Most of us have one ultimate goal in our work. For those with a Lean bent, it might be to increase customer value. For Operations it could be to achieve the perfect order or in Payroll, deliver the perfect paycheck. The CEO however, has the objective of achieving two goals. The first is success in their customer markets. The second is success in capital markets. What makes these two goals particularly difficult is that to be judged successful, they must achieve both goals simultaneously. To achieve the first goal, the CEO must deliver more customer value than their competitors through better products, services and effective use of their channels. As a measuring stick, most of us would gauge success in the customer market by a company’s revenue or profit. For CEO’s however, they must compete in a second simultaneous competition; the capital market. This market is comprised of investors that make up hedge funds, pension funds, mutual funds, private equity and banks. These investors only interest is determining the correct valuation of a company to ensure they make wise investment.
For the capital market, absolute profits are very important, but that’s not enough. Investors want to understand how a company earned that profit. That’s because the size of the profit doesn’t provide any indication about how much effort it took to earn. For example, two companies may be generating the same amount of profit at the end of the year on the same revenue. These two companies earn the same profit, but are valued very differently. The reason for this may be that one is competing through low-cost production and has high levels of debt due to automated factories. The second may be competing on high levels of service. It has no debt but high labor costs. Even though the revenues and profits are the same, investors will value these companies differently which in turn influences the behavior of their respective CEO’s.
Fortunately for the CEO, they receive lots of help figuring out how to balance the company’s performance in each market. The CFO offers recommendations on how to make the many financial ratios, which investors use in part to judge a company’s value, look better. To improve these ratios, companies can sometimes make decisions that are hard to understand. For example, it is not uncommon to see a manufacturer spin-off a slow growth but reasonably profitable plant because it is asset intensive. Simultaneously it enters into a contract to buy the exact same materials from the new owner. One likely explanation is that the company is trying to continue making the products it needs for its customer market while increasing its return on assets (ROA) ratio to increase its valuation in the capital market. Changing how a company operates to improve its valuation is extremely difficult. While the Return on Assets ratio might improve, it could easily impact the customer market: Operations must now incorporate a longer supply chain or absorb higher costs with increased SG&A costs from its new “supplier”.
Finding the right balance between these markets is where there are often spicy debates between Finance and Engineering, Production, Services, and Sales & Marketing. These operational groups can often find themselves at odds with the CFO as they help the CEO determine what is important in customer markets by understanding how external influences such as competition and regulation are affecting the customer market.
It’s obvious that with interdependent pressures acting upon a CEO as he or she tries to increase value in both markets that a continuous stream of really good ideas is required. This observation is supported by the CEO’s polled in the Council on Competitiveness’ latest Global Manufacturing Competitiveness Index: For the second time in a row, over 400 CEO’s around the world ranked an innovative workforce as the most important competitive driver to their company.
What’s surprising though is that with all the metrics a company puts in place to measure the fiscal and operational health of a company, very few are able to overtly measure and improve their employees’ innovative ability.
Fortunately, there are lots of great examples of an engaged groups of people exhibiting exactly the type of innovative behavior that CEO’s value. The example I’ll share is of magazine subscribers. I subscribe to Cook’s Illustrated and Fine Homebuilding. Both of which provide articles to improve their subscribers’ skills and knowledge. One feature both publications have is a reader’s tips and tricks section. Every issue, each magazine publishes dozens of ideas that its subscribers submit. These ideas are exactly the kinds of ideas a business needs:
- How to use common materials to replace expensive materials.
- How to use leftover materials rather than discarding them.
- Creating simple techniques that turn a hard job into an easy job.
I don’t believe cooking and building homes attract individuals with an above average ability to innovate. Rather the cross-section of individuals tells me that under the right conditions all employees have the potential to be a part of an innovative workforce. The trick is to harness that same innovative and productive energy at work that they display about their personal interests.
To achieve this for my clients, I start with organizational behavior 101, but with a twist. Using Maslow’s hierarchy of needs as a framework, I simplify it into three stages: Security, Productivity, and Engagement.
