Industry

Applying lean concepts to labour

Were you to follow Graham, a production executive at a manufacturer who is the protagonist in ‘Lean Labor,’ you would track him at his desk, preparing for the presentation before the company board a week later, to report about the progress on the task given to him, viz. reducing unit costs by 10 per cent in a year.

“He had met his goals through an 8.5 per cent reduction in unit cost and an increase in contribution margin of $15 million annually through better product mix decisions. This combination had achieved the end result desired by the board: the stock price was increasing, reflecting the improvement in earnings. Graham began writing the numbers down in preparation for the meeting,” narrates the book’s author Gregg S. Gordon (http://bit.ly/F4TGreggG).

Importantly, as Graham noted each area of benefit, he realised that the success had been achieved by acting on many small ideas rather than waiting for ‘the big idea’ to develop, adds Gordon. The book wraps up on a reassuring note, that Graham is able to successfully tap into the employees’ ability to innovate rather than chase low wages. My recent meeting with the author was equally heartening; for, his message was that to manufacturers looking to reduce unit cost, especially with limited capital investment, lean can be the answer, with the focus on the workforce and its interaction with the other resources required for production. Our conversation continued over the email.

Excerpts from the interview.

Why has it become necessary to apply lean concepts to labour?

For countries that have depended on low-wage labour to succeed, times are changing. Wage inflation and rising fuel costs are changing the competitive landscape. Traditional methods of using financial metrics to make business decisions are not enough any longer.

Leading companies know that purely financially-driven decisions may work for decisions affecting machines and materials; but they don’t work as successfully with the workforce. This is because machines and materials have an intrinsic value which is understood and is easily translatable to a financial value.

People have something different to offer in addition to the mechanical performance of their job. They have the ability to offer new ideas. The challenge for companies is determining the value and subsequently the level of investment for the promise of a new idea. Those companies those are able to find the right balance of cost while creating an effective and motivated workforce that also provides new ideas will have a distinct advantage in the market.

Lean labour is an approach that allows companies to find increased efficiencies while still respecting the workforce and providing an environment that nourishes new ideas. Lean looks to replace low-value activities with high-value activities, rather than the simpler strategy of working employees harder. Core to its principles is respect for the individual who carries out the work. These attributes make lean labour a good guide for building an effective, motivated, and innovative workforce.

What are the typical challenges of lean labour in an organisation?

The principles of lean have been proven for decades and are well-documented. The challenge when focusing on labour is twofold. First is the evolving of the investment mindset in executives. They must believe that an employee who may be performing a relatively mundane task can also have an idea that improves productivity of the operation. Second is the building of confidence in employees that they are capable of these ideas and that they are valued by management (through recognition and fiscal reward).

Can you describe through a success story how lean labour gets effectively implemented?

There are many, but one that comes to mind is Glen Dimplex Home Appliance in the UK. In order to motivate employees to participate in creating a more efficient environment, executives are committed to vertical integration. Rather than subscribe to the current fad of outsourcing, Glen Dimplex looks through their supply chain to identify work that can be accomplished in-house, and subsequently invests in the training and equipment to execute on those projects.

As a result, employees know that ideas to improve productivity are rewarded with more work rather than lay-offs. Employees benefit from increased employment security and the development of a wide variety of skills that make their job more interesting. Management benefits from a motivated and flexible workforce that participates in contributing new ideas.

Is there a role for new approaches to costing in lean labour?

The first system any company puts in place is an accounting system that provides the information executives need to report on the health of the business as a whole and provide information to investors in a very uniform manner.

Because this information is readily available, it is often adapted for use by managers to make operational decisions. The challenge for manufacturers is that the financial data can often drive behaviour that actually reduces the efficiency of a company because it is not collected, organised and summarised in a way that can be used effectively in making product or customer decisions.

Fortunately, the opposite is not true: data collected for use in making managerial decisions can be used for accommodating both financial and managerial accounting needs. If it is important for a company to understand the actual cost of a product from design to delivery or the profitability of an individual customer, companies are going to have to re-think how they collect and organise their cost data.

Improving their labour costing is often one of the first steps a company can take. Because the granular data are already being collected to generate payroll and feed the general ledger, it is not a large step to also re-use to improve the accuracy of their managerial accounting system.

How can lean labour be applied to non-manufacturing sectors?

This is already occurring in some forward-thinking companies. Many companies recognise that by removing the concept of materials from a traditional manufacturing process, they have just described an information-based service organisation. Information employees using computers to add value to data is very similar to a machine operator using a stamping press to add value to copper slugs.

Unfortunately, many organisations reject the idea because it seems that the processes involved in service organisations are highly variable and that the flows of information are complex and often the activities are not repeatable. But this is actually a sign of artisan level craftsmanship. It is not unlike the ways automobiles were originally built in the early 1900s. In those days, automobiles were built one at a time and no two turned out alike. As a result, it took highly skilled craftsmen months to build a car that was not reliable and repairing them was extremely expensive because each car was unique. To me, that sounds very similar to the “product” the service sector often delivers today.

It is exciting to think of the improvements the auto industry now enjoys as a result of applying lean. Highly configurable cars are available with short lead times at a reasonable price. Reliability is the norm and a car can last for over 10 years. I believe that companies in the service sector could also achieve these same benefits by applying lean labour concepts just as the automobile companies that were able to achieve the transformation could disrupt the market and achieve significant gains.

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Printable version | Sep 30, 2020 9:31:47 AM | https://www.thehindu.com/business/Industry/applying-lean-concepts-to-labour/article2311022.ece

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