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Current Trends in Production Labor Sourcing: Findings 8-10

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:

8.Barriers to outsourcing production labor are significant and multi-faceted.
9. Executives who reported and validated success through sourcing production labor, started with a clear vision.
10. The production labor services market is highly fragmented with a wide variety of companies competing for this emerging growth.

8.Barriers to outsourcing production labor are significant and multi-faceted.

As shown in Figure 10, executives struggle with some key doubts regarding the issues associated with outsourcing. Number one on the list is the risk of quality problems from high turnover and significant training costs. Seamless integration of “their” workers with our workers, along with “who is the boss” confusion is another key concern expressed. Additional issues on how to identify and justify the value and the business case for outsourcing of semi-skilled workers were common throughout the interviews.

Legend for chart: (l-r) Lateness, Absenteeism, Quality, Lack of training, IP loss, Working with HR, Selling value, Cultural alignment, Business case, Union

There is a need for production labor providers to document and prove (case studies and like-industry references) the business case, along with a guaranteed methodology that ensures executives the quality and training will be as good as or exceed the current set of semi-skilled workers. This is also reflected in the following comments:

  • When we outsourced to our current provider, we experienced a lot of quality problems, and end up with a lot of product in the repair bay. People put things together backwards, etc. We have had a mixed experience – and have had a lot of unreliability when it comes to people showing up. We have a lot of tardiness and attendance problems, which results in lost production. People may show up for an hour then leave, or work a week then leave. The real problem is that there is a lot of job instruction required, and training is a real problem. How do we train people to perform a quality job? It is a chronic problem. We only pay these folks $9 an hour. An interesting empirical approach would be to see if there would be any improvement in performance if rates were increased to $10.40 an hour.
  • The biggest risk to outsourcing work to temps is the risk of poor quality, associated with high turnover, and having to re-train people due to do the work over and over. This can lead to customer dissatisfaction and costly rework if it is not monitored. However, it is difficult to quantify business risk and establish it into a decision-making process such as Six Sigma.
  • The biggest challenge is that the provider has to prove their competency – which means moving towards an audit-type role. Because of tight government FDA regulatory requirements on our product – the provider must be able to prove and ensure that they meet standards – since in the end we are ultimately held accountable for the quality of the product. The competencies that must be met must be acquired through training. The individuals working on site must possess the same set of criteria and competencies as any FDA regulated factory, which includes how they do the job, following Standard Operating Procedures (SOPs), and self-assessments. However, I don’t believe this is as difficult as it sounds. The provider could take the outsourced cleaning SOP’s, and simply train their people to a new set of SOP’s, telling them “that is the way you MUST do it.”
  • We will hire contractors for 3 month periods – they are primarily people who work for us, retired, and want a part-time job. We cannot get someone off the street. Most of what is required is knowledge. People can’t put together our equipment without that knowledge, and do not generally have the technical skills.
  • The buy-in from HR was a big issue. I have buy-in but they do not feel that they have to be involved. Co-employment is something that HR is not aware of, even though as they become part of your organization, they work for a third party and work alongside your people. As that usage increases, the potential for problems increases. I have tried to educate myself on this issue – and realized that there is not a good knowledge base about -employment law. If you give awards to employees for meeting safety milestones, can you do the same thing for temp labor, or are you breaching something in terms of co-employment? A competent production labor outsource company should know all these issues and educate, as well as lead the process.

Successful deployment of this strategy did reveal significant returns in both hard cost savings and increased quality and production. In all cases, selecting a highly competent production labor provider and engaging them early in the process was a critical element.

9. Executives who reported and validated success through sourcing production labor, started with a clear vision.

Certainly this is an emerging model and quickly becoming a mainstream technique to control costs, reduce labor variances and remain competitive. Global companies challenged with keeping jobs within the United States while maintaining tight control on quality and increasing production must assess this outsource model.

We recommend the following steps in deploying a production labor outsource model:

  • Group functions into skilled and semi-skilled work.
    • Semi-skilled work is defined as highly repetitious, simple functions which require limited on-going training. Semi-skilled wages are at the bottom to mid-range of a pay scale. Typical functions are material movers, WIP handlers, prep and stage workers, kit installers and machine tenders.
    • Skilled work requires a technical understanding of a complex function, empowered to correct production variances and significant on-going training. Skilled wages are at the mid-range to the top of a pay scale. Typical functions are machine operators, line inspectors, die changers, finished goods inspectors and kit assemblers.
  • Identify two or more production cells early in the WIP (lower total unit cost) where significant semi-skilled tasks occur for initial production labor sourcing. To properly assess the impact of sourcing labor, production cell integrity is a key requirement. Sourcing a production cell allows a service provider complete control of the process and quality assurances. This also allows a company to track variances and hold providers accountable for all functions within the cell. Finally, contractors have the ability to price their services by the piece rate thus transferring cost variances from the company to the provider. In short, your provider becomes a “company within a company” with all the benefits of sourcing while maintaining close control over production standards.
  • Select a production labor provider with proven programs, systems and methods to quickly adjust to meet production changes while reducing risk and exposure. There is a trend emerging where temporary staffing agencies are expanding into the production labor market. Their price model is predicated upon increased headcount and billable hours that appear to be counter to the benefits of a production labor strategy. See “OUTSOURCING TEMPORARY LABOR” below for further details.
  • Obtain an executive sponsor to support this strategy and defend against internal opposition from various departments including human resources, safety, training and purchasing.

10. The production labor services market is highly fragmented with a wide variety of companies competing for this emerging growth.

As can be seen in the chart below, the production services market is highly fragmented with a wide variety of companies competing for growth. However, it should be noted that these providers were spread over a variety of services. Temporary staffing companies have extended their services to compete. However, upon closer review of the marketing materials and discussions with service executives, they only provide an on-site HR manager (referred to as “Vendor-On-Premise”) and have limited industrial expertise to assure consistent production performance and quality control. For many temporary staffing companies, production labor services were formed to compete in the marketplace, not as their core business.

Legend: (l-r) Manpower, Diversico, Servicemaster, Kelly Services, Unnicco, GCA, Addecco, Canteen, Aeramark, Grainger, United Fasteners, Coorflex, Adepco, Created internal 3rd party

Through our interview process with numerous “Best-in-Class” manufacturers, we discovered a dedicated provider of outsourced production labor, GCA Production Services. To reduce risk and assure continuous quality, this company has developed a comprehensive program using the principles of Lean, Six Sigma and ISO. Their services are priced as a mark-up to wages plus nominal management fee or on a piece rate basis. Both price options include a quality guarantee and gain-share program.

Clearly, the ability to have significant “skin in the game” is a major factor in their success to date. Far from just supplying workers to the front door, their program includes a formal lean training, task documentation, training and validation, safety and expert management. Of particular interest is the fact their CEO is credited with pioneering the outsourcing of critical cleaning services for the healthcare industry. It would appear the same business drivers in healthcare also exist in manufacturing.

One “Best-in-Class” manufacturer revealed an annual cost savings in excess of $30,000 per function (worker) outsourced. To date, this manufacturer has realized savings of $12M per year and has incorporated production labor sourcing as a strategic initiative for the next 3 years.

Our review also suggests that GCA appears to have the greatest potential appeal in that they meet the requirements of executives interviewed in the study. Based on this revelation, we are conducting an assessment of other providers of Production Labor Services. The results of this study will be published in the Fall of 2006.