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Author's profile photo Christian Reinboth

Operations Management Basics: Average labor utilization and cost of direct labor

Two important performance measures are the average labor utilization and the cost of direct labor.

Average labor utilization: The average labor utilization is defined as the total labor content divided by the sum of labor content and total idle time. If, for example, the total labor content is 30 minutes and the total idle time is 10 minutes, the average labor utilization is 30 / 40 = 0,75 = 75%. The average labor utilization thus tells us the overall performance or productivity of the process.

Cost of direct labor: The cost of direct labor is defined as the total wages per unit of time divided by the flow rate per unit of time. It tells us, how many Dollars (or Euros) are being spent in order to get one flow unit through a process (e.g. to treat one patient or to serve one customer).

Looking at the direct labor costs is very important, even though labor costs seem to make up – at least at first glance – only a tiny part of the overall costs. But since labor costs are hidden in all supplies and materials a company buys (that is, the labor costs of the suppliers), a company that might on the sheet be only paying for materials does in fact pay for externalized labor.

These lecture notes were taken during 2013 installment of the MOOC “An Introduction to Operations Management” taught by Prof. Dr. Christian Terwiesch of the Wharton Business School of the University of Pennsylvania at

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