Fundamentals: Identifying Costs and Benefits of Ergonomics Activities

SECTION III Service Systems

6.2 Fundamentals: Identifying Costs and Benefits of Ergonomics Activities

There are various recommended metrics by which ergonomic programs or individual projects can be evaluated. Though there is a natural aversion to reducing health and safety issues to financial terms, money is the metric of business. Increasingly, the impetus is toward evaluation of health and safety issues, including ergonomics-related activities, in monetary terms. To date, relatively little has been written on the subject of economic analysis of ergonomics-related activities. The accounts that do appear in the literature, however, describe positive economic effects from ergonomics-related activities (Helander and Burri, 1995; Hendrick, 1996; DeKraker, Lindstrom-Hazel, Cooper, and Ambrosius, 1995).

Andersson (1992a) suggested focusing on savings associated with increased productivity and decreases in absenteeism, rework and spoilage, and turnover. However, for a fair and complete analysis, that can address the question, “At what cost did we achieve ________________ (outcome), and was that the best investment of company resources?” savings must be assessed relative to associated costs. Alexander (1996) recommended changing metrics as a program matures, from activity-oriented metrics (for example:

program implementation milestone completions, number of projects completed successfully) at incep- tion, to results-oriented metrics (for example: changes in health and safety statistics), and finally to systems-oriented metrics that correspond with institutionalizing the program’s practices. In accordance with these recommendations, this chapter presents a systems-oriented method for predicting, tracking, and assessing costs and savings associated with an ergonomics program and its various constituent projects.

The method presented is reasonably complete, in that it accounts for a wide range of costs and benefits associated with a program (refer to Figure 6.1). A Program Record (PR, Table 6.1) is used for program- level analysis, and an Ergonomic Project Worksheet (EPW, Table 6.2) is used to assess individual proposals and projects. Figure 6.2 depicts the flow of information within and between the forms. The forms can easily be adapted to a computer spreadsheet or database. However, the validity of the output is ultimately dependent upon the quality of the monetary estimates and other values supplied by the user. Potential sources have been provided to help the reader identify various costs or savings, or constituent values.

Certain values may already be standardized within some companies. Where values are not available, they should be developed in order to perform fair and comprehensive analyses. Depending on the scope or scale of a particular program or project, some line items that appear on the forms may not require entries.

Only those items that are affected by and change as a result of the ergonomics program need to be tracked. In some parts of the predictive evaluation, providing estimates of expected changes from the current situation may suffice (Konz, 1995).

FIGURE 6.1 Categorical model of costs, savings, and income-generating areas to consider in assessing the economic effects of an ergonomics program.

3. Medical Management

a. PT/OT, nurse (specific to program) ________ ________

b. Lost production

i. Consultation ________ ________

ii. Treatment ________ ________

c. Back belts, wrist supports ________ ________

d. Other _________________ ________ ________

B. Turnover and Training/Replacement 1. Acquisition

a. Recruitment ________ ________

b. Selection ________ ________

c. Hiring ________ ________

2. Development

a. Orientation ________ ________

b. On-the-job training

i. Lost production due to lack of proficiency ________ ________

ii. Overtime to compensate for lost production ________ ________

c. Off-the-job training ________ ________

3. Separation

a. Severance ________ ________

b. Productivity decrement ________ ________

c. Open position ________ ________

C. Absenteeism

1. Compensation costs

a. Wages (including taxes, fringe) ________ ________

b. Insurance charges or fees ________ ________

2. Medical costs

a. Payments to providers ________ ________

b. Insurance charges or fees ________ ________

3. Replacement costs (refer to Turnover and Training) ________ ________

D. Productivity

1. Permanent changes ________ ________

2. Temporary changes ________ ________

E. Rework and Scrapped Product 1. Rework

a. Direct labor ________ ________

b. Lost production or overtime ________ ________

c. Direct materials ________ ________

d. Other _________________ ________ ________

2. Scrapped product

a. Direct labor lost ________ ________

b. Overtime ________ ________

c. Direct material loss, less salvage value ________ ________

d. Other _________________ ________ ________

6-4 Occupational Ergonomics: Design and Management of Work Systems

TABLE 6.1 (continued) Program Record

Costs Benefits

F. Wages

1. Direct labor, including benefits, taxes, insurance ________ ________

2. Supervisory and administration charges ________ ________

G Overhead

Items: ______________________ ________ ________

H. Direct materials (not listed elsewhere) ________ ________

I. One-time costs (such as initial project costs)

1. Equipment ________ ________

2. Jigs and fixtures ________ ________

3. Installation ________ ________

4. Engineering time ________ ________

5. Operator training ________ ________

6. Other ________ ________

TABLE 6.2 Ergonomic Project Worksheet

Step 1. Perform economic analysis on a proposal using payback period or one of the four methods that account for the time value of money (NPW, NAW, B/C, or ROI). Use the first set of columns on the worksheet to identify and document anticipated costs and benefits.

