When labour is less than 5% of product cost

It’s a common practice in the process industry to treat raw materials in highly automated lines, like the processing done by a beverage manufacturer.

In such cases, labour is often only needed for managing the raw materials, monitoring and maintaining the line, packaging the finished product, and managing warehouse movement. Because the cost of the equipment is high, the focus is typically on keeping the equipment and plant running at capacity rather than trimming pennies in labour.

In this scenario, profit margins on products are thin—often around five per cent or less.

Although materials and equipment costs are a significant portion of product costs in this scenario, the only controllable cost is labour.

Differences in wages and overtime; adherence to breaks and lunch times; call-in and shift premiums; effectiveness of the maintenance staff; and unplanned absenteeism are all variables that can and should be managed.

When the details are analyzed, it becomes apparent that equipment runtime is dependent on these same factors.

Labour premiums are willingly paid to get someone in at the last minute because of unplanned absence. A couple of extra dollars for one shift to keep the line running seems like a financially prudent decision.

But this is where the profit leak begins.

It seems like a small price to pay for throughput until it’s realized that unplanned absenteeism has gradually slipped into an acceptable practice because it is rewarded with overtime for someone else.

An easy way to determine if leaks such as these are draining margins is to look at actual labour costs over a period of time compared to expected base pay over that same period.

Will eliminating half of unexplained labour variance have a significant impact on margins?

If so, it’s time to start actively managing the smallest cost in your product: the workforce.