Current Trends in Production Labor Sourcing: Findings 1-3

June 8, 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:

A majority of firms are currently outsourcing semi-skilled workers ad hoc.
A diverse set of different semi-skilled positions is being sourced, but not as a focused lean manufacturing strategy.

Best-in-class manufacturing enterprises are integrating sourcing of production labor extensively in their domestic operations to hold off the threat of off-shoring.

1. A majority of firms are currently sourcing semi-skilled workers ad hoc.

The data suggests that US manufacturers are indeed receptive to sourcing production labor, and that many are already outsourcing major business functions within their manufacturing and supply chain environment. Over three quarters of the respondents are currently outsourcing some set of functions, as shown in Figure 2. Click on graphs to see larger images.

2. A diverse set of different semi-skilled positions is being sourced, but not as a focused lean manufacturing strategy.

A variety of functions are being sourced. The most common positions sourced are maintenance, industrial housekeeping, Packers, and material Movers. However, a diverse set of other functions are also being sourced, including kitting, assembly, logistics, inspection, production helpers, forklift operators, waste handlers, and other non-core, but vital positions as shown in Figure 3. Click on graph for larger image.

(Position titles from left: Material Movers, Packers, Industrial Housekeeping, Helper, Tow Motor, Maintenance, Tool and Die, Forklift, Waste Handlers, Kitting, Assembly, Trucking, Inspection)

Although many reported that adopting this initiative has allowed them to increase their efforts in core areas of increased quality, efficiencies and product improvement, the results suggest that there is no common theme towards how companies select functions for outsourcing. It may be occurring in an opportunistic manner, rather than as a focused strategy for leaning the supply chain. This latter statement is supported by some of the comments from executives below:

We went through a significant headcount reduction of 45% between 2001-2004 – so people left have a high level of seniority. We are a non-union shop, but use seniority-based rules. The people that are left have the attitude that “I’m lucky to have a job”.
We outsource freight loading for outbound shipments. We are in the process of rolling out a remote DC freight strategy – using 5-7 DC’s located regionally, which will consolidate all of our orders to dealerships. All of these DC’s will be outsourced. We are also establishing a $1B logistics service center – to cross dock all of our inbound parts onto service center local trucks for milk run deliveries to our production facilities. We have outsourced the cross docking operation in our DC’s to a 3rd party.
We have a specialty metals clause – a prohibition of buying foreign metals – an edict from DoD, which applies across our industry. However, we have a lot of outsourcing in the area of production labor. Over the years we have outsourced a lot of janitorial and maintenance. We outsource a lot of maintenance and tool cribs and service of replenishment. A lot of these suppliers used to just sell – and have increased their services programs in this area. A lot of programs focus on point of use such as kitting and putting components directly onto production floor. Our outsource provider functions as a distributor and physically loads materials to the floor.
We didn’t have anyone in place to manage spend in the contract labor area for a year. In that time, compliance was not good – we had about 170 sites in the US, and one provider had the lion’s share – 105. One was a pack center in Richmond which uses about 50% temp labor, and 50% full-time in-house employees. Most of these were packers – taking materials from point A to B, using a lot of dexterity, putting things into a box, but little else. We have some major pack centers, and our outsourced providers excel at it. We want to chase compliance – the need is not as significant in these pack centers. We also outsource housekeeping in some locations
We use temp labor for packing, general cleanup on the floor, and to drive port trucks.
We are not currently doing a lot of outsourcing of low/semi skilled workers, but a team initiating a six sigma project are exploring this strategy. It is a different proposition that outsourcing all of our forklifts, tool and die, maintenance, etc., but is focused solely on some of their contract workers with low skills and wages. The strategy is continuing to evolve.
We recognize the global sourcing model is to ship production to low cost countries, but there is some resistance to this. Moreover, the distances to China will fragment the organization, and prevent improved communication and coordination, so there is a lot of resistance to the prospect of global sourcing from other parts of the organization not associated with global purchasing.
We use outsourced labor in “bits and pieces” today. No one at our company is doing it full-time for actual labor. But it is definitely something we would consider. However, I believe that other companies in our industry are also outsourcing maintenance.

I believe it is the exact same model as third party contract manufacturing and logistics service providers – both of which we do now. So introducing it would NOT be a radical concept.

3. Best-in-class manufacturing enterprises are integrating sourcing of production labor extensively in their domestic operations to hold off the threat of off-shoring.

It should be noted that two organizations considered “best in class” have developed advanced levels of production labor sourcing, with a well-thought out model that was integrated into their strategic plan. Both organizations are in highly competitive global industries with very low margins, which had driven them to explore and deploy the production labor sourcing model. They have managed to reduce overall unit costs below an alternative off-shore program while maintaining complete oversight of product quality. What is very interesting to note, is that fact that by deploying this strategy, they have keep jobs in the United States and actually increased quality, production yields and streamlined work in process flow. These thoughts are captured in the statements below.

Our business model is very advanced in terms of outsourcing – we think of it from a different point of view. For any product we produce our systems with our outsource providers will integrate closely. You see the bills of materials and bills structures that look like an hour glass. It has a sameness to it, and it hits an explosion at the other end of the hour glass. We exploit that process as much as possible. All of that product and value, which includes motherboards, power supply chassis, videocards, etc. will be outsourced to one tier one who puts it together for us. The value proposition is that we will ship by water and others to keep it low cost – except if we need it airlifted. It only takes us about a day to build a server, 40 minutes for a desktop, except for accumulations – have large orders with special delivery mechanisms. With all that going on – we really do 60-70% of our manufacturing through other parties. We don’t think of it as outsourcing – it is a system of final integration.

We are a tier one automotive manufacturer, which a highly paid powerful union workforce. The union workforce is highly sensitive about any type of discussion around outsourcing of temp work, which would lead to a significant conflict if it were raised. However, this has led to an interesting new strategy. We are effectively creating a new business, staffed by younger people, who are not part of a union, and who can be paid $10-12 an hour. These individuals cannot actually be INSIDE of one of our plants, so the idea is to remove them and put them inside a separate annex. This strategy is in its infancy, and I am tasked with leading this effort. We are a privately held company, and are facing significant cost challenges, so the family members have delegated this individual to start up and run the company as a trusted manager. We are on JIT replenishment, so the non-union workers can do work such as cycle counts and replenishment that are not value-added, without having to pay high union wages. The union shop would have a mutiny if these people were located in the primary assembly facility. Work completed at the outsourced facility includes overflow inspection work, die cutting to support operations, packing, kit making, and recycling of packaging (regrinding and re-packing to restore it). The operation, although part of the process and supporting it, is envisioned to remain outside of the company, and exempt from union requirements. Eventually, it is foreseen that they may support other businesses not within our own organization as well. The motivation behind this strategy was that we were already supporting a number of local small outsourcing temp agencies in the area – and asked the question (“Why don’t we do this ourselves?”). Change is very tough – it is a rustbelt union environment, and this is viewed as an external change that will be an impetus to drive internal change within our enterprise.