Current Trends in Production Labor Sourcing: Conclusion

June 29, 2006 Staff

PART 1: Findings 1-3
PART 2: Findings 4-7
PART 3: Findings 8-10
PART 4: Conclusion

PLS is a fast emerging trend in the management of semi-skilled production labor. It is perceived by “Best-in-Class” manufacturing companies to be a critical element that has already impacted the competitive landscape and will increase dramatically within the next 3 to 5 years. Dr. Rob Handfield conducted a research study to develop key insights into the viability of this strategy by manufacturing executives, as well as the current state of PLS. Specific findings presented this week include:

11. Executives believe there is a business case for sourcing Production Labor, but lack the framework to create it.

There is a significant economic benefit associated with sourcing of the semi-skilled workforce. Based on our research, we believe an annual savings of 20 to 40% of current labor costs can be realized through a production labor outsource strategy,

One element from our research is clear. In the modern era of global competition, the companies that will succeed and continue to lead will be those that have a strong vision for lean manufacturing within the context of a dynamic and integrated supply chain. The core element that defines the winners from the losers will be an ability to leverage the expertise and knowledge of workers within your four walls, and establish collaborative results with external parties that can support your area of focus.

Many companies have already depleted other opportunities for cost reduction and value improvement through material cost leveraging, headcount reduction, and process mapping. Most, however, have forgotten to include low/semi-skilled labor as an opportunity to drive out waste. Production labor sourcing remains as one of the last, but also the most critical opportunities to achieving lean capabilities.

Without a commitment to focus on value-added activities and elimination of waste, managers will spend too much time “spinning their wheels” and will be unable to focus on those things they need to work on to be successful. To gain a competitive advantage, leadership teams will need to actively engage production sourcing as a competitive weapon in their arsenal. Production sourcing is NOT simply a way to reduce headcount or reduce cost; it is a way of improving economic value and total cost, when other options have been depleted.

To initiate this effort, leaders should engage with proven sourcing providers to initiate a formal study to identify opportunities. Companies should begin by assessing providers for their experience, track record, and knowledge in lean principles, as well as prior experience in cost savings and reduction. A careful analysis of these elements and a planned approach to deployment with the right mix of positions is necessary to obtain optimum results. Production services providers should be evaluated not just on unit price savings, but on the management capabilities to take out waste and improve the economic value of the entire manufacturing site. Our results show that costs savings of 20-40% are possible over the life of a project improvement effort. This is an opportunity that remains relatively untapped, and which executives should consider closely as a means for not just survival, but for success.

Consider the case of a single large manufacturing operation, consisting of 250 workers, of whom 50% (approximately 100) are considered semi-skilled workers.

Assume that semi-skilled workers working in-house are paid $50,000, which includes base pay plus retirement, health benefits, workers’ compensation, etc.
Assume overhead costs associated with maintaining an in-house workforce are accrued, and include HR personnel, payroll, and other fixed costs – which we will assume to be $300,000 on an annual basis.

Assume cost of managing this workforce for 100 workers is a linear function, as shown in the black line in Figure 11.

The second model is one that encompasses various levels of production services outsourcing are employed. An outsource provider of production labor services will typically visit the facility, map out the manufacturing processes, and develop a proposal to develop and train a workforce capable of replacing these in-house semi-skilled workers. Note that replacement or headcount reduction is not always required – but in fact, some workers may be asked to move to other areas for training and promotion if they show the right capabilities and are motivated to do so. This will often happen particularly if an organization is in an expansion mode, and this strategy can significantly increase capacity with no additional fixed labor investment. As shown in the red line in Figure 11, the cost savings associated with doing so are significant.

To begin with, a contract labor force carries a savings of approximately 60% over a fully burdened in-house staff position. This figure is based on interviews with a number of companies and contract staff providers.
There is often a management fee associated with a production labor provider, which may be a scaled fee of approximately $3,000 per position per year, which covers additional costs associated with managing, training, safety, insurance, workers compensation, and efficiency experts. When compared to decrease in time required to manage this workforce, the fee is equal to or less than the direct cost savings of redeploying internal managers, supervisors, trainers, HR and safety personnel, along with the reduced financial risks.