If individuals are insecure about their jobs or feel unsafe at work, they are not likely thinking about ways to incrementally improve the company’s use of an injection molding machine. Creating security has many common themes but is different for everyone. It doesn’t mean every job has to have the same level of security. Instead it means that the employee understands and is comfortable with their environment. Most employees would feel secure in the following environment:
- Employees are paid in accordance to their agreement with the company (presumably risk adjusted)
- Employees receive regular communications from leadership that provides transparency as to how the company is doing and where it’s going
- Employees understand the rules within the company
- Employees are treated fairly and equitably relative to fellow employees
- Employees feel safe in their work environment
With security complete, individuals can be productive. Secure employees want to contribute and add value to a company. They didn’t sign up to fail. Their ability to be productive is dependent on a workplace that creates an environment and situations where they can be successful.
- Employees know what to do to be effective in their jobs
- Employees can measure their individual and collective contributions
- The workplace environment and processes work with them to be productive rather than introducing obstacles.
- The company values an employee’s personal time as much as it values work time.
When employees are secure and productive, they become engaged. Companies who have engaged employees are receiving much more value from their employees than the wages paid. Similar to magazines’ tips and tricks sections, companies have the ability to harvest the ideas created by their engaged employees. To activate this potential, companies need to create an environment where:
- Individuals are encouraged to contribute ideas and are recognized for their work and ideas
- Individuals can map their contributions to the success of the company
- Reasonable failure is tolerated and even encouraged
Similar to developing the process to create a new service or product, an engaged employee can be developed. Companies that have achieved an engaged workforce have figured out how to balance the constraints of the customer, the money, and their employees. For the CEO in the middle of a balancing act, their success hinges on creating an innovative workforce and improving their ROHC – Return on Human Capital.
Outsourcing has traditionally been the province of Purchasing and Operations. Focused on lowering costs, these departments would generally look to a small number of low wage countries.
There are two dynamics that are causing production locations decisions to change: Increasing labor costs are making outsourcing for lower labor costs less attractive. Secondly, politicians are increasingly using their power to create jobs in their own countries regardless of the cost of labor. This is going to put new pressures on Operations and HR to manage their workforce more effectively to remain globally competitive.
How do politicians wield this power? In different ways, but each reflects a need to convert regulatory authority, purchasing power or control over natural resources into quality jobs. To understand how this works, let’s take a look at a couple of examples:
In the U.S. the New York Transit authority purchased $599 million worth of trains last year from Bombardier. A Canadian company. The trains they purchased are manufactured in Bombardier’s Plattsburgh, NY facility. The state government has effectively converted purchasing power (of the rail cars) into good jobs in upstate New York.
“Bombardier and our community leaders work tirelessly to ensure that the region continues to emerge as an industry leader in the assembly and manufacture of transportation equipment.”
Let’s go to China to see a second powerful example of government at work. In November last year, Jaguar Land Rover announced that they were partnering with Chery, a Chinese Auto manufacturer.
“The joint venture will blend together the heritage and experience of luxury premium vehicle manufacturer Jaguar Land Rover with the intricate knowledge and understanding of Chinese customers evident at Chery,” JLR said.
Interesting comments, although it seems that Jaguar Land Rover was doing a pretty good job at understanding the market on its own as The Wall Street Journal reported yesterday that sales increased by 32% over last year on the back of a soaring Chinese market.
Maybe there is more than market knowledge being sought by JLR. The auto blog provides a little more clarity. By setting up local automotive production (which requires a joint venture in China) JLR can also avoid the 25% import tariff it currently faces on its products.
Another example of how the government can use its power, in this case the ability to tax and control company formation, to encourage the increase in skilled local jobs. But like most companies, Chery has its eyes set on more than producing cars for the Chinese market. Auto Blog continues…
“The partnership with Jaguar Land Rover signals the start of international expansion and strategic development for Chery Automobile.”
Every effort at creating jobs does not go so smoothly. In this case we’ll move to India. There’s a pending change in India’s regulations. The Wall Street journal reported on these draft regulations a couple of weeks ago.
