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Productivity Rules

12 January 2011 by Bill Waddell

by BILL WADDELL

Don't let the passion with which the very lean companies commit to their people mislead you into thinking they are not intensely focused on labor costs and productivity. Too many folks seem to think that 'respect for people' and 'lifetime employment' mean leaving labor cost and headcount by the wayside and working instead on other things. There are no other things to work on. It is all about labor costs yours, your suppliers, your suppliers' suppliers The difference between lean thinking and old school manufacturing management is that lean thinking is far more holistic, less self-indulgent, and a lot more creative. But it is every bit as centered around labor cost.

The following charts show the make-up of labor at most manufacturers, along with the make-up of labor at those that are much better than most. Your company most likely falls somewhere between the two.

In most companies, the ratio of direct labor to indirect labor is about 3 to 1. The better companies get closer to 4 to 1. In most companies, direct labor spends about 70% of its time actually working on making the product, with the rest spent on meetings, downtime, waiting for parts, paid breaks, and other things that do not create value. In the better companies, this number is closer to 80%.

This chart shows how the total labor cost breaks down under those assumptions.

The big difference between lean companies and the rest is that lean businesses are focused on the 40-50% of labor cost that is not creating value the indirect labor and the ineffective direct labor. Those who can't get their eyes off the past obsess about the 50-60% of their total labor cost that is actually doing things customers appreciate.

In fact, it is very rare that I come across a company in which the direct labor people are working at much less than 100% efficiency to their standards. That doesn't stop management, however, from adding a couple of industrial engineers with stopwatches to the indirect labor count to hover over the direct folks with stopwatches looking to increase efficiency from 98.6% to 98.7%.

When we rant about the folly of ERP systems and the like it is largely because such tools add complexity to an already over-complicated process and add to the indirect, non-value-adding headcount without an offsetting increase in value for customers.

The cultural root cause of much of the inability to see the low hanging fruit of ineffective and indirect labor seems to be an assumption of the supremacy and wisdom of non-productive people. How else can we explain the fact that in just about every company an employee can make more money by getting promoted from a production job to the quality inspector, material handler, or supervisor/babysitter? Why else do we pay people who shuffle paper and enter data more than those who actually make products for customers? Why else is getting paid a salary rather than by the hour viewed as a success? In fact, in most companies, the further one can get from the factory floor, the more they make.

It should come as no surprise that, after sending such a loud and clear message that indirect labor is so important work to be rewarded more generously than direct labor the indirect labor folks come to work with an assumption that their work is vital and that improvement must come from the less capable folks who are still stuck in front of a machine making things. It leads to a lot of silly practices, including (and don't get me wrong the temporary use of experts to teach and demonstrate is usually necessary) creating whole departments of lean coordinators, Six Sigma belt-wearers, and continuous improvement administrators. The 'lean steering committee' is often a permanent institution, the primary accomplishment of which is often to schedule the next steering committee meeting. The net effect is more often than not an addition to the non-value adding labor base, consisting of folks whose charter is to pull effective direct labor people off of their jobs onto kaizen teams, with the objective of conjuring up ways to make them more efficient when they are actually working goosing the 98.7% up to 98.8%.

The low hanging fruit is all in indirect labor. The truly lean companies are as focused on labor as old Fred Taylor was. The big difference is that they pay scant attention to the efficiency of direct labor and look for ways to reduce indirect labor. Rather than promote people to material handling, maintenance, and inspection jobs they try to eliminate those jobs. Rather than create new management ad staff jobs, they try to eliminate the need for those jobs and push the decision making down to the production floor.

The charts above can be a pretty good measurement of 'leanness'. If the percentage of total labor cost or total headcount (including everybody that means you too CEO's, Black Belts, and Directors of Continuous Improvement) that creates value isn't getting a whole lot better, the lean effort is most certainly misdirected.

1. Discuss the pros and cons of Bill Waddell's position on the make-up of labor in manufacturing,
2. What is your opinion of Bill Waddell's comment below the article on the division of labor in service organizations?

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