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Outsourcing Production Labor: A New Breed of Lean Manufacturing

The following report is introductory to Dr Handfield’s research on “ Current Trends in Production Labor Sourcing

Manufacturing companies are beginning to examine the business case for outsourcing production tasks and functions to contract labor providers. There is a major difference between temporary staffing agencies and contract labor providers. Temporary staffing agencies supply companies with workers on a short-term basis, either to fill in for absent employees or to supplement existing staff during particularly busy times. Temporary employees are employed by a staffing company, but the work they do is for the client company. This means that the staffing company is responsible for the employee’s salary and other employer expenses, and the staffing company charges the client company for the work done by the temporary employee. There is a high risk of co-employment under this model with significant financial risks.

An increasing proportion of workers are finding permanent job positions through contract labor providers, which reflects the trend towards changing demand, on-demand supply chains, and dramatic increases in the need for a “flex and respond” capability in the supply chain. As customers demand increasing responsiveness in a lean environment, more organizations are finding their production requirements will shift dramatically. The need to “flex” the workforce is becoming a major requirement for success in the 21st century business environment. Notwithstanding this trend, a majority of contract employees eventually become permanently established at companies where they have previously been contracted to. Nearly one-fourth of the client companies which responded to the survey now have contract employees working permanently in their company. Several companies interviewed use contract labor as the only method to hire new employees. A “try it before we buy it” strategy. The benefits are significant, including reduced 90-day turnover, reduced training and benefit costs, increased first-day productivity and increased productivity metrics.

The contract labor industry is divided into the following sectors:

  • Office and clerical. Accounts for roughly one-third of the staffing industry’s revenue and payroll. It covers secretaries, general office clerks, receptionists, administrative assistants, etc.
  • Professional/Technical. This combined sector used to be broken into several smaller divisions, including professional, technical, health care and marketing. All these areas have been growing, thanks to shifts in the market as more people with higher skill and education levels look for the flexibility provided by temporary and contract work, and as the demand for these people increases. As in the first two sectors, the professional/technical area now accounts for about one-third of industry revenue and payroll. It covers a wide range of positions, including engineers, scientists, lab technicians, architects, technical writers and illustrators, draftsmen, physicians, dentists, nurses, hygienists, medical technicians, therapists, home health aides, custodial care workers, accountants, bookkeepers, attorneys, paralegals, middle and senior managers, and advertising and marketing executives.
  • Industrial. Currently, it accounts for one-third of the staffing industry’s revenue and payroll and includes the following positions: manual laborer, food handler, cleaners, assemblers, drivers, tradesmen, maintenance workers, etc.

Our study, “Current Trends in Production Labor Sourcing,” focuses primarily in the latter category, in a specialized niche known as “production labor services”. In the production labor environment, contract workers are often brought in to help close the gap that may arise due to unplanned increases in requirements, seasonal demand, temporary production problems, or other reasons. They may be employed for a period of time and then released, once the “crisis” is over.

We are also finding, however, that some organizations are embracing outsourcing production labor for another reason entirely: to “lean” out their manufacturing supply chain. Moreover, some organizations are finding that they can keep many of their jobs in the US instead of “off-shoring” them, by employing production labor services, especially in the area of “semi-skilled” workers. This worker group is often characterized by high turnover, significant on-going supervision and high training and safety expenses. When low/semi-skilled workers are outsourced to providers who specialize in augmentation and production labor services, managers are free to focus on value-added core competencies that directly impact their business, drive out waste and increase operating margins.

Companies are turning to contract workers for a variety of needs. The idea driving this trend is simple: bring in people to meet the demand for labor or expertise only when those people are needed. Companies executing this strategy are able to reduce fixed expenses by maintaining a smaller direct (or permanent) staff. When work loads increase, they are able to bring in top quality temporary workers using a human version of a just-in-time inventory system. As an added benefit, the cost of a contract worker is often lower than that of a full-time employee due to the elimination of benefit expenses.