When is high overtime appropriate?
February 1, 2010
We are typically asked about ways to lower overtime. It is clear that most companies view overtime as a necessary evil. They try to get it as low as possible and consider all overtime reduction as a cost savings.
In many instances, they are right. However, just as often, they are wrong.
From a pure tangible cost perspective, overtime probably is about 10% more expensive than straight time. This means you can reduce overtime costs by adding more people (more straight time hours). However, suppose you try to do this but overshoot the mark. You hire so many more straight time hours that you now have more than you need. You are overstaffed.
Being overstaffed is about fifteen to twenty times more expensive than being understaffed. If you are understaffed you pay for overtime instead of straight time. This probably comes to an extra couple of dollars an hour. If you are overstaffed, you are paying full wages and benefits to hours you don't need. Depending on your hourly rate, this could be anywhere from $20 per hour to well over $40 per hour.
So back to the topic at hand. When is high overtime appropriate.
The short answer is - when your workload is highly variable.
A longer answer would be - when your workload is highly variable and the skill set you require of your workforce is not readily available using any of the traditional workforce argumentors (i.e. part time and temporary labor).
If you staff to match peak workloads and your workload is variable, then you will find yourself overstaffed quite often.
If you staff to match you lower workloads, you will find yourself understaffed. This means overtime.
The greater the variability, the more idle time you will incur if you staff to peak production and the more overtime you will incur if you staff to minimum production. Since overtime is significantly less costly, you will pay less if your staffing tends towards the minimum production.
There are ways to schedule your workforce to closely match a variable workload. The more predictably variable it is, the better the match becomes.