Engineering For Lean: Right-Sizing Your Labor Cost Infrastructure With Industrial Engineering

Did you know that the exemplar of lean manufacturing, Toyota, assigns an industrial engineer to each foreman in its plants? It’s true. Toyota has long understood the value of optimizing operations through traditional industrial engineering techniques. For example, the company “stopwatches” each operation to assure that the people performing work tasks can actually accomplish the task in an optimal amount of time. Optimal is defined as the rate feasible to do the task “right the first time” according to the Toyota standard method (for quality purposes) and to be economically efficient in the traditional manufacturing cost paradigm. If the time assigned to an operation is not “optimal,” then the workers receive additional training or the operation time is adjusted. Assigning an industrial engineer to each foreman has other benefits – work flow management, cycle time reduction, work methods and the like.
So, how does the Toyota approach – clearly feasible for a multibillion dollar global corporation – relate to the small to medium size enterprise (SME)? The message of the Toyota example is rediscovery of the lost art of industrial engineering and its use in making an SME company lean and cost-effective. Certainly few if any SMEs can afford to have an industrial engineering staff like the one Toyota has, but industrial engineering talent can be obtained in many ways and employed just as effectively,
WHY BOTHER WITH INDUSTRIAL ENGINEERING?
Why indeed you may ask? Isn’t labor cost reduction passe with labor costs per unit amounting to six or seven percent of the sales dollar? Does it make sense to try to squeeze an extra quarter second out of an operation by changing the way some one moves their left hand when turning a dial? Furthermore, isn’t labor a variable cost that fluctuates with production requiring us to staff up and down as needed? The answer to all these questions is no. Let’s look at each of these questions and then visualize some benefits from industrial engineering in a twenty-first century style.
Low unit labor costs. It is true that direct and indirect labor on a unit basis is lower than it has ever been in recent memory but, labor is often the single largest non-material total dollar expenditure for most manufacturing companies. It therefore behooves management to insure that the labor force is trim and is not growing out of proportion to the level of sales revenue.
Squeezing the additional quarter second out of the process. The additional fractional time reductions and fractional people reductions (we saved one-third of an employee by doing this!) associated with traditional industrial engineering were no doubt meaningful to cost reduction in the first half of the twentieth century when labor forces were orders-of-magnitude larger. These fractional savings, in fact, added up to actual dollar labor savings back in the day. They have almost no similar value today except to comprehend how jobs may be combined to eliminate duplication or non-value added activities.
Labor variability. One of the enduring myths of the twentieth century (and the twenty-first as well) is the notion that labor varies in direct proportion to output. Labor is now part of the manufacturing company infrastructure and must be managed as a controlled resource and not assumed to be a variable resource. The distinction between controlled and variable is an important one. Controlled implies that as production rises, the labor compliment need not increase if we seek alternative ways to organize and manage the infrastructure. Similarly when output declines, the force may not decline if we are tight on indirect labor in non-production areas and can shift people to such non-value added but necessary, and deferrable, work. In actuality, labor should increment and decrement in “plateaus” or “steps” along the production curve and the increment/decrement plateaus should be actively managed.
Industrial engineering facilitates the management of all of these labor issues. It is now focused on the phenomenon of the “infrastructure” and labor as a significant cost of the infrastructure (hence the title of this article). Stop-watching and labor efficiency variances and comprehension of fractional work can now be used to inhibit the impulse to “hire as a first resort.” If, for example, every time a new direct or indirect labor hire was contemplated, an industrial engineering analysis of the presumed need and the related work in the area was made, work re-engineering and worker redeployment could likely result in avoidance of adding another person to the payroll.
OPPORTUNITIES FOR COST CONTAINMENT/REDUCTION
Ultimately, industrial engineering in the modern sense (the Toyota approach) is about keeping the labor cost infrastructure “right-sized” to the revenue of the enterprise and the elimination of waste. With this in mind, we can examine some ways to reduce costs necessary to right-size and to contain them as growth occurs.
Supervisory span of control. A common but misguided practice is to have too many supervisors in relation to the number of direct labor employees supervised. The Competitive Rivalry In Airline Industry textbook ratio of foreman to direct laborers is 1 to 20. If you are at 1 to 19, not to worry but if you are at 1 to 10, the span of control is worth a look.
Unbalanced lines. Line balancing is one of the basic tenets of industrial engineering. In the “old days” of extensive manual operations, it had much to do with stop-watching of individuals but now it is directed toward balancing around a machine constraint in a production cell. Frequently, line balancing can result in lower crewing of cells by having workers move back and forth around the constraint device.
Timed operations and earned hours. While the concept of “earned hours” according to engineered standards is often misunderstood and misused, measuring the overall efficiency of large operations over relatively long time periods is a good indicator of real crewing needs. The caution here is not to calculate labor efficiency variances by individual shop orders or small departments by the day but rather to calculate it and report it for an entire department of perhaps twenty-five people in periods of no less than one week.
Extended meal break time frame to limit “floaters.” In shops where machines pace the plant, floaters are employed to substitute for machine tenders on scheduled breaks for meals. The number of such floaters is often dictated by the period in which the meal break is taken and, of course, the number of employees and machines. For example, if meal-breaks on the first shift are taken between eleven AM and one PM, more floaters will be needed than if the meal-break period was extended to two PM and fewer floaters could cover multiple breaks sequentially.
Cellular organization. Much is written about cellular organization lately. Re-engineering the plant into product cells is the modern equivalent of old-fashioned plant re-layouts. The labor cost advantage is that workers can multitask in “U” or “J” shaped cells instead of being chained to a particular station and operation. And, if workers can move around and multitask in a cell, you need less of them.
Set-up reduction. Rarely do we hear that set-up reduction can have an impact on labor costs but it does. Similar to the economics of cellular organization, set-up reduction avoids the waste of additional labor infrastructure by contributing to a high rate of machine utilization and thereby requiring fewer people waiting on set-ups. Reducing set-up time is a fine example of industrial engineering value in eliminating wasted time with consequent lower cost and greater throughput.
Create cost containment metrics. The keys to successful use of metrics are threefold: controllability of the processes being measured by shop management, a feeling of accountability to senior management for achieving numerical success and, connection to financial results. There are metrics that express labor cost utilization and containment – here are some to consider: first time quality, machine uptime as a percentage of scheduled uptime, shop order due date performance. These and other metrics measure the underlying cause of the need for labor. Machine uptime, for example, tells us if we are wasting the labor resource by having machines idle and the workers assigned to them idle as well.
Do it right the first time. There is probably no greater waste of labor (and other) resources than rework. Enforcing a first time quality ethic can result in lower labor cost by avoiding this egregious form of waste.
So where are you in the labor cost continuum? If you feel the pinch of lower profitability whether felt in less sales per employee or a cost creep that seems to be encroaching on your revenues or a higher break-even point, you may be a candidate for right-sizing your labor infrastructure to fit How To Manufacture A Prototype your revenue base. Toyota, always the leader in manufacturing management methods, has reinvented the idea of industrial engineering in the modern era to, among other things, contain labor costs. Perhaps, your labor infrastructure can benefit from an industrial engineering diagnosis as well.