The draft regulations would require that a substantial percentage of technology hardware purchased by government agencies and some companies come from India-based manufacturers. Foreign players would have to swiftly set up local factories to market their products here.”
In this case the government has the power of both regulatory control and purchasing power to create local manufacturing jobs. But it hasn’t thought through the practicality of trying to stand up an industry overnight. If you look carefully at the U.S. and Chinese examples, they started small and take place over decades. This allows companies to adjust and make changes as they learn. In this case India is going to disrupt a large market. The challenge here is that the buyers of this equipment probably still need it at competitive prices. Secondly, for manufacturers, it will take time to create the infrastructure, skilled employees and a supply base.
So why does this change in outsourcing strategy matter for readers of Lean Labor? It signals a shift from companies making decisions about moving production and employees overseas due to cost considerations to them making production decisions based on new revenue considerations. Previously all decisions were based on cost, delivery and quality. Now the decisions will be based on revenue opportunities with the pressure on Operations to make it profitable.
This means that the workforce and its managers are going to be under the same pressure to manufacture competitively, but now they will face the added complication of managing multiple cultures, languages, time zones, exchange rates and regulations among multiple production facilities.
What can you do to get started? From a systems, measurement and policies perspective, the companies that I’m working with are putting a repeatable plan in place to get acquired companies, jv’s or start-ups on board quickly. Policies and procedures are being standardized to a practical point. Companies recognize that a one size approach doesn’t work though and enough flexibility must be left in the system to let the local employees manage the nuances of each country and situation. More teeth are being applied to standardizing all types of data so that it can be quickly rolled up, analyzed and acted upon. Automation is being implemented to ensure administration costs don’t overwhelm smaller populations of employees.
Having a solid plan in place with documented success in other locations ensures that there is less room for the local facility to negotiate a unique environment. At the same time a well crafted plan makes sure that moral, engagement and the potential for innovation aren’t crushed.
For HR and Operations this represents an opportunity to create competitive advantage through the workforce. Those companies that can master distributed manufacturing and workforce management will have access to an increasing number of growing markets. Those that don’t will be stuck servicing larger mature markets as their competitors grow around them.
I was in the UK last week and had an opportunity to participate in a production tour of a local manufacturer. This company produces consumer goods for yard care and is a great example of a manufacturer that sees the extremes of variability in their business. Imagine if your company received five percent of its revenues in 1 day. And 20% of its revenues in one month. Now try and keep your large retail customers happy as they demand delivery of stock within 2-3 days of placing an order. Let’s make it a little more interesting. The product is fairly mature and technically fairly simple in nature. As a result, the majority of your competition manufactures their product in China. Let’s finish it up with a highly variable demand driver: the weather. Too dry and water conservation goes into place making it illegal to use their products. Too wet and no one needs their products. With predictions of climate change increasing the extremes in weather, no one expects any of this to get better.
I visited this company about 4 years ago and it was impressive to see the changes the operations team has made since that time. Starting from the warehouse, a new warehouse management system is constantly re-allocating product within the racks to flow raw materials towards production and finished fast-turn goods toward packing & shipping . At the same time pickers are regularly re-allocating stock within the warehouse to maximize use of space. The company has reduced packing error rate by implementing a packing process that is “part” centric rather than customer order centric. What this means is that they bring a pallet of product to the packing area and pack the quantity required by each customer in a separate carton. They then pull the next pallet of product. Their third party logistics partner then consolidates the boxes by customer order and delivers the completed orders. The company’s order accuracy rate is so high that some of their customers have eliminated incoming inspection, providing a cost advantage.
On the production floor the team has increased use of production cells to eliminate WIP as they found some components were getting damaged as they were moved from operation to operation. To reduce labor and reduce cycle time, they have built quality into the product through the use of built-in quality inspection by operators to reduce quality inspectors and extra steps from the production lines.
