China rises to the challenge of increasing labor productivity
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.
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.