Finding the opportunity with variable overhead costs requires trying to understand how these costs are allocated in the financial statements and then analytically drawing some correlations between those costs and the process hours.
When companies volumes decline they are often stuck with more fixed costs than they need. Fixed costs are often much more difficult to reduce than variable costs because they represent a longer term commitment in many cases.
Indirect labor includes supervisors, material handlers, quality technicians, mechanics, and IT support, all functions which are required to support the production of goods or services. While the functions are important to keep organizations working, its not always easy to determine how many people you actually need.
Hours worked are driven by how many people you need to run a process to achieve some volume output. So there are two distinct analytical questions; how do you staff the process, and how well does the process run?
Whenever we see overtime over 5% an analytical red flag goes up and we start to suspect that there may be too much cost built into the process. Many organizations use overtime to offset peak volume periods.
Cyril Parkinson wrote a humorous essay for The Economist magazine, in part drawing from his experience working in the British Civil Service. He observed that work tends to fill the time available for its completion.
There are a number of functions in an organization where it’s tough to move the productivity meter. You might actually produce more but the base costs don’t change so the true productivity measured from a financial perspective doesn’t change.