To manage the large swings of temporary employees, management has isolated product operations that can be trained in as little as a couple of hours. This allows employees become productive as quickly as possible. They also reduce the seasonal swings of premium pay and shorter, unpaid weeks with their full time workforce by using banked hours. In this case employees work longer hours during the busy periods (winter and spring) and enjoy 3 day work weeks during the summer. The employees’ time is accrued and then paid later in the year during their time off, so weekly pay isn’t affected. The company transitioned away from piece rate to hourly pay so that employees receive the same size paycheck in both seasons which helps employees manage their cash flow at home.
They have also implemented a Kronos workforce management system that allows them to see labor usage and WIP movement throughout the plant. Previously they only had knowledge of materials when released to the floor and when they were entered into finished goods inventory. This visibility into what was happening on the shop floor has allowed for changes to labor standards which resulted in the lowering of standard costs on their two largest product lines. The information also provided the insight to re-design some processes. As a result, in the four years since I visited, their labor effectivity as measured by OEE on assembly lines has improved by 18%.
They have also made the factory more visual. Not like you would expect with lots of LCD screens spewing production information; those are purposely kept at a minimum. But rather lots of signs and color coding to help the many temporary employees find their way around the factory so they can stay productive.
The production cycle time is now so short and the factory so small relative to production volume that if they stop loading the trucks during busy season, production will have to stop within three hours because there is no room to put anything.
As though this wasn’t enough, this company has also gone green. From putting 50 tons of production waste into a landfill annually, they have gone to a virtually zero landfill footprint through re-using, re-cycling and finding markets for waste materials.
As though this wasn’t enough, their Director of Operations is looking to visit other manufacturers. He feels that while he has kept his head down and focused on the improvements, after a while they begin to focus on smaller and smaller gains. He feels that by seeing other company’s operations, he’ll be able to look at his operations again in a whole new light.
One of the challenges AT&T faced in the 1970’s was the problem of knowing when to send a technician out to fix a problem with a telephone line. This challenge emerged as businesses began taking advantage of the analog phone lines to send data. While a voice call could withstand reasonable signal degradation, data was much more sensitive to signal quality. Some problems were easy to identify, like when the line was broken due to a pole being knocked down. But there were dozens of other reasons that signal quality could drop without completely failing such as a failing diode or transistor, or electrical interference due to incorrectly routed wiring, or a faulty ground system. Any of these and other problems could crop up at any time due to the constant aging, upgrades and expansion of the telephone system.
This was an important problem to solve. This was an important new revenue source for AT&T and it justified its monopoly at the time by arguing that only one company could keep all the technology working together at a reasonable price with the high level of voice and data quality that AT&T provided. But investing in aggressive line maintenance would mean rising labor costs. The alternative and inexpensive method of waiting for the customer to let AT&T know about a problem would reduce revenue and result in a push for the deregulation of a profitable monopoly.
When I first heard about this problem from a retired Bell Labs (AT&T’s R&D division) engineer, it sounded very similar to the labor problem that companies face today. Companies compete based on delivering high quality products and services at a competitive price. The ongoing challenge is delivering these products and services through an increasingly complex set of events working in harmony.
My first thought was that manufacturing companies avoid this problem entirely in a way that AT&T couldn’t. Companies today add buffers to cover up small quality problems. Excess WIP and finished goods inventory are increased just in case raw materials are late. Lead times are quoted that are longer than truly necessary in case machines break down or people don’t show up. Premium freight is used as the final back-up. Unfortunately, the phone company didn’t have the luxury of back-up systems. It was running a real-time service and only had one shot at getting it right because there was only one set of copper wires that ran from the switch to the customer’s phone. They couldn’t afford to run a “just in case” pair of wires to every phone that was going to be attached to a modem.
What struck me next is that if the phone company was able to keep a complex, real-time system operating with no back-up in the 70’s, what could we learn from that today? There might be new opportunities for companies to use those same techniques and shrink their buffers. This would of course result in lower costs and shorter lead times.
