Of course it’s not that easy. The article goes on to say that the R&D Tax credit is taken advantage of primarily by large corporations. That leads me to believe that many smaller or mid sized companies feel that it’s too hard to earn the credit.  For those that have not explored this credit it can be a significant opportunity to counter the effects of relatively uncontrollable costs such as commodity costs or increasing healthcare costs for their employees.

Additionally more states are also enacting R&D credits to encourage companies to move high paying jobs within their borders. This is in addition to the federal credit.

Take a look at Ceradyne, a high performance ceramics company recently acquired by 3M. According to their 2011 annual report, they earned $2.9M in tax credits on revenues of $400M and earnings of $29M in 2010. That’s right, they increased their annual net income by 10% through this credit.

Why did I select Ceradyne as an example? Because I worked with them in the past and they clearly understood that in order to accurately track wages spent on qualified R&D expenditures….and keep the credit through an IRS exam…that they needed solid record keeping. In their case they extended their use of their existing timekeeping system to include their engineers.

How did they get their engineers and other employees who were working on qualified research to start accurately collecting time? They explained the value of the record keeping to them in terms of profits which directly impacted the engineer’s employment.

Sure there are other ways to collect the records, but it’s going to be a quite a negotiation when the IRS examines your records. Especially if you try and claim wages based on your general ledger’s cost centers. The first thing the IRS will do is to look at the roles allocated to that cost center and pull out the wages paid to managers and administrators. Even though in today’s flattened organizations it’s likely that many people are performing multiple roles, some of which probably are eligible for a tax credit.

Next Steps

If you are in Operations or HR, go spend a couple of minutes with your in-house finance or tax expert. There are also consultants such as Hackett or Deloitte that have specialists in this area. Ask them if collecting accurate time records would help increase your company’s credit. Discuss what activities are eligible and make sure these are all being tracked to ensure you get full credit.

If you all agree it makes sense, then you can justify increased data collection. This data will not only ease the IRS examination and likely increase your tax credit but it can also be re-used to help project performance. Would it be helpful to know on a daily basis who is (or is not) working on a project, what phase it’s in or how many dollars have been invested to date?

Before you start collecting the data, spend the time explaining the personal benefit of this tax credit to your employees (increased share price/profit sharing/bonuses, stable employment/more investment in projects that interest them) and your change management job will be a simpler too.

Want to learn more about R&D tax credits (by the way, you can claim more than wage expenditures)?

Here’s a couple of good links:

http://www.irs.gov/pub/irs-pdf/f6765.pdf

http://www.journalofaccountancy.com/issues/2010/mar/20092122

http://www.statetaxcredits.org/

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.

Secure Employee

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

Productive Employee

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.

Engaged Employee

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.

Jaguar Land Rover’s largest market is now China

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:

United States

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.

NY Congressmen Bill Owen proudly announced the benefits of the deal:

“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.”

China

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.”

India

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 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.

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 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.

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.

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/

More jobs to open up at Nashua Community College for new work readiness program

“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.

Collaboration between Community Colleges and Automotive Companies Results in New General Maintenance Mechatronics Curriculum

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.

I recently returned from China where I attended my employer’s first customer event in China, KronosLive. Over 100 companies attended. They ranged from large privately held white good manufacturers, network equipment manufacturers and shoe manufacturers to many multi-national manufacturers with locations throughout China.

Customer panel discussing methods to increase labor productivity

Enjoying dinner, entertainment and awards ceremony

As this was a workforce management conference, the topic was of course focused on labor. Similar to my trip last year, the main topic was rising wages. To add pressure, many are facing growing payroll taxes to support an increasing array of benefits from the government as well.

At the conference, it was apparent that companies have mobilized with respect to workforce management. Here are two strategies that companies, both privately held and US based multi-national, spoke about during the conference.

Flexing of the workforce

As an increasing number of companies are working towards compliance, they realize they must become more innovative in how they flex the workforce. One company that deploys customer engineers in the field is accommodating its busy and slow periods in two ways. First it allows employees to draw on unearned vacation days. At this manufacturer of semiconductor fab equipment, the engineers might have slow periods in the beginnning of the year. If there is no work they have two choices, they can take unpaid leave or they can borrow vacation days off. They can then earn those days back as they accrue them through the rest of the year. They true up at the end of each year. The second method is overtime banking. If an employee uses their maximum overtime of 36 hours per month or would like more time off, they can bank their overtime hours and use it for paid time off later. These two techniques make sure the workforce is paid consistently throughout the year but allows the company to flex labor up and down as the workload changes.

Increasing the effectiveness of Operations

The second company implemented a new metric that is near and dear to my heart. They began using the Overall Labor Effectiveness metric at one of their key operations. The kpi began at 72% and is now running at 90%. They attributed the success to employees and supervisors having better knowledge about individual’s performance and visibility to all as to how the operation was performing. Even better was that the hours improvement came out of overtime so there was 150% savings in term of wage cost.

It became clear to me during the conference that Chinese companies realize they must change their strategy from one of purely low cost labor to survive. They are executing on one of three strategies:

• They are implementing continuous improvement and automation with respect to labor to increase productivity and maintain low unit cost.
• They are increasing the value of what they build with the same labor. Sometimes this value is delivered through value-added services other times through the complexity of what they are building.
• They are extending globally to build global brands and take more of the profits along the supply chain that were previously spread among other participants.

