Overtime: Fact V. Fiction
July 8, 2014
It is not unusual for a company to contact us with the following idea: "If I can just put in the right schedule, I will save a ton of money on overtime."
There is really just one condition where this is absolutely true. If your current schedule has too many people at one part of the week and not enough people at another part of the week, the right schedule will correctly redistribute these people and you will save a ton of money.
Then there are times when this is partially true. If your operation is expanding and the size of your workforce is fixed, then overtime will go up. When overtime goes up the following happens: (1) The workforce makes more money, (2) The workforce becomes fatigued, (3) Productivity per person will drop, (4) The accident rate per hour will go up, (5) Quality will decrease and absenteeism and turnover will increase.
The perfect schedule will allow you to keep these from happening. It does this by allowing you to add straight time hours to "replace" overtime hours.
Note the use of the term "replace."
In most cases, reducing overtime means adding straight time. From a cost perspective, the two are nearly identical. Straight time costs include wages AND benefits as well as taxes. Overtime costs include a premium rate and taxes. In the end, they typically cost the company the same. What this means is if you say, "We can eliminate $1 million a quarter in overtime costs with a better schedule!" It is very likely that your next sentence should be "However, we will also spend $1 million a quarter in additional straight time costs."
This is not to say you should not keep a handle on your overtime. Too much will certainly cost you; often in disastrous ways (as noted above). However, overtime should not be seen as the "low hanging" fruit on the road to reduced costs.
If you want to reduce your costs - increase your volume.
There is no simpler way to do it.
By the way, most companies, with level production levels find that an overtime rate between 5% and 15% is just about right. Keep in mind, in a typical workforce, 20% of your workforce avoids all overtime. 20% of your workforce loves all the overtime they can get. The remaining 60% will work what they feel is a fair amount.
If you want to know how your workforce feels about overtime...
Ask them. Don't guess.