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Measuring Cost Per Pound? Include All Expenses (Part 1 of 3)

“When a manager or operator measures their plant’s performance by cost per pound, what factors—labor, purchasing, utilities, maintenance, rewash/ragout, or others—must they include in their calculations to arrive at the most accurate figure?”Hotel/Motel/Resort Laundry — Charles Loelius, The Pierre New York, New York City
Laundries are operated either as a cost center, such as a hospital or hotel OPL, or as commercial, for-profit entities for which both revenues and costs are recognized.
Regardless of how a laundry is structured, the manager or operator needs to effectively communicate financial information to upper management or investors.
Cost per pound is an excellent barometer of plant performance when accurately calculated. To arrive at an accurate cost-per-pound calculation, both direct and indirect linen-processing expenses must be considered.
Direct linen-processing expenses would include:

  • Production wages — Those paid to hourly employees directly involved in processing/handling.
  • Production benefits — Costs associated with holiday, vacation and sick pay; worker’s compensation; health insurance and retirement costs; and employer’s share of Social Security and unemployment benefits.
  • Utilities — Costs associated with gas, electricity, fuel oil, steam, water and sewer.
  • Linen replacement — Cost to replace stained, worn, torn and lost linen. It is typically 8 to 17 cents per pound processed.
  • Chemicals — Costs associated with all laundry chemicals. Inventory your supply in order to establish accurate consumption.
  • Production supplies — Costs associated with any supplies used in linen processing. These supplies should also be inventoried to establish consumption. They include ironer pads, covers, aprons, flatwork-ironer tape, mending supplies, shrink-wrap, string, hamper liners, ironer wax and wax cloths.
  • Linen distribution — Costs associated with clean/soiled-linen transport, including driver payroll/benefits, fuel, tolls, truck insurance, maintenance, repair, and amortization on vehicles.
  • Equipment maintenance — Costs associated with keeping plant machinery and equipment operating. These expenses include engineering and maintenance payroll and benefits, equipment parts, and outside service contracts.

Indirect linen-processing expenses are any other expense needed to operate, including:

  • Management payroll and benefits.

  • Clerical payroll and benefits.
  • Uniforms.
  • Depreciation on equipment and buildings.
  • Amortization on circulating linen.
  • Rent (if applicable).
  • Sales expenses.
  • Office expenses.
  • Taxes, insurance, licenses, permits, etc.
  • Miscellany, including lease charges, safety, legal services, training, and travel and entertainment.

The second, but equally important, part of the equation is accurately determining the pounds of laundry processed.
[NP][/NP]Most operations consider pounds washed as pounds processed in determining pounds-per-operator-hour (PPOH) and cost-per-pound calculations. While using pounds washed is by far the easiest method, it is prone to errors and inaccuracies.
Since pounds washed were weighed when soiled, the figure is inflated by an indeterminate soil factor. While a historical soil factor can be applied, it will not be 100% accurate.
Washed loads should only be counted once; eliminate rewash pounds from the equation. Again, a historical rewash percentage can be factored in, but the results will be inaccurate.
Furthermore, inflating the number of pounds washed can easily skew cost-per-pound data to make an operation look falsely efficient. Extrapolated weights based on pieces produced will provide more accurate data for both PPOH and cost-per-pound calculations. Determining average clean weight per piece is easy, and software programs can help as well. Given a large enough sample, weight extrapolation is an accurate method of calculating clean poundage.
In for-profit laundries, perhaps the best and most accurate method of determining the operation’s financial efficiency is extrapolating clean weight from pieces shipped. In this manner, cost is recognized at the time the corresponding revenue is generated. This method is the most “unforgiving,” as the plant is only credited for the pounds that generated income. Excess production would only be credited when shipped and billed.Equipment/Supplies Distribution — Donnie Weiland, Tingue, Brown & Co., Alvin, Texas
Recently, due to great midday hunger pangs, I succumbed to my scheduling and went through a “drive-thru.” I ordered a double hamburger.
[NP][/NP]After receiving the sack containing my food and hurriedly paying the bill, I quickly drove onto the street. At the next red light, I opened my prize. Alas, no hamburger! Rather, it was a fish sandwich.
Being too far from the restaurant, as well as my next meeting location, I relented and began to eat the unwanted morsels. While filling, fish was not what I had asked for. I made a mental note to check off that restaurant from my future-visit list.
Oftentimes, our wonderful industry is guilty of not giving management what it has asked for. It asks for cost per pound but we give it a “perceived” cost per pound. What’s the difference?
True cost per pound is the total of all costs associated with producing one pound of clean goods.
Far too many times, managers tend to use “soiled” pounds received as their basis for calculations. After all, it’s easy to use, especially if someone else has recorded the weight. Also, it makes the final outcome appear in your favor, due to the 8-15% soil factor. But it’s wrong—one should use the “clean” weight.
Some other managers will use a washroom weight (the projected poundage based on their perception of what is being washed). An example: five 200-pound washers operating for an eight-hour day equals 8,000 pounds, right? Wrong! Due to the soil factor and differences in terry cloth volume and weight (as opposed to flatwork volume and weight), you’ll be off substantially.
What is the moral of the story? Weigh the goods at the shipping end of the plant for complete accuracy.
Once you’ve determined the correct weight, the next step is to define and include all cost components of the laundering process, establish a well-defined “break point” for a specified period of time, and proceed mathematically to divide all costs by the poundage.
The cost components will include all personnel, benefits, machinery, chemicals, utilities, income from rag sales, maintenance parts, supplies, linen replacement, and anything else that caused you to spend money to operate.
Some people want to use only the production costs, which is acceptable as long as everyone involved realizes which components are part of the equation.
By using these calculations, management won’t check you off its list.Check back tomorrow for Part 2 of this story!
 

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