Step 2. Track all project costs, savings, and income throughout the life of the project. Use the second set of columns, which will facilitate comparison between projected and actual values. This will prove useful for future evaluations.

Step 3. Transfer all actual costs and benefits onto the Program Record, in order to provide information that will facilitate the evaluation of the program as a whole.

Perform economic decision analysis for proposal in the area below:

State all assumptions:

Calculations:

Outcome:

Decision:

* This table is presented in an abbreviated format. It should contain items B-I that appear on the Program Record (Table 6.1).

Item* Expected Costs Expected Benefits Actual Costs Actual Benefits

B. Turnover and Training C. Absenteeism ...

I. Project costs

6-5 FIGURE 6.2 Information flows from individual Ergonomic Project Worksheets to the Program Record.

6-6 Occupational Ergonomics: Design and Management of Work Systems

Program Record

The costs and savings included in this analysis method are primarily those discussed in Konz (1995), Oxen- burgh (1997), Andersson (1992a), and Andersson (1992b), although modifications have been made to some of their methods and cost definitions. Additionally, items specifically associated with the ergonomics program and team have been added. Refer to Table 6.1 when proceeding through the discussion that follows.

A. Ergonomics program — regular charges. These are costs associated with the maintenance and day- to-day functioning of the program.

1. Meetings. The ergonomics team meets on a regular basis. While in these meetings, members are not working on production; therefore, lost production costs are associated with the meetings.

Overhead charges may be assessed as well, for indirect labor for nonproduction employee mem- bers. Line items and suggested calculation method:

a. Lost production

(1) where

CLP = Cost of lost production, $ Wh = Hourly wage rate¹, $/hr Th = Time (length of meeting), hr b. Other

2. Training. Ergonomics training, specific to an employee’s responsibilities, is a fundamental element of an ergonomics program. Lost production, consultant fees, and materials are all costs associated with training. The costs of training for indirect labor (such as engineers and managers) should also be accounted for. Line items and suggested calculation method:

a. Lost production: calculated per Equation 1, above, substituting length of training time for meeting time

b. Trainer/consultant costs c. Materials: books, pamphlets, etc.

d. Other

3. Medical management. Medical management is a key element to an ergonomics program. Any costs that can be directly attributed to this element, as well as any savings, should be accounted for.

One example would be contracting with a physical therapist to work onsite for a half day each week to answer employee questions or assist with treatment regimens. Lost production associated with these visits should also be accounted for. If as a result of the ergonomics program, a facility eliminated the practice of providing back belts on demand to workers, the cost savings from that decision should be accounted for. Line items and suggested calculations:

a. PT/OT, nurse (for effort specific to program)

b. Lost production: calculated per Equation 1, above, substituting length of consultation or treat- ment session for meeting time.

i. Consultation ii. Treatment

c. Back belts, wrist supports purchases: If these items are purchased in conjunction with the program, the line item would appear as a cost. If these items are no longer purchased as a result of the program, the elimination of the average monthly expenditure on these items should be recorded as a savings.

d. Other

1In all calculations where wages appear, include pay and fringe benefits. However, do not include overhead (burden). That is treated in item G of the EPW.

C_LP=W_h×T_h

b. Selection c. Hiring

2. Development costs. These are the costs associated with bringing an employee “up to speed” on a job which an employee has left. The most common costs associated with development are asso- ciated with orientation, on-the-job-training, and off-the-job training. Orientation costs might include costs for materials and trainers. On-the-job training would result in a loss of productivity due to lack of expertise of the new employee and possibly the need for overtime in order to compensate for lost production. Off-the-job training costs might include materials, costs for trainers, and loss of productivity while in training sessions. Line items and suggested calculations:

a. Orientation b. On-the-job training

i. Lost production due to lack of proficiency

(2) where

CLC = Lost production due to learning curve effects, $ Wd = Daily wage rate (includes benefits), $/day

eff = New employee performance, relative to seasoned (range 0-1) Td = Time (learning period in days), days

ii. Overtime to compensate for lost production

(3) where

COT = Cost of overtime, $

WEh = Hourly excess wage rate for overtime, $/hr Th = Time (number of overtime hours), hr

c. Off-the-job training (formal instruction away from the workstation) i. Trainer and material costs

ii. Lost production: Calculate per Equation 1

iii. Overtime to compensate for lost production: Calculate per Equation 3

3. Separation costs. Typical costs associated with the departure of an employee include severance costs, reduced productivity, and open position costs. Severance costs include compensation, set- tlement, or benefits paid to employee upon departure from company. Productivity may be reduced prior to employee’s departure (from employee and from co-workers). Open position costs might include overtime for other employees to make up for the vacant position, or lost productivity if lost productivity results in income loss. Line items and suggested calculations:

C_LC=W_d× −

(

1 eff

)

×T_d

C_OT=W_Eh×T_h

6-8 Occupational Ergonomics: Design and Management of Work Systems

a. Severance

b. Productivity decrement (similar to calculation in Equation 2) c. Open position

i. Lost production

(4) where

CLPO=Cost of lost production due to open position, $ Wd=Daily wage rate², $/day

Td=Time (number of day position remains open), day

ii. Overtime to compensate for lost production: Calculate per Equation 3.

C. Absenteeism. Costs associated with work absences that are both work-related and associated with ergonomic hazards of the job are referred to as absenteeism costs (Andersson, 1992a). They include workers’ compensation costs, medical expenses, and replacement costs (Andersson, 1992a). Note that sick days (nonrecordable lost time days) may also be reflective of poor ergonomic conditions, and, therefore, might be expected to respond to ergonomic modifications. However, rather than making this assumption, sick absence data should be tracked before and following modifications, in order to deter- mine: (1) if this is the case, and (2) what standardized value might be used in economic analyses of proposed capital expenditures in the future.

1. Workers’ compensation costs: Monies paid to ill or injured employees during their absence from work are accounted for here. These may be represented by or substituted with insurance fees. Also include payroll taxes, benefits, etc. Line items:

a. Wages (including taxes, fringe) b. Insurance charges or fees

2. Medical expenses: These are expenses associated with treatment for illness or injury, and may also be substituted with insurance fees. Line items:

a. Payments to providers b. Insurance charges or fees

3. Replacement costs: Review costs associated with turnover (Category B, described above) for costs associated with loss of production, overtime for other employees, hiring of replacement or tem- porary employee, etc. Line items: Refer to Turnover and Training (Category B, above)

D. Productivity. Productivity may be adversely impacted by poor work conditions, or positively impacted by ergonomic controls. Equipment that requires frequent maintenance or adjustment may reduce productivity when it is running (suboptimally) and when down for maintenance or adjustment.

Productivity changes can be estimated from predetermined time systems, historical records, experience, or from pilot time studies. Actual changes can be determined from time study, work sampling methods, or production records. In calculating productivity savings, actual production time requirements should be used in assessing productivity changes, rather than standard times unless production rate is equivalent to the standard. Time standard allowances are one place to look for improvements in productivity. Often allowances are built in for less than optimal working conditions (such as poor lighting or strenuous, fatiguing work). Modifications that target allowances are likely to improve productivity. Line items and suggested calculation method:

2In all calculations where wages appear, include pay and fringe benefits. However, do not include overhead (burden). That is treated in item G of the EPW.

C_LPO=W_d×T_h

a. Lost production time for maintenance, repair, or adjustment. Refer to Equation 1.

b. Overtime to compensate for down time. Refer to Equation 3.

E. Rework and Scrapped Product. These are costs associated with products that must be reworked, reduced to salvage, or written off (Andersson, 1992a). Per piece costs and rates are required to perform the calculations.

1. Rework. Direct labor and material costs, and costs associated with making up for lost productivity, such as overtime charges; extra costs associated with warranty claims may contribute to rework costs. An inventory fee may be charged if product is stored for a significant period of time before being reworked. Line items and suggested calculations:

a. Direct labor

(6) where

CRdl = Cost of direct labor for rework, $/production unit Wh = Hourly wage rate, $/hr

Rpu = Rework rate, units to rework/units of production Tru = Time for rework, hr/unit

b. Lost production or overtime: Refer to Equations 1 or 3.

c. Direct materials d. Other

2. Scrapped goods. Direct labor and material costs, less salvage value of materials; costs associated with making up for lost productivity, such as overtime charges, contribute to the costs of scrapped goods. Overhead charges may also be included. Line items:

a. Direct labor cost b. Overtime

c. Direct material loss less salvage value d. Other

F. Wages. Wage costs to the company include wages for productive work hours (no absences or vacation hours included), and additional charges associated with wages (taxes, benefits). Personnel and adminis- trative charges are included in the methodology of Oxenburgh (1997). They are included as a separate line item in the current method, per recommendation of Konz (1995), for the following reasons: (1) it is unlikely that these charges will change as a result of ergonomic changes, and (2) savings may be unfairly inflated by working with a larger labor cost. Line items:

1. Direct labor, including benefits, taxes, insurance, etc.

2. Supervisory and administration charges

CR_dl =W_h×R_pu×T_ru

6-10 Occupational Ergonomics: Design and Management of Work Systems

G. Overhead. Included in overhead that might be likely to be affected by ergonomics-related changes would be items such as utility costs, insurance fees, and OSHA fines. Activity-based costing is promoted as a method for allocating overhead costs (Riel and Imbeau, 1995).