This was not an easy problem to solve for Bell Labs. Millions of different wires had to be monitored constantly and dozens of things might go wrong at any time. But instead of the traditional manufacturing approach of measuring all the things they knew typically went wrong, Bell Labs turned the problem around. Its engineers knew what the electrical signal of a perfect call looked like and it knew the limits at which point data would be garbled. Why not look for signals that were not perfect (I’ll wave my hands like it was easy, but they used some sophisticated statistical analysis to determine this). An “off” signal would indicate that data integrity was at the edge of degrading. This technique provided the technicians time to diagnose the problem and fix it before the customer noticed it.
So if we were to turn to my favorite topic, labor management, how could this be applied?
Historically and for many today in manufacturing, we report what happens at the end of the shift in terms of production, quality and performance. We might also measure and report on common problems such as overtime, unplanned absence, low performance and machine downtime. But this information is all history at this point. Sure we can address some of these when they start trending, but if we are going to start using statistics anyway, might there be a better way?
Best practice today is to measure some or all of these factors in real time so that they can be addressed as they occur, minimizing the disruption. We can also take that data and analyze the trends to make process improvements.
But that is not really taking advantage of what Bell Labs did to address their similar problem. We need to think of a way to point to a problem that is emerging and give supervisors more time to react. We need to provide new supervisors with instant experience about a production line.
I’m thinking about something like this:
We create a labor schedule for the next week. We have lots of information at our fingertips about the people on this schedule and the performance of this line. We know their tenure, if they are contract employees. We have records about their propensity for unplanned absence, and if that trends to specific days or times of the year. We understand their safety records. We might also know their historical performance on this line or operation and the level of quality they produce.
We know what a perfect day looks like in production and we can then use statistical analysis similar to AT&T to notify us when it looks like that won’t happen. This will focus supervisors on the highest risk lines and give them time to do something about the problem before it happens.
I’ll take the simplest example that I still hear about on a regular basis on every continent I have visited:
“We scheduled too many in-experienced people and the line ran slow.”
This is an entirely predictable situation that can be addressed long before the shift starts. It might not be just “green” employees. You could be scheduling a line that has a high likelihood of a “no show” tomorrow. It might be a combination of people and a specific type of product. What other combinations of employee attribute and personal history are going to cause production issues during that shift? Statistical analysis of a schedule will greatly improve your odds of knowing about a problem before the shift starts. This will give employees time to reduce the risk before costs and delays start piling up.
20 years ago we looked at past performance. Today we measure it in real time. Companies that want to gain the next competitive advantage through labor productivity will start using the data they already have to predict tomorrow morning’s performance and do something about tonight.
I just returned from the American Payroll Association’s Fall Forum in Las Vegas. This was my first interaction with the APA and I have to say I was impressed with the organization and the attendees. I was invited to speak on the topic of the Perfect Paycheck to a group of senior payroll leaders. While this subject was not new to them, what surprised me was the amount of energy they had around the subject of Lean and continuous improvement. As it was the first time interacting with the APA I decided to stay a couple of days and see what I could learn. For those of you who are not familiar with the APA, it is an association of payroll professionals that has been ably led by Executive Director Dan Maddux for over 20 years. I had the opportunity to speak with Dan during the conference where he painted his vision for the organization. As he recounted various stories about the APA’s members, I was amazed to see how fiercely loyal APA members are. As one example, he noted that over the past couple of years as companies budgets have been cut, members have been paying their own way to attend the conferences. These conferences are heavily centered on continuing education. Dan explained to me that while community was a part of the reason these professionals attend the conference; the larger reason is that the knowledge required to run payroll changes so rapidly that professionals cannot afford to stop learning. Without continuous education their ability to do a good job diminishes and their career prospects dim as well.
I began to realize the complexity of what these people do every day and how rapidly the information that impacts payroll changes. Wages, taxes, stock options, pensions, one time bonuses, company policies, garnishments and benefits are all changing throughout the fifty states. And these are all coming from different sources. To add an entirely new level of complexity, Payroll departments are now being asked to consolidate their global payroll operations. In addition to the wage and tax variation, Payroll managers must now also contend with different types of tax filing requirements, restrictions on how cash can be moved around the world and data privacy laws limiting what data can be moved.
