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The Approach to Labor Cost Reduction

Improvements in both productivity and humanity have long been major themes at factories everywhere. The market envi-ron ment and needs differ from one era to the next, and facto-ries must always attempt to make improvements in productivity and humanity that match the current market conditions.

Until recently, the general supply of products lagged behind demand, which in many cases meant, “If you can make it, it will sell.” Factories sought to expand output volume, and looked at productivity-boosting measures as a means of doing just that. Human labor became more and more specialized, and factories tried to give workers simple tasks that they could master quickly. This simplification of worker roles as little cogs in a big machine tended to rob workers of the joy of creating things, but it served the factory’s objective, which was to have a stable and highly regimented workforce that could turn out increasingly greater volumes of products. The following equa-tion describes this volume-oriented approach to productivity.

PRODUCTIVITY PRODUCTION OUTPUT PRODUCTION

↑ = ↑

IINPUT →

Eventually, the overall supply of goods overtook demand, leaving more room for diversification based on consumers’

individual preferences. Manufacturers began to notice that their large production runs of identical products were no longer selling as briskly. Sales forecasts heralded the dawn of a new era, in which high volume output could no longer be assured of high volume sales.

Manufacturers began searching for a better way of mak-ing products that would sell. This was the advent of today’s wide-variety, small-lot era. The soil was right for the JIT pro-duction system to take root. In contrast to the large-volume production approach that emphasized production and was thus a “product-oriented” or “product-out” approach, the new approach for the wide-variety, small-lot era emphasized the customers (that is, the market) and was a “market-oriented”

or “market-in” approach.

Naturally, this new era saw growth in production volumes slow to a trickle. Manufacturers reckoned that the only feasi-ble way to raise productivity in such a sluggish market climate was to reduce labor costs and other product input costs. They sought to cut labor costs by investing in greater mechaniza-tion and automamechaniza-tion, but such improvements require a lot of investment funds and cannot ensure steady productivity because of rapidly changing market needs. Eventually, people started talking about building products more economically by matching production input to customer orders. This is the basic idea behind the labor cost reduction approach described in the following equation:

PRODUCTIVITY PRODUCTION OUTPUT PRODUCTION

↑ = →

IINPUT ↓

Thus, we can define labor cost reduction as meeting the needs (changes) of the next process (ultimately, the market) while incurring as few personnel costs as possible.

Let us suppose, for instance, that a factory employs ten people to produce 1,000 units per month of product A.

However, a recent slowdown in sales has shrunk customer

orders to just 800 units a month. The traditional response to this situation is expressed in the following equations. The equation expressing the previous order level is:

1000 UNITS (Monthly output)

10 PERSONS (Labor ccost)

100 UNITS (Number of products produce

= dd per month

by each person)

The equation expressing the new order level is:

800 100

UNITS (Monthly output) UNITS (Number of products

produced per month by each persoon)

8 PERSONS (Labor cost)

=

The arithmetic is quite simple; assuming each worker can produce 100 units per month, the factory simply needs to reduce its workforce from 10 persons to 8 persons. However, it may not be so simple to reduce a ten-person workforce by two persons, especially if each of the ten workers specializes in handling just one type of machine.

This problem has forced some manufacturers to discard the concepts of single-process operations and strictly defined job roles and to instead embrace the new notions of multi-process operations and flexible job roles.

The realization of this kind of labor cost reduction is not with-out its technical obstacles, and the chief obstacle is a psycho-logical one: giving up the fixed idea of large lot production.

The Difference between Labor Cost Reduction and Labor Reduction

Terms such as “labor reduction” and “labor savings” are famil-iar to all of us. We tend to think in these terms when con-fronted with the following types of situations.

Let us suppose that a factory has been using a single-spindle drill that required some manual assistance in drill-ing. Then the factory managers decide to buy a numerically controlled (NC) drill to automate more of the drilling work.

However, the NC drill still requires a human operator, and so the factory is unable to reduce its manpower even after pur-chasing it. Whereas the worker used to be busy with manual drilling, now he or she simply sets up the workpiece, presses a start button, and watches the NC drill do the drilling. The NC drill has realized a labor savings (that is, the worker has less work to do), but not a labor cost reduction.

This case illustrates the meaning of the familiar term “labor savings.” The investment in the NC drill has raised the plant investment cost without bringing a reduction in labor costs, so overall costs are actually higher than before.

Another familiar term is “staff reduction.” Staff reduc-tion means responding to demand fluctuareduc-tions by simply reducing the number of workers without making any waste-eliminating improvements. However, if we just reduce the number of workers without making such improvements, the result will be labor intensification—in other words, more work to do for the remaining workers. Obviously, this kind of labor cost-cutting cannot go on for long. The following short definitions should help clarify the distinctions we need to make among labor reduction, staff reduction, and labor cost reduction.

Labor reduction:

◾ Reducing the workload without cutting labor costs.

Staff reduction:

◾ Reducing the workforce without remov-ing waste (which means a heavier workload for remain-ing workers).

Labor cost reduction:

◾ Removing waste, then using the

minimum required workforce.