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Profitability is driven by productivity. You want to increase profits, so your task is to maximize productivity, which is basically a measure of output per dollar of capital deployed. It does not matter what percentage of your dollars (aka capital¹) is spent on labor or equipment; the task is the same — to maximize yield.

Two elements drive productivity:

Use rate — total time units a person or machine is in productive use, divided by total time units of observation time.

Example 1: Bulldozer #224 was used 52 hours over the past 14 days, a use rate of 15.5% (52 divided by 336), assuming that a bulldozer, in theory, could be used 24 hours a day.

Example 2: Tim Tomer was observed 100 times over the past three months; 61 times he was working productively. His productivity rate was 61%.

Output rate — units of output produced by a person or machine, divided by time of work or operation.

Example: Bulldozer #224 moved 87 cubic tons of material during the five days ending September 22. Workdays were eight hours each, so #224 averaged 2.175 cubic tons of material per hour of uptime during this week.

The focus of this article is assessment of use rate. If a business assesses and tracks its use rate and takes steps to increase use, productivity increases and profits improve.

The way to assess use rate is work sampling. It lets you identify, through observation, the percentage of time employees and/or equipment work productively. If it’s equipment, “working productively” depends on what the piece was acquired to do — mold parts, pump water, take pictures or be rented out. If it’s a person, “working productively” means “doing the task the person was hired to do.” It could also be defined as “doing a task that generates revenue or leads to generation of revenue.”

Note: Herein we use the terms productivity and use rate synonymously, to a degree. When we assess people, we talk of productivity. When we assess equipment, we talk of use or usage.

When a company uses work sampling to assess its productivity it is referred to as a work sampling study. Employees and/or equipment are observed repeatedly, over a defined period and, at each observance, the productivity of each person or piece of equipment is recorded. It’s simple in concept, but to garner meaningful and reliable data, the methodology must be soundly developed and executed.

Work Sampling in Practice

Joe Smith, owner of ABC Construction, was not happy with his firm’s unprofitability. His efforts to identify the cause and therein fashion a remedy led him to look into his employees’ productivity. Do they work efficiently? Do they stay productive throughout the workday?

He decided to make an objective assessment. He located and consulted with a work sampling expert to design the program and consult on implementation. Once the plan was developed, Joe met with his employees to explain the initiative. He explained what would be measured, who would do the measuring and in which situations. Joe emphasized to the employees that this study was to improve company-wide productivity and profits and that a more productive, profitable company would mean more job security and higher profit distribution bonuses. Assessment of individual employee performance was not the objective.

He also explained to his employees:

Work sampling process. Work sampling is a series of instantaneous observations of work-in-progress done randomly over a specified period. These observations, known as samples, are compiled to show the percentage of the day workers perform productive work.

Identification and definition of work categories. Each observation or sample would be recorded in one of three major categories: productive, supportive or recoverable.

• Productive: Defined as “getting the job done.” For example, if the observed is a draftsman, he or she is drafting. If it’s a doctor, it’s working with a patient. If it’s a salesman, it’s talking to a customer or prospect.
• Supportive: Defined as any activity that is required to maximize the time that can be spent getting the job done. For example, if the observed is a draftsman, he or she may be cleaning the drafting table, updating the software, talking to a client or taking continuing education classes. If it’s a doctor, it may be inputting client information, taking continuing education classes or talking with his/her nurses about a patient plan. If it’s a salesman, it’s writing notes from a call, writing a letter or proposal to a client, or studying competitor data.
• Recoverable: Defined as “not adding any value at all or contributing in any way to getting the job done.” For example, whether the observed is a draftsman, doctor or salesperson, the observation should be recorded as recoverable if the observed is talking to someone on the phone about non-work matters, using the restroom, taking a “smoke break,” talking to co-workers about non-work matters, playing solitaire, or waiting unproductively because “the computers are down.”

Methodology. Employees are told they will be observed but not when. Observers follow preplanned routes, and the study continues until the predetermined number of samples is collected. Each time an employee is observed is one sample. It is the observer’s responsibility to document what the employee is doing when the observation takes place. The observer must document the activity based on the predetermined work categories as he or she proceeds through the job site tour. Was the action productive, supportive or recoverable? Each employee may be viewed multiple times, depending on the length of the study and how many observations are needed.

How many samples are needed? It depends on the level of confidence desired, the allowable margin of error and the current ratio of productive to unproductive time. You can easily figure out how many samples you need to get results with a 95% confidence level and a low 3.5% degree of error by:

1. Taking an initial sample of 30 observations and determining the percentage of time occupied in productive use for the sample.
2. Looking in the table below for the number of samples needed, based on results of your preliminary sample.

For example, Joe took 30 samples (i.e., 30 routes around his facility) and calculated the productivity rate at 7% (i.e., productive time plus supportive time). Using the table (top right column), he needs his full study to have at least 578 observations.

