3%

% EFFECTIVENESS 85.4% PLANNED TIME 1.30 DAYS/UNIT ACTUAL TIME 1.28 DAYS/UNIT

Our capacity in the quarter was 1,170 units:

27 People X 65 Working Days/Quarter X 85.4% Effectiveness 1.28 Days/Unit

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The % IDLE PRODUCTION TIME shown above is computed as follows

% Idle Production Time = 1 - (Actual Production/Maximum Production Capacity) = 1 - (1 - 1,166/1,170) = 0.3%

Potential production bottlenecks are available labor, inspection line capacity, and/or units of raw material.

To better understand estimation of effectiveness, let’s assume that this quarter we will hire 5 new people. Their effectiveness will be 50%. Previously hired employees’ effectiveness would be around 98%. Please keep in mind that we should never assume 100% effectiveness as there are many human, process and business factors that affect actual effectiveness.

Estimated Weighted Average Effectiveness = (27 x 98% + 5 x 50%)/ (27+5) = 91%

If one new line is installed, estimated effectiveness will reduce by 5% to 86%. If two new lines are installed, the effectiveness will reduce by 10% (2 x 5%) to 81%. Please note that with many human, process and business factors, the actual effectiveness may fall in the range of +/- 9% from the estimated effectiveness.

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