reduce-material-costs

Resource Usage Variance

“Double, double, toil and trouble. Fire burn and cauldron bubble…” followed by a management report telling you that you have used too much “wing of bat” last week!

Understanding usage variances can often seem like a ‘black art’, especially when your accounts team present you with a vast spreadsheet with hundreds of seemingly meaningless numbers. In all likelihood, most of this is simply ‘noise’ that gets in the way of identifying opportunity. Even if all variances have potential for improvement, they can’t all be your top priority.

At its simplest level, resource usage variance is the difference between the resources actually used and the resources that should have been used; this can potentially apply to any product, process or service that your company provides.

However, it is rarely this straight forward and many factors come into play that can make actually understanding and using the final numbers extremely difficult:

  • How accurate is the standard that you are measuring against?
    • Overly soft standards can mask opportunity and are just as much of a problem as unrealistically hard standards, as both can also diminish your understanding product profitability and lead to: poor commercial/operational decision making; swings in P&L results from mix or volume changes; accidental margin giveaway; unbalanced supply and demand; remedial action in the wrong area.
  • Have standard process losses been identified and accounted for?
    Unavoidable process loss, transfer loss, avoidable through investment. If they have, remaining variance may be avoidable through improved process or control.
  • Where multi stage processes are involved, is consumption and production measured (accurately) at each stage?
  • In whatever system is being used to calculate variance, are the right numbers being captured?
  • Is normal variability of input resources accounted for?
    Especially true of multiple supply sources or items such as food where, for example, growing seasons can significantly impact yields.
  • Do the people that are being asked to improve variance understand how it is calculated and have an in depth knowledge of the processes within your business?

If you are unsure about the above, changes to like for like trends may be more indicative of the need for action than usage vs standard. Where these trends show a performance decline, Stage Mass Balancing, Activity Studies and Value Stream/Process Mapping may be required to identify specific waste points where action can be taken to remove loss and/or non-value add activity.

In a complex business with a large number of inputs and outputs, you should also ask yourself “Are all of the resources worth the effort of measuring at every stage?”. If you make 1000 different products using 5000 raw materials, you may want to capture all of the stages of consumption and production for a few key items, where variance creates real risk or cost, and use simple “In vs Out” for those items with low spend/variability/order volatility/lead time/risk or combination thereof.
In short, beware of spending more on measuring variance than the variance is actually worth!

 

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Gary Jowers is a Director at Applied Acumen. 

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