“Good judgement comes from experience. And experience? Well that comes from poor judgement.”
Some of us are old enough to remember Dean Martin. Whether he stated this quotation about experience and poor judgment, I will never know. But let’s face facts—it has merit. And some executives are displaying very poor judgment by not understanding what is happening in the manufacturing area when costs are on the rise. This sentiment is especially true when it comes to tight labor markets
Keeping your costs in line is hard enough when you are constantly fighting material costs in an inflationary market. However, it is not just material that is causing you headaches but the tightening of labor, which in turn will pressure your company to stay competitive for labor rates. Many of you are slow to the idea that you cannot expect your labor rates to stay flat, to somehow constantly fill the vacancies with new hires and to keep your costs and profits in line.
When clients call on my services, they are normally focused on their manufacturing output, and if this is the case, I ask two very simple questions:
- What is your labor rate ratio to sales as a percentage? (Shop labor costs with burden rates divided by total sales)
- What is your labor turn rate in your manufacturing? In other words, how many people do you have to hire monthly compared to the total staff to keep all of the positions filled?
It is a big red flag when I hear clients tell me anything above a 15% ratio of shop labor to sales. A healthy labor cost-to-sales ratio is less than 12%. So if they state that their labor to sales is above 15%—and some have labor costs hovering between 17% and 21%—and they are constantly hiring to fill all of the positions, then I know that two things are happing in their manufacturing without stepping foot on their property:
- The quality of their manufacturing is suffering because the new personnel do not have the same skills as longtime employees.
- Output suffers because the new personnel cannot produce at the same rate as experienced personnel. Also the output is suffering because they are not actually keeping all the positions filled, and the same issue of quality is hampering their output.
Oh, you can talk about all you want about creating a great working environment, which I do extensively as part of my consultations because you cannot implement lean principles without good employee relations. But if you are not keeping up on labor market wage conditions, you are only fooling yourself—hence the Dean Martin reference at the beginning of this article. All of you know this because of the labor rate increases you are paying your truck drivers, whereas it has been not as plain to see for the manufacturing personnel. So when you are ready to come to terms with pay rate adjustments, keep heart and know there are solutions besides expensive equipment upgrades.
Purchasing new equipment with some type of automation can and will reduce the labor per unit but only up to a point. I do not know how many times executives have told me that their salesperson lied to them because they did not get the bump they were promised or expecting. It is my job to explain in detail how to change their processes and actually achieve their goals, to in fact reduce their labor costs to sales. So, let’s take a look at some basic math to help explain where I am going with this.
For every one million dollars in sales, with a labor cost ratio of 12% and an average shop labor of $15.00 (fully burden), the total labor is $120k. That equals about 8k man-hours, ignoring overtime for these calculations. What if you need to raise your shop’s labor rate by $2.00? How will that affect the bottom line?
As you can see by the spreadsheet calculations, it is simple math that your labor rate will increase by $16k, which raises your labor ratio to 13.6% from the 12% historical rate. That is coming directly off the bottom-line numbers of your profits. However, what if you could increase your shop labor efficiencies while still increasing your hourly rate? This can and is being done by your competitors, and they are not doing this by just purchasing new equipment.
Getting an 11.8% gain in shop efficiency is sometimes so easy for my services that I look like a miracle worker. Many of my clients are operating below a 12% labor cost-to-sales ratio, and you could see this too. It is not just automation, and it is not just about the manufacturing processes. Lean manufacturing includes everyone, which means the entire company. Sales, design, and administration have a big hand in helping the manufacturing get the efficiency gains they need to achieve. Too many of you are too focused only on the shop processes while overlooking all of the other areas that contribute to lost manufacturing efficiency. An example is stopping a work-in-process order that has already been cut to do a rush order. That happens all too often with companies that have yet to figure out proper scheduling and better order process practices.
All operations need a blend of automated and non-automated equipment, balanced with proven, practical lean principles. By combining the best practices of industrial engineering, such as proper time benchmarks using man-minutes rather than board footage, along with lean practices, an 11.8% gain in productivity is a low bar to clear. Many manufacturers are getting more than that in efficiency gains, but when I start throwing out those numbers, too many people fall into the non-believing camp. So, let me state for the record that when your gross margins are above 35% (sales minus the direct manufacturing costs of labor and material), a 9% to 12% labor-to-sales ratio should be the goal for your manufacturing shop, no matter your labor rates.
Whether you are a new or a longtime existing operation, save your company a great deal of time and money by getting professional help along with training for effective implementation of lean manufacturing and time standards from Todd Drummond Consulting (TDC). TDC is the number-one expert on reducing costs and improving productivity in all departments of the wood truss and wall panel manufacturing industry, using proven and practical lean manufacturing practices combined with industrial engineering principles. Before you buy equipment, get TDC advisement! TDC does not receive any referral fees from any equipment or plate vendors, so you can trust TDC for unbiased vendor and equipment recommendations, which are shaped by the vendors’ customer experiences. But don’t take my word for it about TDC’s services—read what so many current and past clients have been willing to give for public testimonials: https://todd-drummond.com/testimonials/
Website: www.todd-drummond.com – Phone (USA): 603-748-1051
E-mail: todd@todd-drummond.com Copyright © October 2018