I was pleased to see this progress for two reasons. First it means that the middle class continues to grow while people are working reasonable hours and making decent wages. This will result in growing demand for all types of goods produced globally. Secondly, it means that companies are focusing on increasing the value of their operations rather than relying on low cost labor. This is more aligned with manufacturers in developed countries who provide a living wage to production employees and should result in more balanced trade.

It is already starting to drive differently to effect this change. Currently China is now driving with two feet. One foot is tapping the brakes (by curtailing construction) and one foot is gently pressing the gas pedal (through the loosening of credit by banks).

What other avenues can China pursue to grow this now large country at a controllable pace?

There are many levers that governments have used over the years. But in China’s case, it has already pulled many of them as far as they can go. Let’s take a look at a couple of those options and why they won’t work in China right now:

Devalue its currency. As China never let the Yuan rise in value in order to fuel its growth, it is under tremendous pressure to increase the value of the yuan from other governments and even its own citizens who desire more global purchasing power. It is politically untenable to increase the valuation of the Yuan without expecting economic retaliation from other countries. This option is not available to China right now.

Transfer GDP creation to a different sector of the economy. China turbocharged construction over the last decade to fuel its fast GDP growth and is now slowing that sector down due to excess capacity in the industrial sector and an overheated residential market. Comparatively, as the US exited manufacturing, its transition was buffered by significant consumer demand for services, government subsidized healthcare and a strong housing market. This allowed much of the employee population previously employed by manufacturers to find new, albeit lower wage, work. The U.S. had a more balanced economy which allowed it more choices. China’s low wage strategy has not enriched the bulk of its population meaning that consumers cannot afford to carry the economy right away.

China can’t wholesale offshore its jobs to lower its manufacturing costs and spur demand. Its economic success is based on a promise to its citizens that it will increase their standard of living over time. Without a place for those displaced manufacturing jobs to go, the promise would be broken and instability would result. Secondly, the difference in wages in neighboring countries isn’t enough to overcome the increase in logistics costs in all but the most labor intensive industries. This was not the case in the U.S. where Chinese wages were a tiny fraction of U.S. wages and the transfer of some jobs resulted in lower cost goods for the majority of Americans.

China can’t reduce wages of its employees to spur export demand by quietly letting inflation reduce wages relative to the cost of other goods. Intentionally or not this is what occurred in the U.S. over the last several decades. Reducing wages in China overtly or passively would only reduce China’s already paltry consumer demand. This is one of the areas of GDP that China is trying to grow in order to reduce its dependence on exports. Look at the Foxconn to understand what direction wages in China are going. The U.S. transitioned to lower wages because the transfer of manufacturing jobs also lowered the cost of consumer goods. The pain while noticeable, was manageable as people reduced savings to fund current lifestyle with the expectation that the government and pensions would provide a comfortable retirement as it had for their parents. Americans are now realizing what we did to ourselves with this domestic consumption GDP strategy.

China can’t automate its way into high productivity. While there will certainly be automation projects at individual companies and it will occur over time, don’t look for a government strategy that would rapidly automate the plant floor to increase competitiveness. This is simple. While the U.S. rapidly increased productivity through automation, it was able to absorb the workforce in other industries. China can’t do the same on such a large scale.

So what options are left?

There are only three that I can see and from my observations China is pushing hard on all those levers.

Rather than export production China can export labor. This is the “government spend” component of GDP growth China is investing its treasure in building political allies and securing natural resources around the world. For example, it is investing heavily in the Bahamas by building out its infrastructure. And guess who is providing the labor for 8,000 jobs there? This is a technique used frequently by the U.S to invest in other countries for political reasons but ensures that the U.S. receives a share of the economic benefits by requiring U.S. contractors participate in the projects.

China can increase the value of what it produces to generate greater GDP. Exiting out of low value goods such as apparel production and into technology is a goal of the Chinese. This is a slow but traditional path as countries move from agriculture to industrialization. Alternative energy and automobile production are two good examples. Unfortunately this has generated some accusations from global manufacturers and technology providers that rather than develop or license technology themselves, Chinese manufacturers are counterfeiting brands and stealing intellectual property to speed up this transition. How this will play out is unknown.

Chinese production operators commute home in company supplied buses after a day's work. None have cars and many supervisors and managers carpool.

China can increase its labor productivity in its existing industry to lower its costs while increasing standard of living. I can personally vouch for this change in attitude by Chinese manufacturers. During a recent visit to China, I visited factories where young supervisors had implemented sophisticated techniques including active use of kan bans, 5S and changes in process to effect line leveling. They also exhibited a thorough understanding of how to manage constraints within production. Even the accuracy of payroll is now becoming a hot topic as labor laws are being enforced and wages rise. Increasing productivity was the secret to the U.S.’s success. The challenge is productivity gains are a slow path relative to most other methods of growth because it comes from the bottom up. The upside is productivity gains are a sustainable competitive advantage because it is extremely hard to duplicate. Whether the government will make this a formal strategy is yet to be determined.

This is an interesting inflection point for China’s economy and I look forward to seeing if China can exhibit the same tenacity and success in the next phase of its economy as it did in the last one.