I also heard interesting stories about how payroll managers used the data that they know so well to help solve workforce issues. One person created a report that showed a specific department that was experiencing high turnover was actually being over-worked. She highlighted the amount of overtime this department was working and sent it to management. Management was shocked, they had never seen an “overtime by person” report and had no idea it was so concentrated in one department.
If there was one shared frustration in the group though: Many payroll managers feel they have much more to offer besides accurate processing. When it comes to labor spend, these people know exactly where every dollar, yuan, peso and euro are going. They are intricately involved in everyone’s pay and as a result know what is going on in the company.
If you are looking for hidden costs or capacity in your operation, payroll data is a treasure trove of information. Many companies view this role as a function necessary to pay their people. What they don’t realize is that the data required to process payroll can tell you quite a bit about how your operations are running. Those looking for a competitive advantage would do well to set up a meeting with their payroll director and start taking advantage of a new angle on operational excellence.
Commoditization of a product is a natural evolution of the market and is not the worst case scenario. If you are responsible for a commodity product, that means there is still a viable market for what you build. This is a much better proposition than being obsolesced.
Your main problem is that while you have been working to build brand awareness, optimize distribution channels, add features, improve quality, reduce costs and shorten lead times, your competitors have been doing it faster and better. Or it could be as simple as your patent expired.
You still have some options. Performing some market and customer research may yield some ideas to breathe new life into those now low-margin products. Below are some time proven strategies for increasing the value of a commodity product.
Create a new category for the product
Don’t confuse this with marketing efforts like new labeling or exciting new advertisements. I’m thinking about thoughtful extensions to a product. Let’s look at the wholesaler of proteins such as fish, poultry, pork or beef. How much of a premium are you willing to pay for a different brand of fresh fish? Much of the product is packaged under a store label.
Now take a look at the prices for marinated chicken or a breaded fillet of fish. There is often a 100% premium for this category. That doubling in price per pound is not due to the increased cost of production. It’s only a couple cents worth of ingredients and a small amount of labor. It’s not that it takes significant skill. Putting meat and marinade in a bag is pretty easy. What the processors have figured out is that there are enough consumers who don’t plan well, who are too tired or don’t have enough time between work and dinner to prepare this style of food. Producers have filled this lack of planning and time by offering a convenience. They have taken the marinating process offline for the consumer and give their customers something that is highly valued: The ability to deliver a delicious meal in less time. The result? A high margin market for a previously commoditized product with an extremely limited capital investment for the producer.
Reduce risk and uncertainty for your customer
Are your products used in critical applications where downtime is expensive or causes bad publicity? If so, your downstream supply chain may be stocking up on inventory to ensure this downtime is minimized. Excess carrying cost, excess real estate costs and product obsolescence are all now costs that reduce profits for your customer. By providing 24×7 hour rapid replacement of parts, you can eliminate the excess inventory and create a differentiated service without making any changes to your product. Even better, determine if you can have an impact on reducing that downtime and make the changes necessary.
Improving outcomes and reducing costs for your customers
Visit with your customers all through the downstream supply chain and review their processes that relate to your product. Are they performing processes that you could perform more efficiently? Do they lubricate the product before it’s installed? Is it kitted in a warehouse with other products that you can provide? Are field installers modifying the product because they have found a different use or there’s a new requirement that never made it back through Purchasing?
Your customers can receive value from your existing data
The hot buzzword these days is Big Data. Any data that your company possesses was expensive to collect. Re-using it to provide value to your customer is a great way to differentiate from your competitors. If they are not capturing that data, it will be a difficult to duplicate what you are doing. Here are some suggestions that I have seen where manufacturers have re-purposed data they collect that was originally intended for use in timekeeping or labor productivity management:
- Use real time labor tracking to provide the status and completion time of components to your customer. When they have a downed machine, being able to confidently predict when it will be back up is very valuable to them. The value of this information has no relation to the cost of the part they are waiting for.
