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 stop watches to the indirect labor count to hover over the direct folks with stop watches 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 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 success? In fact, in most companies, the further one can get from the factory floor, the more they make.

It sould come as no surprise that, after sending such a loud and clear message that indirect labor is so imortant - 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 the indirect labor. The truly lean companies are as focuused on labor as old Fred Taylor was. The big difference is that they pay scant attention to the efficiency of direct labor and look far 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.

1. 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.Discuss the pros and cons of Kevin Meyer'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.

Comments

1. Steve says
2. 12 January 2011 at 11:00 am
4. Bill,
5. I thoroughly enjoy reading your posts time and time again and this one is no exception. Like usual I'll make sure to read it a couple of times because there always seems to be nuggets of wisdom to pick up on the second round. Keep posting!
6. Matt says
7. 12 January 2011 at 2:45 pm
9. Do you think the same ratios apply to Service organizations as well?
10. Dennis Britton says
11. 12 January 2011 at 3:03 pm
13. Bill,
14. I sense a sales dilemma here. Since the people hiring lean consultants come from indirect labor, why would they be motivated to hire someone to tell them they need to reduce their rank?
15. Bill Waddell says
16. 12 January 2011 at 3:38 pm
18. Matt,
19. I don't know what the ratios would be in service - i.e. 3:1 or 4:1 people actually providing service to customers to people doing other work, but I have no doubt there is a lot of non-value adding labor in service organizations.
20. Anyone who has stood in a long line at a bank with only two tellers working, but can see three other bank employees sitting in front of computers or messing with a file cabinet knows that to be true. Service examples are legion, where service is slow but you can see lots of people doing things other than taking care of customers.
21. Bill Waddell says
22. 12 January 2011 at 3:40 pm
24. You're probably right - my business would improve if I took to telling people what they want to hear, rather than the truth. Frankly, however, it is way too much fun telling people things they don't want to hear.
25. david foster says
26. 13 January 2011 at 5:46 am
28. Re the bank example...I was at the bank once when the lines were very long and few teller stations open...I suggested to the branch manager that *she* could open up another station. She was very offended.
29. Joseph T. Dager says
30. 13 January 2011 at 7:53 am
32. Good Comments Bill. I would assume the ratios change depending on the type of industry but it is a great one to use. In manufacturing companies that I ran, it was one that I always monitored especially during growth cycles. It always seemed there was a tendency to add overhead during those times rather than working smarter. The old saying, "We will make it up in volume". The problem was when you stopped you had created dependent positions and a bunch of "internal customers," seldom a sound Lean Strategy.
33. Kathleen says
34. 13 January 2011 at 8:33 am
36. Re: Bank productivity.
37. I've often thought taxpayers could save a lot of money if the US postal service built smaller lobbies to mirror the number of clerks actually serving customers. Instead of 6 windows, reduce it to 2 or 3 because it is rare there are more than 2 or 3 clerks serving customers at any given time. Just think of the savings... lower building costs, furnishings, utilities etc.
38. Scott Allen says
39. 13 January 2011 at 6:01 pm
41. Interesting article, but seems to come from 1 side. I believe any good leader can evaluate his/her staff to determine where there is overage. While headcount and labor cost are obviously at the forefront of managers, the idea of creating a lean environment, and eliminating wasteful practices from order entry to time of invoice, does not mean to eliminate headcount. It may be very tempting to do so, but the real deal is to be able to handle more transactions, carry less inventory, and take less steps in processing an order(s) with the same people. What is often not talked about at this point, is the sales hooplah that needs to go on to bring more business in, as these once inefficient processes are streamlined. My thought here is, if your a company looking to start a lean journey, and you believe you are overstaffed to begin with, than cut deep first, than start your journey, don't do it in reverse, as it is bound for failure.
42. Bryan Zeigler says
43. 13 January 2011 at 6:27 pm
45. Just curious, do you count water bug material handlers as direct or indirect labor? I've experienced a company so focused on eliminating indirect labor they hurt the production because machine operators were looking for parts rather than making parts.....
46. Bill Waddell says
47. 14 January 2011 at 1:44 pm
49. Bryan,
50. They still have to be called what they are - which is indirect labor. In a perfect world (or at least a perfect factory) there would be clear, visually controlled, point-of-use storage for all of the parts and the direct folks could get their own materials without loss of production.