Review Direct Labor Cost Controls

by Hank McHale

Hank McHale & Associates

In todayís economy, manufacturing companies must continuously work toward keeping their manufacturing costs low or risk losing their competitive edge. US manufacturing costs have been rising over the last five years; labor costs have risen 10 percent (Deloitte, 2013 Global Manufacturing Competitive Index). Direct labor can be a large cost in manufacturing, depending on type of product and degree of automation. It also can be one of the least controlled costs, in spite of significant emphasis on lean manufacturing throughout the past decade.

Hidden causes of excess direct labor costs

Failure to identify and control hidden root causes results in excessive direct labor costs – 20-30 percent of total direct labor costs, in many cases. Iím not suggesting the following list is complete for any and all types of plants, but I have observed these 14 causes over a wide range of plant locations manufacturing various types of products.

  1. Equipment incapability or breakdown
    Equipment incapability or excessive breakdowns can cause delivery delays, increase processing time and cause excessive cost. To assist in root cause analysis, information is needed as to which equipment is breaking down and the frequency of breakdown. From this information, problem equipment is identified and remedies are applied.
  2. Tooling incapability or complexity
    All kinds of problems result from inadequate tooling quality, including undersized and oversized parts, grooved parts, etc. A formal tool evaluation and control program is essential.
  3. Inadequate operator and supervisor training and instructions
    Failure to take time initially to train people who are new on the job results in much more time correcting problems than would be required for training in the first place.
  4. Inadequate process instructions
    Instructions should include items such as routing sequences, dimensional drawings, machine instructions, set-up instructions (including drawings), lubricating instructions – in short, any processing variable that can affect the quality or running of a part.
  5. Employee failure to follow process instructions
    Adequate time should be taken by supervisors or staff to explain the whats and whys of the instructions. Sufficient time should be allowed for discussion, feedback and questions to make sure every operator understands the procedures.
  6. Inefficient plant layout
    If the plant layout requires a part to travel unnecessary distances in its process around the plant, the result is excess processing time, inventory and labor costs, equipment and plant space.
  7. Inferior quality of vendor material or untimely delivery
    A formal evaluation program can be used to strongly encourage vendors to continuously improve their quality, delivery, lead time and cost.
  8. Difficult or complex part design
    To minimize quality and manufacturing delays, dialogue should be established as early as possible between the design authority and manufacturing about the manufacturability of the part.
  9. Inefficient process routing
    Excessive or unnecessary routing steps can result in excess processing time, high inventory and labor costs, unnecessary equipment, excessive scrap material and wasted plant space.
  10. Equipment or operation bottlenecks
    A bottleneck exists if, for whatever reasons, the time available to process a quantity of parts is insufficient to meet shipping requirements. The more often bottlenecks are tolerated, the more delivery delays will result and the higher costs (e. g. overtime).
  11. Excessive set-up time
    Manufacturing lead time and labor costs can be reduced by reducing the time required to change tooling and equipment for different part numbers.
  12. Excessive production batch sizes
    Manufacturing costs can be reduced by minimizing the number of batch sizes that are significantly larger than what is needed to meet schedule quantity requirements.
  13. Inadequate departmental support functions
    Fork lift drivers delivering material late to the production line, Quality Control personnel being late releasing production to make parts and die preparation being late to the production line are all examples of inadequate departmental support affecting direct labor efficiency.
  14. Restrictive union contract provisions
    Managers must take the initiative in convincing the union to allow improvements in quality, delivery, lead time and costs. The union must be convinced that such improvements are for the health of the company and benefit to workers.

The proper measure of direct labor efficiency

Perhaps just as important as identifying and controlling a more complete number of root causes of excess direct labor costs is that most managers measure direct labor efficiency in ways that do not adequately identify the amount of direct labor cost opportunity. Many measures of direct labor efficiency include too many allowances for direct labor waste (i.e. direct labor personnel are doing something other than making useable quality parts). The appropriate measure for direct labor efficiency is as follows: total direct labor hours making useable quality parts divided by total paid direct labor hours (excluding lunch and breaks).

To determine actual measured direct labor efficiency, each direct labor operator should keep track of both the minutes spent making useable quality parts and the minutes spent on anything else (waiting for a machine to be repaired or set up, walking to another machine, changing to a new material, etc.). Evaluating and minimizing each of these time categories will help reduce direct labor costs. The greater the difference between 100 percent direct labor efficiency and actual measured efficiency, the more potential cost improvement opportunity.

Measuring direct labor efficiency the right way for cost control purposes; measuring and categorizing unproductive direct labor time spent by operators and identifying methods to minimize that unproductive time; and addressing the aforementioned 14 causes of excess direct labor can result in a 20-30 percent reduction in direct labor costs and a corresponding improvement in gross margins.

In nearly 25 years, Hank McHale has gained a variety of manufacturing operating experience embracing a diverse group of products, processes, plants, organization levels, ownership positions and companies. He has served in positions that range from materials manager to plant manager to CEO/owner; with responsibilities that include managing plants in the United States, Brazil, Europe, Canada and Mexico. Most recently, he completed a 4 year assignment as CEO of GS Industries, a plastic injection molding business in Bassett, Virginia. McHale is the author of "Actual Experiences of a CEO: How to Make Continuous Improvement in Manufacturing Succeed for Your Company", published by the American Society for Quality Control. For more information, call Hank McHale & Associates, a management consulting company, at 248.470.3443 or email hank@hankmchale.com.