While labour may be the most controllable resource for a manufacturer, it is also the most difficult to manage, writes Gregg Gordon in ‘Lean Labor: A survival guide for companies facing global competition’ (http://bit.ly/F4TGreggG).
Resources such as machines and inventory are inanimate objects with well-understood attributes, so it is easy to calculate the benefit of reducing inventory in terms of improved cash flow or the return on investment by increasing throughout using automation, he reasons. “When it comes to labour however, the analysis becomes murky. There are many attributes that affect performance and as a result the return on investment is difficult to measure. Understanding the potential in an existing workforce, or in a workforce that is about to be acquired is almost impossible to predict.”
Unique attribute of workforce
The commonly-used metric of ‘unit labour cost’ – computed as value of output divided by cost – may be easy to comprehend; but it can ignore the unique attribute of the workforce to innovate and develop new ideas and processes, reminds Gordon. Hastening to add that the challenge in measuring the value of the workforce does not mean the workforce does not offer an opportunity for a company to increase its value, he avers that those companies that effectively manage their workforce and the intellectual property (IP) the workforce creates will enjoy higher returns than competitors that do not effectively capture that potential.
Importantly, the author underlines that a workforce-based competitive advantage is far more valuable than any advantage based on a temporary gain from something available externally in the market. The reason, as he explains, is that whoever is providing those external resources will see the value they are delivering and begin marketing those advantages to others. “Internally developed intellectual property is much more difficult to duplicate because no one is selling it on the open market. This ability to innovate is a skill and as this skill is used, the workforce gets better at it, increasing the pace and impact of innovation. This workforce-driven innovation is a sustainable competitive advantage.”
Paycheque efficiency
In a chapter titled ‘Delivering the perfect paycheck,’ the author observes that if employee paycheques were considered a product line, the same would rank as one of the largest products at most companies. But as an expense, rarely is it given the same level of operational scrutiny as a revenue-producing product, he rues. “Like a utility such as electricity or water, payroll is expected to be on time and accurate, with managers only paying attention when something goes awry. While companies are heavily focused on efficiency and effectiveness in their main value-add processes, what they don’t realise is that just the mistakes made by producing a paycheque inefficiently can inflate payroll on average by 2.4 per cent.”
The book lists three main categories that provide the best return on investment when it comes to improving the timekeeping and payroll process. First, one learns, is to automate manual processes within the timekeeping system by taking steps such as eliminating paper forms, no longer entering information into multiple systems and calculating values automatically rather than manually. “Second is to eliminate grey areas that cause interpretation in pay and accrual policies. Third, weakness in the processes should be eliminated. These weaknesses allow some employees to game or abuse the system, which lead to higher pay without corresponding increases in output.”
Instructive read on a critical factor of production, whether you are in manufacturing or services.
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