You can have the hottest supply chain technology out there. And you can have the coolest-sounding processimprovement initiatives in the business. But they'll all amount to nothing if you don't have the right people in place to use those tools and execute those processes.
But how do you know if you're doing a good job recruiting and retaining the right people? How do you know if your human resource (HR) strategies are actually working? The answer, as is the case in many aspects of business, is to use metrics.
Without any type of human resource metrics, it is difficult to make proactive hiring and personnel decisions, and it is nearly impossible to identify how the results of those decisions are affecting your bottom line. As the business environment becomes more dynamic and complex, and the components of the supply chain become increasingly difficult to manage, it is critical to set HR goals, measure results, and then control the human resource processes that support your company's overall business strategy.
According to the Society for Human Resource Management (www.shrm.org), there are several elements that can be measured to show how HR contributes to your business. These statistics, which are explained in the society's HR Metrics Toolkit, apply across industries and can be readily used by supply chain professionals.
What follows is a brief summary of these elements:
Hiring yield ratios. The hiring yield ratio provides information about the percentage of applicants from a recruitment source that makes it to the next stage of the selection process. For example, if a company receives 100 résumés and 50 are found acceptable, that results in a 50-percent yield.
This ratio can be used to track the percentage of applicants who pass or fail the various steps of the hiring process, such as skills testing, drug screening, and background checks.
Cost per hire. To calculate what your company spends on recruitment, add up all of the costs involved in the hiring of an applicant ("help wanted" advertising, travel, agency fees, and so forth), and then divide the total by the number of people hired.
This metric can be used as a measurement to show any improvements in recruitment or retention costs. It can also be used to determine what the recruiting function can do to increase savings or reduce costs for your company.
Time to fill/hire. This statistic represents the number of days from when the job requisition was approved to when the new hire starts work. It is one way you can determine the efficiency of the recruiting function. It is derived by computing the total number of days elapsed until the requisitions are filled, divided by the number of new hires.
Absence rate. This calculation allows you to measure absenteeism in order to determine whether your company is suffering from this problem. You can also use it to determine the effectiveness of an attendance policy and of management in applying the policy.
To calculate the absence rate, take the total number of days employees are absent in a month and divide it by the average number of people employed during the month. Multiply that answer by the number of workdays, and then multiply the total by 100.
Turnover/retention cost. By calculating the separation, vacancy, replacement, and training costs resulting from employee turnover, a company can determine the turnover cost for a particular position, a class code, a division or functional area, or the entire organization. To get that figure, simply total the costs of separation, vacancy, replacement, and training.
Turnover rate. This measures the rate at which employees leave a company. It is a statistic that will help to identify trends and assist in determining what your organization can do to improve its retention efforts.
To get that figure, divide the number of separations during a month by the average number of employees during the month, and multiply that number by 100.
Human capital return on investment. This metric measures the return on investment (ROI) ratio for employees. It gives companies an opportunity to optimize their investment in such human resource practices as recruitment, motivation, training, and development.
Here's the formula: Revenue – (operating expense – [compensation cost + benefit cost]) / (compensation cost + benefit cost).
Training return on investment. This measures the total financial gain or benefit an organization realizes from a particular training program, minus the total direct and indirect costs incurred to develop, produce, and deliver the training program. Calculate it by deducting the total direct and indirect cost from the total financial gain or benefit, and multiply that number by 100.
Workers' compensation. Use this number to analyze and compare the year-to-year change in payouts under workers' compensation on a regular basis. Doing so will help you to determine trends in the types of injuries as well as the number of injuries by function, department, and job category. This statistic should be used as a benchmark to show whether your company's HR practices are effective in reducing workers' compensation accidents and costs.
To get this figure, simply divide the total workers' compensation cost for the year by the average number of employees during the year.
Workers' compensation incident rate. This metric looks at the number of injuries and/or illnesses per 100 full-time employees. Divide the number of injuries and/or illnesses per 100 full-time employees by the total hours worked by all employees during the calendar year, and then multiply that number by 200,000. Compare this number to the standard in your industry to determine how your organization is performing compared to its peers.
Next steps
For some companies—especially smaller organizations— the data used to calculate these metrics may not be readily available. In fact, you may need to spend some time identifying sources of the data you need and developing a system to capture that information. Remember that consistent data collection and reporting is critical to the accuracy of any measurement process.
Once you have some results, you can go on to the next steps: benchmarking and goal setting. Comparing the performance of your supply chain organization to others of similar size within your industry will help identify areas of strength as well as areas for improvement. A helpful reference for this type of analysis is the annual "Capital Benchmarking Study" published by the Society for Human Resource Management. This report includes data from a number of key industries, including transportation, warehousing, and distribution.
From there, it is a matter of setting performance goals, homing in on your opportunities, evaluating the key human resource processes involved, and establishing new best practices to optimize your company's performance. Open communication and collaboration across the organization is essential for a successful metrics program.
As you move forward, compare the various metrics outlined here, using the same time frame so that you can accurately identify any improvement or decline in performance. Over time, as process adjustments are made and new practices are institutionalized, the impact on your company's bottom line will become clear.
And the next time you're asked, "Are your HR practices effective?" you'll be able to provide an answer that is based on facts.