Evaluating Results

Computer software can analyze work sampling results. In most cases, observers record the work by hand on worksheets and input the data into a Microsoft Excel or similar spreadsheet software. There are also some new programs that let you record the data directly into a smart phone.

But the study results do very little for you. It’s up to you to use the data to your advantage. How?

First, share the results with your employees. Simply helping them understand how “little distractions” add up should help improve productivity.

Second, talk to your observers about the types of distractions they saw. Then develop ways to eliminate them.

Third, conduct follow-up sampling studies and compare results. Consider devising company-wide goals and rewards for improvements in productivity.

_{1 Capital also can be parsed into two types: debt and equity.}

For more information or help with a work sampling project, contact one of the following:

Jack Greene, Jackson Productivity, 843-422-1298

Nelson Lee, Laubrass, 513-624-6629

If your business has outstanding borrowing (bank or credit card loans) and has been profitable in one of the past two years but is now suffering “immediate financial hardship,” you may be eligible for up to $35,000 of interest-free money.

That’s right. As part of the America’s Recovery Capital (ARC) program approved by Congress in February, the Small Business Administration (SBA) rolled out new aggressive loan programs to support small, struggling businesses. The loans are available to established, viable, for-profit small businesses that need short term help to make their principal and interest payments on existing business debt.

The $35,000 interest-free “ARC Loans”, as they are referred to, can be obtained from SBA approved lenders (i.e. banks).

The SBA defines “immediate financial hardship” as a “change in the financial condition of the company including, but not limited to, declining sales, frozen credit lines, and difficulty meeting payroll or paying rent or making loan payments.” Businesses also must be able to demonstrate, through quarterly cash flow projections, that they can continue operations and repay the ARC loans. For more on eligibility, click here.

Borrowers will not have to pay any up-front loan fees. ARC loan proceeds will be disbursed directly to the creditors listed by the borrower in the loan application. Creditors will receive the funds over a six-month period after the loan is approved. Repayment need not begin for a year after the last loan disbursement. The repayment term is five years.

ARC loan proceeds can be used to pay home equity loans or credit card debt … so long as the funds borrowed were originally used for business purposes only. Loan proceeds cannot be used for new capital expenditures or repayment of existing SBA debt that was incurred prior to February 17, 2009.

The ARC loan program kicked off June 15 but many banks have been slow, or have declined, to enroll in the program. The reasons cited by the banks have generally been one or more of the following:

1. lack of awareness about the program
2. lack of information about the specifics of the program
3. concerns about whether the bank will be able to earn an acceptable profit margin on the loans

Banks will receive from the U.S. government an interest rate of prime plus 2% and a 100 percent guarantee against loss of principal.

Loans will be available through Sept. 30, 2010 or until all funds have been expended, whichever comes first. SBA officials expect 10,000 ARC loans will be issued prior to the cutoff date. Only one loan per applicant is allowed.

In an attempt to make sure all businesses across the country benefit from the new loans, there will be an ARC loan cap of 50 per week for each SBA-approved lender and no more than 1,000 loans issued from any one lender in total.

Start-up businesses are not eligible for the ARC loans.

Dear (Seller’s Name):

In connection with your private sale of stock to me of 500 common shares, par value $____ (referred to herein as the “Shares”), of XYZ Corp. (the “Company”), I hereby represent that:

(i) I am acquiring these shares for my account and for the purpose of investment and not with a view to distribution, and I will not dispose of such shares in any manner that would involve a violation of applicable securities laws;

(ii) I have had the opportunity to ask questions of, and to receive answers from, the Company with respect to my acquisition of the Shares. I have been given full access to such financial and other information for me to make a fully informed decision as to investing in the Shares;

(iii) I have been advised and understand that these shares have not been registered under the Securities Act of 1933 (the “Act”), are “restricted securities” within the meaning of Rule 144 under the Act, are subject to restrictions on transfer, and that the Company is under no obligation to register these shares under the Act or to take any action that would make available to me any exemption from such registration;

(iv) I have not received any offer to acquire the Shares pursuant to any advertisement, article, notice, or any other communication published in any newspaper, magazine, or similar broadcast media;

(iv) I understand that no federal or state agency has made any finding or determination as to the fairness for investment of the Shares;

(v) I understand that investing in the Shares is highly speculative;

(vi) I am an “accredited investor” as that term is defined in Rule 501(a) of Regulation D under the Securities Act; and

(vii) I understand that the certificates for such Shares shall bear an appropriate legend restricting transfer in accordance with applicable securities laws and the terms of a shareholders agreement.

You are authorized to deliver the enclosed additional signed copy of this agreement to the Company, and this agreement shall be enforceable directly by the Company.

_________________ ___________________

Signature         Date

_________________

Printed Name

THIS IS ONLY A SAMPLE LETTER. CONSULT WITH LEGAL COUNSEL BEFORE USING IT.