- Provide detailed records of the charged services that you provide to your customers. This ensures them that what they are being billed for is accurate and that your company is in control of the services it delivers. One company details and presents the services it delivers during natural gas extraction to its lease-holding customers. It turns out to be exactly the same data the company uses to track time for payroll and understand its labor cost per project.
- Provide an auditable history of the product . It’s one thing to have a quality sticker applied to a product. It’s a different level of control to provide an auditable trail of quality checks throughout the production process. This is exactly how one company re-used its labor tracking data to increase its customer’s confidence that it was shipping high quality components.
Lean selling is the prescription for a commodity market
These are just a few examples of how to differentiate your company’s offering with little or no change to the product and limited capital investment. What’s different is that it requires your company to understand your customers supply chain and the challenges they face. Fortunately there is a tried and true process to get there. It’s called Lean and the first step is training your sales force in the basic principles.
Think this will be tough to justify with management? First, this isn’t the Lean that reduces waste inside your company. This Lean project increases revenues and differentiates your company from the competition. Second, your sales force already has a name for this. They call it solution selling. The reason solution selling is so hard for them is that the vast majority of sales trainers they hire don’t provide a formalized method to analyze their customer’s supply chain. They train the sales people to ask the customer to describe their challenges. Sales people are then supposed to eliminate those challenges with the products they offer. This approach is extremely difficult for salespeople because if a customer knows it’s a problem, it’s probably not an easy one to solve. The real opportunity is identifying previously unknown waste. It’s what’s called latent pain: Everything seems to be working fine from the customer’s perspective and no one is complaining. Your company’s opportunity is to teach the sales force about the “system” the product lives in and provide the tools (i.e. value stream map, 5 why’s) for the sales force to use to uncover those opportunities. You can probably name some situations where an enterprising sales person has done this already. The opportunity is to institutionalize that analytical and creative behavior throughout the sales force.
The good news is that these techniques apply to every product whether commoditized or not. Secondly, it’s a profitable experience for everyone. Customers, your sales people and your company all benefit when waste is removed and value is added back to a commoditized product.
While it may seem that the headlines are mainly driven by U.S. based companies, the skilled employee shortage is worldwide.
This was confirmed in a global benchmark study completed by IDC this April. Companies in countries around the world are facing a skills shortage.
To help understand the relative size of the issue between countries, the chart below documents the response to the question posed to manufacturers in 11 countries around the world: “Is a shortage of skilled production workers impacting your production?” The shortage is having an impact ranging from 20% to 60% of manufacturers around the world. This is an opportunity for manufacturers that are competing globally to gain an advantage over their domestic and foreign competitors. By ensuring a skilled workforce is available to your company, production will be impacted less and costs will be lower than a competitor that staffs inefficiently.
While everyone acknowledges the problem, finding a solution is difficult. There are two reasons for this. As a trend it’s large, but at the individual plant level it’s rarely the binary effect of someone is working today and retiring tomorrow without any plans to cover their job. There are many ways to temporarily handle labor shortages. Overtime goes up, production might slow, temporary workers with the right skills might be hired at a premium, or production might be outsourced to another company. None of these are desired outcomes, but it’s what happens.
When the problem becomes acute enough, companies are acting to address the shortage. One company I spoke to realized the average age of their skilled production employees was in their mid fifties. To ensure those skills and techniques that were developed but not documented over the past 30 years weren’t lost, they developed a plan to video tape each operation for training purposes. This wasn’t too popular with the union employees until assurance were made that this wasn’t an effort to ship the current jobs offshore.
The second reason is that a skilled labor shortage isn’t a traditional supply chain problem. Skilled employees are a result of unorganized choices and opportunities that individuals, schools and manufacturers all make. As a whole this results in a labor pool from which companies recruit. Because the lead times of developing skills are long and companies can’t guarantee they will receive the benefit of investing in a student over a long period of time, they are forced to recruit from a free market of which they have very little control. This makes the labor supply chain very different from a material supply chain where long-term contracts can be put into place and relationships can be developed over time to improve efficiencies.
