Features Business Operations Commercial
Measuring Productivity

By Bill De Decker

Much is written in the media about rapid improvements in productivity
driving the economy. Increased productivity is a powerful force in any
business, because it allows higher output and/or higher profits,
without a corresponding increase in cost. Which leads to a question: Do
you track productivity in your helicopter operation? And if you do,
what do you track?

Let’s
look at some useful productivity measures. But first, what exactly is
productivity? In simple terms, productivity measures the relationship
between the output of an organization, person or process and the
required input. The best measures of productivity are easy to
calculate, easy to explain and relevant to the success of the
organization.

One of the most common measures of productivity is
flight hours per year per helicopter, or utilization. It is easy to
calculate and it is very relevant to your success because the more you
fly the greater the revenues. However, there is another good reason to
track this measure carefully – the impact on fixed cost per hour and
therefore profitability. Simply put, operating costs are divided into
two groups – variable costs and fixed costs. The variable costs are
mostly fuel and maintenance costs and they are incurred in direct
proportion to the hours flown. The more you fly the greater the cost
and the effective cost per hour stays more or less constant. Fixed
costs on the other hand tend not to be directly proportional to hours
flown. For example, the cost of a hangar, many insurance policies,
scheduling and dispatching personnel, management personnel is the same
no matter how many hours are flown. Thus, if more hours are flown the
effective cost per hour goes down, as shown in Graph 1.

At the
same time, the price the customer is prepared to pay is not tied to
your utilization. As a result, if you can reduce your fixed costs,
profitability will increase, as shown in Graph 2.

Another
example, this one less frequently used in the helicopter business, is
annual revenue per employee. This measure focuses attention on one of
the foundations of financial success for any commercial organization
(revenues) and relates it to the staff (and the implied costs) that
creates the revenues. Total annual revenues are easy to measure, as is
the number of employees. Thus it is relevant, easy to calculate and
easy to explain. For example, assume an organization with 18 employees
has annual revenue of $3,040,200. This would yield a ratio of $168,900
of annual sales per employee.

There are a number of ways to use
this information. One is to benchmark your organization against other
organizations (as shown in industry surveys or annual reports). This
will show how your operation compares with your peers. Another is to
calculate this productivity measure for previous years of your own
organization, to see how this measure of productivity has changed over
the course of the last few years. Consider the examples in Graph 3.

Trend
#1 shows a real problem. Productivity varies substantially from year to
year but overall is stagnant and since each year expenses increase and
wages go up, this organization has been falling behind.

Trend #2
shows growth in productivity but when you analyze it, you’ll see that
all they do is keep up with inflation (about 2.5% per year). In fact,
Trend #3 is the only one that shows solid growth – the employees are
becoming more productive. And, if these are your numbers, thereE is a
good probability that you are doing very well. On the other hand, if
Trend #1 shows your numbers, there is a high probability you will be
struggling to stay alive.

Another way to use this information is
when the director of operations says that they “just gotta have another
pilot or engineer or dispatcher!” Often, the only question asked by the
manager is “well, do you have someone in mind?” (I know, I’ve been
there and done that). The real question that should be asked is “OK,
but where is the additional $168,900 in revenues to support this person
going to come from?” This ties the decision to hire another person
directly to the revenues needed to pay the salary, benefits, training,
supervision, etc. If this is not done, the addition of the another
person may make life easier, but it may drag down the productivity of
the operation and decrease the profitability of the organization. In
fact, if staffing levels were correlated to sales per employee for
Trend 1, you may well find that staff was added when revenues didn’t
really warrant it. Perhaps this organization tends to add employees too
fast when sales pick up.

Another popular measure of productivity
is employees per helicopter. For the operations or maintenance
department, a variation of this productivity measure is maintenance
engineers or per pilots per helicopter. In all cases, this measure is
very relevant, because it relates the source of income to one of the
primary fixed costs associated with aircraft operations. For example,
according to the 2004 Survey of Operating Performance published by the
Helicopter Association, midsize (4 -7 helicopters) commercial operators
averaged 1.67 employees per helicopter. However, this productivity
measure varies from a low of .86 to a high of 3.5 employees per light
single-engine turbine helicopter. In other words, some organizations
are a lot smarter at getting productive work out of their employees
than others. And you’ll find that the ones with the lower number of
employees per helicopter may be tough to compete against.

A
final productivity measure that is worth tracking is ‘hands-on’
maintenance hours per year per engineer. In a commercial maintenance
operation, these are the hours that would be billed to the customer.
This is important to measure, because the cost of engineers is the
same, no matter how many ‘hands-on’ hours they work. For example,
assume that the salary plus benefits for a typical engineer is $60,000.
At 800 ‘hands-on’ hours that equates to $75 per hour. But if the
engineer can be scheduled to put in 1,200 ‘hands-on’ hours, the cost
per hour decreases to $50 per hour – a significant saving! Again, it is
clear that the more ‘hands-on’ hours each technician produces the
higher the likelihood that the operation is efficient and productive.

The
list of productivity measures is limited only by your desire to
understand what is really happening with your organization. The
important thing to remember is that if you track productivity, you’ll
have a much better understanding of where your organization is headed.
And you’ll be making your contribution to the hea