How to cut labor costs – and improve morale

Keeping employees happy while boosting productivity is on the minds of manufacturers these days.

Many positions remain unfilled because of a lack of skilled labor, according to the National Association of Manufacturers. The overall industry economic outlook is mixed, requiring companies to do more with less.

In a changing environment, manufacturers focus on their No. 1 controllable cost – labor, according to consultant John Frehse, labor strategist for Core Practice, LLC.

Many factors affect labor costs, with a fair number tied to a labor-demand mismatch, including overtime, idle time and absenteeism.

This misalignment also affects productivity and capital utilization. Frehse believes that an innovative approach to shift scheduling can improve productivity and reduce labor costs while boosting morale. His approach was developed from Core Practice’s benchmark survey of 100,000 shift workers.

The eight-hour, five-day, 40-hour workweek schedule is standard in many companies and has been for decades. Companies running around the clock often use three eight-hour shifts, with pay differentials. If a company staffs for high-demand periods, there will be a lot of over-capacity. Minimum staffing means high overtime, and everyone knows overtime is expensive and should be avoided.

But is it really? An employee’s fully loaded cost must first be calculated. In addition to hourly salary, benefits and payroll taxes (fringe) need to be included.

But that’s not all. The dollar value of paid time off is a cost to the company. For example, say a full-time employee receives $20 per hour. The fringe ratio is 40 percent, and with 38 paid days off (holidays, vacation, and sick time) or 15 percent, the actual hourly cost is $31.

Overtime for that employee will cost 1.5 times $20, plus about 10 percent in payroll and unemployment taxes, or $33. Benefits and paid time off are not included because they are fixed costs and do not rise in proportion to hours, as taxes do. Each hour of overtime costs the company an additional $2. Each hour of idle time costs $31, over 15 times as much.

Of course health, safety and productivity issues need to be considered when increasing overtime.

But looking at labor from a purely cost standpoint, it might be more economical to hire fewer people and pay overtime than staff up and have people standing around.

Better matching of production demand and labor can lead to significant savings. Idle time might also plague ordinary operations if there is a mismatch or a bottleneck in work flow.

Demand-driven scheduling is on the rise as companies seek to mitigate these work flow and staffing issues. Only 10 percent of employees in Core Practice’s benchmark study want part-time or seasonal work, according to Frehse.

That means the standard full-time schedule must adapt to meet fluctuating company needs. And what do workers want?

The study revealed that, while 81 percent of employees are content with pay and benefits, they want flexible time off – and more of it – to help them balance work and family life. They don’t mind overtime – 71 percent want more or are content with the current level. But they did mind that overtime often isn’t predictable.

Frehse is a proponent of the 12-hour shift and helps many manufacturing clients evaluate and implement it. In this rotation, two weeks have three shifts each and the third week has four, separated by a day off. The most striking change is in the amount of time off.

Not including vacations, sick time, or holidays, the standard eight-hour day, 40-hour week, means 260 work days and 104 days off. The 12-hour full-time shift worker will work 173 days and get 191 off. The worker will get six days off in a row 17 times a year. Total commuting time and costs are reduced with fewer days driving to work, too.

The change to 12-hour shifts might not work in all companies, depending on how labor-intensive the tasks are or other work flow constraints. Analysis of labor utilization is a first step, with identification of daily idle time and demand ebbs and flows.

How much overtime are you paying and what is it actually costing you as opposed to adding more employees? How accurate is your forecasting and planning? How much lead time do you have to schedule the right-sized work force to meet demand?

Using technology to manage labor costs and deployment helps, Frehse said, adding that manufacturing companies have invested heavily in many aspects of lean production while neglecting human resources applications.

Communicating with employees is also key. In the benchmark study, fewer than half of employees felt that management communicated with and cared about them.

Implementing change requires engagement and buy-in by workers to ensure success. Identifying their satisfaction drivers and morale through a survey or focus groups might be a great first step.