A well designed production labor management program includes a component that seeks to further “lean” out existing production processes to minimize the number of additional temporary workers in an environment, with the savings passed on to the customer. Preliminary research suggests that these savings may drive an additional 10 to 15 percent savings achieved through lean workshops, process re-engineering, and work studies. As the number of outsourced positions increases, this number increases as the potential for re-designing the workflow and achieving efficiencies increases. In one case, the cost savings from production cell efficiencies totally offset the management fee in the first year.

The combined potential savings of an in-house versus outsourced production labor service is shown in Figure 11. The projected savings are significant, especially as the number of outsourced positions increases. Projected savings can be in the order of 20 to 40% (30 percent savings is shown in the illustrated example). Next, we explore the perceptions of manufacturing executives to the possibility of using outsourced production services, given the existing state of the manufacturing landscape in the U.S.

Based on our research, 100 percent of executives noted that having an integrated workforce with a training and safety component is unique and desirable. This is also reflected in their comments.

We have had no other problems with our other outsource contractors. I think this is a trend that will continue, as organizations continually seek ways of reducing costs. If you don’t do it, somebody else will and will take your place in the market.
One private company stated that the CEO was opposed to any form of outsourcing, and wants to control all aspects of production using in-house people, using internal performance measurement systems.
We are actively doing it and will continue to do so.
“There is no question that outsourcing of the semi-skilled labor force is a trend that will shape the industry and which will be required for survival”.
Are the skills right? And is there a business case? Yes – it is something we would like to explore.
We do not need skilled support every day, except in the peripheral areas that are not in our core business. It makes sense to do this – as long as it is not too highly tiered.
We used temps to buffer our seasonal spikes in business. Are we getting the quality we are willing to pay for? There is more production work that requires using learning principles. It IS making a different. The problem is not the temps – but it is part of a temp workforce strategy. It is naïve to think that we are not competing with low cost countries who are paying people less.
Interestingly last week, I had a visit from a quality assessment and audit team from Chrysler. They wanted to interview me because of my book “Creating a Lean Culture”, in Productivity Press (2005). We were doing an exchange of business cards, and I learned that they are a supplier quality team which visits problem suppliers – a form of “outsourced supplier development” team. They deal a lot with the “yard holds” – cars that have quality problems and need work. They identify the supplier problems, go to suppliers, and solve them – but are all contractors with Kelly Services! They were very serious about their work – middle aged technical professionals. They are part of Chrysler – but not really! An interesting development.
We have a couple of key suppliers that work for us – and we do outsource form time to time the assembly process. It is a skewed opinion – and they might work for us, to have them on someone else’s payroll. Results have been very good – but is skewed, since they are trained in our business and working for a key supplier. No real experience outsourcing off the shelf type stuff. With quality checks in place – I suspect that you could make it better. I would imagine has to be a good working relationship with your supplier – and an interaction to ensure our standards are being met. Only make 200 units per year.
Tough area to manage – unlike anything else. You are not sourcing something you can count on to show up – need X number of people – these people have free will and can show up or not – and makes managing a commodity very attractive some days versus managing people. This is like HR without the glamour! HR’s red-headed stepchild.
Outsourcing of temp labor is important for us, but building a business case is also difficult. It is a highly emotional subject within our company. We recognize that we need to face it and have launched a six sigma project to explore it further.

Toyota is also actively utilizing this approach. They have developed their own integrator, called Toyota TUSHU, which is essentially a materials company that handles all of Toyota’s MRO. They fix product, and sequence inbound shipments for the Toyota assembly operation. They are “joined at the hip” in terms of their information systems, and also outsource all of their low skill manufacturing to TUSHU.