Current Trends in Production Labor Sourcing: Findings 4-7

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:

4. Executives believe that production labor outsourcing will continue to grow rapidly in the future.
5. Best in class companies are tightly integrating with outsource providers through multiple inter-company multi-functional teams.
6. The decision to outsource labor is evenly split among the companies between senior management and middle management levels.
7. Executives feel that their managers spend too much time (UP TO 50%) managing semi-skilled workers.

4. Executives believe that production labor outsourcing will continue to grow rapidly in the future.

The respondents indicated a positive view of production labor outsourcing, and that it is a trend that will continue to occur in the future. Almost 90% of the respondents viewed it favorably. Only one company, a private company, did not consider outsourcing as an option, and this was due to the perceptions of the founder and CEO of the company, who is vehemently opposed to this trend.

The responses from executives suggest that outsourcing of production labor will increase due to the need to increase competitiveness, focus on core competencies, reduce costs, and keep jobs in the US which would otherwise be shipped to China. As the need for flexibility and customer closeness increases, companies will need to find ways to keep jobs in the US to maintain responsiveness and flexibility to US customer requirements, while continuing to drive out costs. Executives’ concern over loss of intellectual property in China or India is also top-of-mind as a reason to keep production in the US. These thoughts are captured in the statements below.

• Our full-time workers on the floor have no animosity towards the temps. Much of the discussion currently takes place at the corporate level. The decision is made primarily on the basis of increasing profitability. Another trend are companies bringing work back from China in furniture manufacturing. They are seeing rapid changes in products and design that are too frequent to be managed in a long lead-time environment. So the work is staying more at home. We outsource items such as casters and locking mechanisms overseas to China, but otherwise use local production.
• We have to outsource. My title is materials risk management – and we are looking at the entire supply chain for opportunities to outsource pieces that we are not good at.
• We are outsourcing when appropriate to meet a business need. We have a lot of proprietary stuff – and are very conscious of IP in China and India – so don’t outsource a lot. We do not use Indian call centers, because of the fact that when a technical person calls for a technical solution – they need to have someone with the technical background, so it can only be done in-house. However, we outsource things that aren’t core to our business.

• Outsourcing will definitely increase. Temp labor is double digit growth – 11%, and I only envision that increasing. I look at how unstable the marketplace can be – and we will see tendency of our locations to not want to hire. We will see a lot more temp labor in those areas. Other trend is to “try before you buy” – especially in smaller locations – want to bring people on as temp but may want to convert at some point in the future – have an agreement in place to say after a certain number of hours, can convert at no charge. Temp labor will do recruiting.

5. Best in class companies are tightly integrating with outsource providers through multiple inter-company multi-functional teams.

One company we interviewed noted that they have multi-level communication channels to facilitate collaboration with their outsource production services suppliers. The provider has become an integral part of their production team and has formal KPIs, production goals and standards. In essence, this has moved to a pure-play, “company within a company” model, bring the best in off-shoring manufacturing within the tight control and four walls.

• It takes a team of IE’s, of product engineers, of supplier quality engineers, procurement, and logistics people that will wrap around an outsource– and an equivalent of specialists and planning folks from the management team from that supplier – to go in and drive that process. Multiple people from suppliers are in our local facilities, including field application engineers (FAE’s) who live in our facilities and they are the feedback mechanism to go back to their company, institute supplier quality processes, failure analysis, and leaning of processes. We have a lot of real-time internet data systems that go between us and the supplier – that we call collaborative and reciprocal information. Databases are used to share updates on what is going on, when material gets here, quality and yield of material as we use it. Achieving this level of integration requires specialists involved in managing the process. But the benefits are that you have moved manufacturing to a lower cost center with higher capability, and are keeping it in the US. And you have moved some of the responsibility in terms of being world class – which is now with the supplier. We almost have stickum – we are that close with our outsource providers. You will see daily performance, weekly performance, quarterly performance reviews between us and suppliers – this is not just in terms of making the product – but also deals with people who are providing service technicians for us, the HR services for us – and our processes are robust as a result.

• A contract labor force is a highly appealing model. We will need to outsource molding and assembly to a non-union workforce to be competitive. Outsourcing to low cost countries is not feasible, as the long leadtimes associated with this process are unacceptable, so the work needs to be done locally. The only solution is to have a local non-union workforce do the work. To facilitate this, we have established processes to train workers in constraints management, and have located HR people on the floor. Their quality group sets specifications, and they currently have 7 people who are flexible unskilled workers in their operations. Management is strongly pushing this model, which is in a pilot phase, and which could expand in the near future.

6. The decision to outsource labor is evenly split among the companies between senior management and middle management levels.

About 55% of the companies noted that it was a corporate level decision, while 45% noted that it was not an integrated strategy but the decision was made at the plant level. The latter group noted that there is a need for a sourcing strategy that aligns preferred vendors for outsourcing of production services.

Further, the comments suggest that there is not a consistent strategic imperative that is driving the decision across the organization. Building a business case and deploying the strategy without a support function is also a problem. Companies are seeking to find specialized production services companies that can provide a single integrated point of contact across multiple plants, as shown below.

• The decision is made right now at plant level – but this has changed. We have worked hard to grow procurement’s relationship with corporate HR organization, and helping them to understand what temp labor brings to the table. Our usage will only increase. We also need to educate our managers in co-employment, because it is not something that is part of training process when people come in. I have a friend just named as a plant manager – small plant, with 1-2 temp labor positions. But this individual is not training on co-employment, and what you can and cannot do. The fact is, co-employees don’t work for you, and there are things you can and cannot do in these situations.

• The team is struggling to get good data around modeling and creating the business case. What is the inefficiency rate for using temp workers, versus low cost internal workers. There are many different opinions within our company regarding what should be done or not, and the six sigma team is struggling to get good data around this project to justify a business case. Our plant manager is in favor of outsourcing temp labor, but is struggling.

7. Executives feel that their managers spend too much time (UP TO 50%) managing semi-skilled workers.

Executives feel too much time is spent with semi-skilled workers (between 20 and 50%) As shown Figures 7 and 8 below.

Several managers mentioned it is “far easier to motivate a $60,000 a year skilled worker, than a $10/hr worker”. Work ethics are very different between the low and skilled workforces.

“Skilled workers give two weeks notice” when they leave. Most low/semi skilled workers just, “don’t show up for work because they have already started a new job”. Another plant manager commented, “one new material handler resigned when I ordered breakfast from him at the local fast food drive-up. I was handed his PPE with my order”.

Conversely, the skilled workers suffer from reduced attention to their issues including production quality, streamlining and product enhancement. One skilled worker commented, “I had a major production issue, but my manager was too busy covering no-shows, which stopped the shift”.

Further, there is a gap between the ideal and actual amount of time that managers spend on various value-added and non-value-added activities. Executives believe managers spend too much time on supervising non-skilled workers, and not enough on continuous improvement and six sigma projects (Figure 9).