Keep Labor Utilization Lean, Save Profits
By Tom Dossenbach
One of the major costs of wood products manufacturing is the human effort necessary to convert customer orders into acceptable products. While it is usually third behind raw materials and overhead costs, labor cost is substantial and, if excessive, can squeeze or eliminate profits altogether or cause serious competitive pricing problems. This month, I am looking at this important area in light of lean manufacturing.
In the April issue of W&WP I discussed the principal that any unnecessary activity that did not add value to the product or service must be eliminated to become "lean." Obviously, any unnecessary activity involving people adds costs to the product. There are three ways to address this problem.
The most desirable action is to eliminate the activity all together. This alternative was covered in detail last month and is the most important consideration in lean manufacturing.
The second alternative is to leave things as they are and accept a lower margin on the product than would be available if the activity did not exist. If the Ajax Cabinet Company, a kitchen cabinet manufacturer, has to place four "quality inspectors" on their assembly line to catch and fix problems before finishing, the company is accepting more than $100,000 a year in additional manufacturing costs. Thus, the company is accepting a lower margin or lost profits by that amount, which could be invested back into the company.
The third alternative is to do nothing to remove the unnecessary overhead but to maintain the margin by raising the price of the product. This is risky at best and often leads to pricing above competition. Adding the cost of needless activities to the price of a product will not fly in today's market because consumers will not perceive any extra value in the product to match the higher price tag.
Direct vs. Indirect Labor
Indirect labor are those functions that are necessary or unnecessary but do not add value to the products or services of a company. The key to obtaining lean manufacturing status is in recognizing what is necessary and what is not. Ajax would probably argue that their inspectors and the $100,000 spent were necessary to add value by not shipping cabinets with scratches, rough surfaces, etc. A cost to correct mistakes should never be accepted as necessary direct labor or as indirect labor. Remember. Do it right the first time.
The forklift operator at Ajax Cabinet who unloads plywood from the delivery truck and stacks it in the plant is a materials handler. Handling or moving materials from point A to point B may be necessary but adds no value to the product and therefore is indirect labor. Some will try to argue that moving materials from a saw to a shaper is necessary in the manufacturing process and therefore should be counted as direct labor. The fact remains that the handling adds no value even if it is required and should be separated from direct labor costs as an overhead item - a cost incurred as a necessary expense for doing business because it cannot be eliminated. All indirect labor should be a constant target for elimination.
When looking at a company with declining profitability, it is almost universally true that excessive labor and materials are being expended to produce their products. This is a symptom of deeper problems within the company, but that is another subject for another time. The identification and elimination of the excess labor is paramount and sometimes necessitates removing excess labor from the payroll through layoffs.
Many times a company is willing to eliminate unnecessary activities but is not willing to eliminate the cost of those who are engaged in those activities. Unless Ajax Cabinet is growing and constantly hiring new employees, the company needs to lay off some or all of the repair people as the causes of quality problems are eliminated. To just transfer them to another department when the company is not growing is transferring unnecessary cost to another department and does not add to productivity.
I am in favor of transfers and retraining if a company is in need of additional good people; but if a company wants to get lean, it has to remove the waste no matter how unpleasant the task might be. Having more employees than necessary is a costly and dangerous waste that can threaten the longevity of a company.
Gauging Labor Utilization
To manage labor, you must not only look at job functions but also job activities. Many times a direct employee will be engaged in activities that do not add value to the product - they will be performing indirect activities. Some may be necessary and some may be unnecessary. It is my hope that management will think its way through these questions as a warm-up and then do a walk-through of a department tomorrow.
No matter what sector of the wood products industry a worker is in, labor utilization will be a key to long-term survival in this decade. Everyone has the desire to look at their operations with a critical eye and start cutting out the waste or "fat". After all, that is what continuous improvement and lean manufacturing are all about.
ANSWERS TO AJAX WALKTHROUGH: (NLA=Necessary Labor Activity; ULA=Unnecessary Labor Activity)
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