| Have you ever wondered what a business process | | | | then one FTE equates to 2,080 hours in a year (52 |
| costs an organization or what the largest cost to a | | | | weeks x 40 hours per week). Of course employees |
| company building a product is anyway? It is usually | | | | may have holidays, vacation, and sick time available to |
| either labor or materials, depending on the type of | | | | them. To arrive at the right labor calculation to use, |
| business, and over the decades we have seen a shift | | | | subtract the number of hours your company grants |
| where overhead is consuming a bigger slice of the | | | | your employees for vacation, sick, and paid holidays. |
| "product cost" pie. | | | | In our example, I use 1,880 hours as the standard labor |
| While this article discusses business processes, and | | | | hours. I arrived at this number by subtracting 80 hours |
| not product creation, labor is still a big cost component. | | | | vacation, 40 hours sick time, and 10 days (or 80 hours) |
| So knowing how much labor a process consumes will | | | | of paid holidays from the starting point of 2,080 hours |
| help you better understand the cost. This article | | | | in a year. |
| provides the basic steps on how to calculate the labor | | | | Once you know the FTE number to use, divide the |
| cost of a business process, which include: | | | | answer in step 2 by the FTE number. In our example, |
| | | | divide 2,560 (total annual hours spent on the quote |
| 1. List the process activities and times. | | | | process) by 1,880 hours (FTE number) and you get |
| 2. Identify the annual volume. | | | | 1.36 FTE. This means that the quote process |
| 3. Determine the FTE number to use. | | | | consumes a little over one employee and almost 1-1/2 |
| 4. Determine the salary and employee benefit rate to | | | | employees. Using the FTE concept enables you to |
| use. | | | | account for percentages of an employee's time spent |
| Here is more detail on each of these steps. I will use | | | | on a business process. |
| developing a product quote as the example. | | | | Fourth, multiply the employee salary by the FTE |
| First, you have to know the process time for the | | | | number. For simplicity, assume the work of creating a |
| business process in question. Determine this by | | | | product quote is completed by one type of employee |
| identifying how long each step in the process takes | | | | - entry level clerks. If they earn $30,000 a year, multiply |
| and total the actual time consumed by the activities. | | | | $30,000 by 1.36 (FTEs) to arrive at $40,800, the |
| So, let us assume that it takes 46.0 minutes for each | | | | labor-only cost for the process. |
| quote. Translated into hours, this equates to.8 hours | | | | Of course, most employees receive benefits, so you |
| (rounded up) to produce each quote. | | | | have to add your organization's employee benefit rate |
| Second, multiply the time from step 1 by the annual | | | | (often referred to as "EB rate") to the employee's |
| volume. Let us assume that we produce 3,200 product | | | | salary to arrive at the final labor cost for the business |
| quotes a year. In our example, multiply the.8 hours | | | | process. |
| (labor per quote) by 3,200 quotes (volume). This equals | | | | If you have many different types of employees |
| 2,560 hours spent on the quote process in a year | | | | involved in a business process and they all earn |
| (annual labor hours). | | | | different salaries, you will find it helpful to build a |
| Third, decide what full-time equivalent (FTE) number | | | | spreadsheet to perform the calculation. |
| you should use in your calculation. While the definition | | | | Estimating process time and its associated cost is the |
| of FTE varies by business, it generally means the total | | | | fourth step to improving the effectiveness, efficiency, |
| number of hours an employee can be paid for in a | | | | and adaptability of your business processes. |
| work year. If an employee works 40 hours a week, | | | | |