But for the most part, this labor market works. As the demand for different types of jobs ebb and flow the different components of the market adjust to slow down the creation of some skills and increase the production of others.
The challenge with manufacturing jobs is that the technology and improvements in process have shrunk the market of jobs while at the same time increased the requirements in terms of skills required to perform the job. This means that companies have less time than ever to train employees for increasingly skilled jobs and are more dependent on the free market to supply these skills.
At the same time, the labor market has led the other partners in this labor supply chain (individuals and colleges) to redirect their investments and efforts to invest in other types of careers. Unfortunately the market and supply chain is not very efficient. Four years after the Great Recession of 2008, the supply chain is not reacting as quickly as one might expect.
- Too many students are selecting business majors and colleges are encouraging it because with high student to faculty ratios and no labs to support, it is a profitable degree to provide. The problem is that the students are studying less. Additionally, with no consensus on what that degree means, students are less marketable. The Default Major: Skating Through B-School
- In 2011 the first ever survey evaluating the availability of courses in community colleges found that 32% of respondents were not able to take their desired course because the roster was full. And this wasn’t just the popular courses that always fill up first; 28% of students were turned down for recommended Math and English courses. (The Pearson Foundation Community College Student Survey, conducted online by Harris Interactive)
Creating an inventory supply chain that is flexible and responsive to the end market is considered a competitive advantage. Since the nineties, creating a high performance inventory supply chain has been the focus for the majority of manufacturers and retailers. Yet when it comes to the labor supply chain, progress has been slow over the same period of time.
This is an opportunity for the Human Resources department to create a competitive advantage for their company. The good news is that all the entities in the supply chain want the same thing. And that makes it much easier to obtain cooperation. Colleges want to graduate students that will be productive. Students want high paying jobs. Your company wants a steady flexible supply of labor. Your opportunity is to create your own labor supply chain by working with government and colleges.
There are a number of ways to approach this but here are two examples.
You can partner with a college that has recently been awarded a grant and influence how that grant is spent. For example in New Hampshire, Nashua Community college was recently awarded a grant that they want to put to work to build the skills for advanced manufacturing. If you are in New Hampshire, reach out to NCC and make sure these are the skills your company needs.
The Department of Labor has a number of resources to identify grants that have been awarded in your area or industry. http://www.dol.gov/dol/grants/
“We want to create a skilled workforce that will help the advanced manufacturing industry thrive.”
You can go even further like Toyota did in Kentucky and build an employment program that has the college deliver site specific training to ensure employees are productive the moment they step up to a workstation.
One of these AMTEC-aligned initiatives is based on a relationship between Toyota Motor Manufacturing and KCTCS system member Bluegrass Community and Technical College (BCTC) in Georgetown, Kentucky that has resulted in a paid internship program for high school graduates who get accepted into an Advanced Manufacturing Technician Program. Students who are accepted into this program spend three days at the Toyota plant and two days studying under the community college’s Associate in Applied Science Degree program in Industrial Maintenance Technology. As noted on the program’s website “the courses of study are identified by Toyota as the most critical courses necessary to become a top flight multi-skilled maintenance technician in an advanced manufacturing operation.”
To be successful in developing your labor supply chain you are going to need solid information about your requirements and what you can deliver in return. It’s going to require investment and therefore ROI for your company and your company’s partners. This doesn’t mean a conversation with supervisors about what they need next year. It requires a rigorous study of what skills are required at your company. If you are lucky and have a workforce management system in place you’ll be able to use “Big Data” techniques to analyze the supply and demand and have factual information. For example you can look at trends in age, leave accruals, tenure, turnover, absenteeism and overtime relative to the skills and certificates that your employees have to understand current demand and supply. You can also look at production forecasts and new product or plant investments to forecast future requirements. And don’t forget to talk to plant management and engineering about automation plans so that you know about future decreases in requirements as well. Having this data in hand will make you a better partner to the rest of your labor supply chain and ensure their ability to respond meets your demands.