Slippery Rock Gazette

Ed Hill

Synchronous Solutions

Nope.  Not always. Overtime is an additional cost to operations. It is also a form of Protective Capacity, which is an essential tactic of staffing.  

In fact, because “Murphy Lives,” overtime is often necessary to overcome the inevitable happenings in a custom manufacturing world. 

Overtime may be needed for myriad and virtually unlimited issues: 

• Equipment breakdown
• Worker absenteeism
• Employee turnover
• Employee mistakes
• Material defects
• The unpredictable market
• Demanding customers
• Severe weather

The federal overtime rules are contained in the Fair Labor Standards Act (FLSA). Un-less exempt (basically, salaried workers), employees must receive overtime pay for hours worked over 40 in a workweek at a rate not less than time and one-half their regular rates of pay. There is no limit on the number of hours employees aged 16 and older may work in any workweek. The Act does not require overtime pay for work on Saturdays, Sundays, holidays, or regular days of rest, unless overtime is worked on such days. But states do have variable rules regarding overtime pay. Some states require overtime payment for work in excess of eight hours per day. Be sure to check the rules and regulations in your state to be safe.

The challenge is to use it wisely and not to let it get out of control. Scheduling overtime is a reasonable way to meet higher than expected demand and to overcome errors and disruptions. It normally makes you more money than it costs, unless it becomes excessive and causes further disruptions to a stable workforce.  

Excessive overtime is generally considered to be time over 55 hours per week, on an ex-tended basis. That’s about 11 hours per day, per worker over a 5-day workweek, or an average of 3 hours of overtime per day, per worker. Anything more than that is excessive and can result in diminishing returns. Another reasonable standard is overtime excess pay should not exceed 10 percent of all direct labor payroll over an extended time period.  

The Cost of Overtime

Overtime financial costs are easy to calculate. The overtime excess is 50 percent more than the hourly rate, for all hours worked over 40 hours in a week. For every 25 direct labor workers you employ, your labor cost at $15 per hour are:

Here’s the point. Even at an average of just 1 hour of overtime per day, you could hire an additional three workers for the overtime excess cost you are incurring. Of course, that assumes you can find the additional workers, but the cost of overtime will allow it.

In addition to being expensive, excessive overtime can have many other undesirable effects.

Overtime will produce diminishing returns. Production during overtime hours will initially equal production during regular hours.  But, as the overtime is extended, either daily or over weeks, the rate of productivity will decrease. There will come a point, after prolonged overtime, that the productivity during overtime hours will become ground-less.  In other words, production during a regular 8-hour workday can be more than production including overtime hours. Watch out for this.

Overtime can create a dependency. Effective hourly pay rates will increase substantially with overtime excess. For each hour of overtime per day, a $15 pay scale increases rapidly:

That kind of pay increase can become very attractive to a family, even to the point of making the overtime pay important to the monthly budget. Workers can become accustomed to that increased pay rate. When the need for overtime by the company decreases, the worker can perceive it as a cut in pay. This is another reason to avoid the practice of extended overtime.

Overtime is usually reactive in nature, meaning that it is usually poorly planned. Quite often, the need for overtime is communicated to the workers too late for them to plan for it, and too late for the company to properly schedule it.  

Most importantly, such poor planning of overtime just adds to the chaos. This can create a stressful workplace and can diminish morale among the workers. All that can increase turnover, decrease quality, and even increase the possibility of safety concerns.

Having said all that, overtime is a reasonable method to create Protective Capacity, which is the capacity to overcome variability. This is the minimum capacity at each resource step needed to meet the demand plus an accommodation for Murphy. The accommodation for that variability is calculable, meaning that where there is little variability, there is little need for Protective Capacity. Where there is high variability, there is need for more Protective Capacity. With adequate records on production and variability, this can be planned accurately. 

Protective Capacity does not mean higher costs. This planned cushion of additional capacity is essential to meeting the market demand given the known levels of variability (aka Murphy). Business is all about creating value (Throughput), not reducing costs. Overtime, provided it is not excessive or long-term, is a reasonable method to create Protective Capacity.

Except in extreme cases or over extended periods, the cost of overtime will always be exceeded by the creation of Throughput ($T), also known as Value Added. That means that overtime is a good financial tactic unless it becomes excessive. When the negative effects noted above begin to surface, you should back off the overtime schedule and give your people a break. You might even realize a comparable level of productivity without the overtime. When the cost of overtime becomes extreme and/or long term, it is time to do some hiring.  

Moreover, it is important to routinely complete Capacity Planning. Look out into the future and estimate the demand by product and market segment. Then calculate the capacity needed at each resource step to complete that demand. Add about 15 percent Protective Capacity to overcome the inevitable “attacks by Murphy,” and compare that to the current staffing.  

There are many other tactics and strategies that you can use to maximize productivity (and profits) without excessive overtime costs.  

For more information on how to effectively plan and control overtime, contact us at Synchronous Solutions, 704-560-1536, www.SynchronousSolutions.com .

Ed Hill is the owner of Synchronous Solutions. Visit the website www.SynchronousSolutions.com.