H. Direct materials. Any changes in direct material costs not included elsewhere would appear here.

I. One-Time Costs. These costs are typically incurred in conjunction with capital expenditures (invest- ments), and include costs for equipment, jigs and fixtures, installation, engineering time, and operator training costs (refer to items B.2.b and c for costs associated with training). Capital expenditures are discussed in more detail in the section on project calculations. Line items:

1. Equipment 2. Jigs and fixtures 3. Installation 4. Engineering time 5. Operator training 6. Other

Supporting Data

In order to estimate or calculate costs and savings for projects, information may be required on several of the following items (Andersson, 1992b):

• Total hours, and hours categorized as productive vs. nonproductive (absences, vacation, training, illness, injury): for machine(s), process(es), individual operator(s)

• Wage rates

• Direct and indirect labor hours for a product or operation

• Labor hours and costs associated with specific absences, by illness or injury, by department, by job, by time period

• Turnover by department or job, by time period

• Accounting of rework and scrapped material, at particular stages of production

• Time standards

Data Sources. Simpson and Mason (1995) provided suggestions for locating these supporting data.

When values are not available in house, they either need to be calculated from available data, or, if applicable, industry standard values might be used.

• Personnel department: Costs and/or rates of absenteeism, turnover, training, workers’ compensation.

• Industrial or process engineering: Allowances, time standards (and assistance with time standard estimates for proposals), production variation, rejection rates, inspection costs, excessive down- time, equipment maintenance costs and time requirements, scrap and rework rates and costs.

Simpson and Mason (1995) provided a 30% of ownership cost rule-of-thumb estimate for machine maintenance.

• Medical department: Nature and severity of illnesses and injuries, nature and length of health- related absences.

Additionally, Simpson and Mason (1995) identified other resources within a facility upon which the ergonomics team may draw information or support:

• Safety department: To help with locating areas within the plant with ergonomic hazards.

• Medical department: Type and frequency of minor injuries, type and frequency of reported mus- culoskeletal-related symptoms.

computerize it in order to facilitate its use).

Project Evaluations

Ergonomics team activity is often project based. Each proposed project should be evaluated before being undertaken, not only in terms of ergonomic benefits, but in economic terms as well. Methods for performing economic analyses on small projects, large projects, and light duty assignments are examined in this section. Simpson and Mason (1995) cautioned analysts to be conservative in their estimations of benefits from proposed projects. They found it preferable to underestimate, rather than overestimate, in order to reduce the likelihood of implementing projects that turn out to be poor investments of company resources.

Small Projects. Small projects may be evaluated by using payback period analysis as an accept/reject criteria, recognizing that this does not account for the time value of money. Payback period is simply the length of time required for benefits for equal initial project costs, without consideration of interest.

If savings are equivalent in each time period, then Equation 7 can be used to calculate payback period.

(7) where

PB =payback period, in months, years, etc. corresponding to S C =one-time project cost, $

S =periodic savings (or income), per month, year, etc.

Capital Expenditures. Projects that require significant monies to be spent at the beginning, with the expectation of benefits (savings, income, or both) in the future are referred to as capital expenditures.

There are several ways to evaluate whether or not a proposed project would be a good investment of a company’s funds. The first assessment is simply a go–no go decision, in which estimated costs are compared with estimated future benefits (income or savings). If costs exceed benefits, then from an economic standpoint, the project would not be a sound investment of the firm’s money. If the benefits at least equal the costs and the company has limited funds, then the project should also be compared with other projects in which the company could invest its resources. If the company cannot undertake all the acceptable projects, then, according to economic theory, the costliest project that will provide the acceptable incremental return, among all acceptable projects, should be chosen.

In performing capital expenditure evaluations, the time value of money (interest rates and acceptable rate of return for the company) should be considered for projects that have extended lives. That is where benefits may not be realized immediately, where benefits may be realized for an extended period of time, or where there are recurring costs associated with a project (for example: periodic replacement of parts, or maintenance costs).

There are four popular methods for performing economic analysis of capital projects: Net Present Worth determination (NPW), Net Annual Worth determination (NAW), Benefit/Cost ratio (B/C), and

PB = C S