Improving Profit/Employee

However, there is one counter-intuitive relationship you should recognize. To improve Profits/Employee, you would expect to always reduce complement. But consider two Cases (see below).

REVENUE	Case 1	Case 2
Sales	$110,050	$135,300
VARIABLE COSTS
Direct Labor	$31,215	$38,330
Direct Material	$44,637	$55,151
Inventory Carry	$1,413	$1,390
Total Variable Costs	$77,264	$94,871
Contribution margin	$32,786	$40,429
PERIOD COSTS
Depreciation	$7,587	$7,587
SG&A: R&D	$1,958	$1,958
Promotion	$4,100	$4,100
Sales	$4,070	$4,070
Admin	$848	$1,186
Total Period Costs	$18,562	$18,901
Net Margin	$14,223	$21,528
Other (Fees, Write Offs, TQM)	$0	$0
EBIT	$14,223	$21,528
Interest	$5,395	$5,395
Taxes	$3,090	$5,647
Profit Sharing	$115	$210
Net Profit	$5,624	$10,277
Complement	707	854
Sales/Employee ($000)	$156	$158
Profits/Employee ($000)	$8	$12
Employee Turnover	10.0%	10.0%

Both cases were produced with Capstone.xls. In Case 2 we increase Sales by $25M. To build the additional units, Complement increases by 147 workers, a whopping 21%. Yet Profits/Employee actually increase from $8 thousand/Employee to $12 thousand/Employee.

How can this be? The secret lies in the Period Costs. As Complement increases, Period Costs stay about the same, and Expenses/Employee actually fall. This reflects the more general principal that you want to work resources, including fixed expenses, as hard as possible.

Let's look at another example. Suppose you are running 100% First Shift, but can sell another 20% if you run on Second Shift. The Second Shift labor costs are 50% higher and you require a larger Complement. However, notice that the First Shift has already paid for Period Costs. Anything you produce on Second Shift gets a free ride on the fixed expenses. It is possible that your Second Shift units are more profitable than the First Shift units.

When the HR and Labor Negotiation decisions are turned off, you will not lose points for having a Turnover rate higher than 10%. However, if one or the other is active, you will lose 10 points for every percentage point above 10%. Employee turnover can be kept at 10% by spending money in Recruiting and Training hours. It is driven up by Overtime and dissatisfaction with the labor contract.