Six Ways to Reduce Labor Costs in Manufacturing

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Published: Thursday, July 20, 2017 - 12:01

Labor costs are likely the largest line item on your company balance sheet. Therefore, a successful cost-reduction strategy must adequately balance resourcing and cost controls.

Although laying off part of the workforce may seem like the quickest and easiest solution to reducing labor costs in manufacturing, it may not be the best way to resolve the issue. The cost of finding and training new employees is extremely high, so it makes more financial sense to hold on to your employees and keep them happy.

But this begs the question, “is there a way of reducing labor costs in manufacturing without laying off the workforce?” Luckily, there are several. Here are six methods for reducing labor costs in manufacturing:

1. Cost reduction by design

Product development drives about 80 percent of the product’s cost. Of that cost, the concept and program architecture drive about 60 percent. Therefore, manufacturers can save a significant amount of money on parts, materials, quality, and labor by considering cost reduction during the design phase of the product.

Several of the most important considerations include:
• Design for manufacturability. This involves considering manufacturing issues—such as raw material selection, secondary processes, dimensional requirements, and even the final packaging—at the concept stage to reduce material, overhead, and labor costs.
• Design for lean. Lean design is ideal for companies that have high product values tied to labor costs. Manufacturers can consider factors such as design simplification, design for assembly, and standardizing processes to reduce direct labor costs.
• Design for quality. This ensures high quality and reliability within the products to eliminate rework, which increases labor costs per unit.

2. Eliminate overscheduling

Overscheduling is a considerable source of labor costs in any operation. When management has access to imperfect information about the production demands, their scheduling is just a best guess. However, by using predictive scheduling software based on sophisticated algorithms, you can optimize your employee scheduling efforts.

With this software, managers are able to look ahead at the incoming production demand and make the scheduling decisions from those data. This ensures the business is adequately staffed to meet the demand and eliminates excessive and unnecessary labor hours.

3. Lean production

Lean production eliminates nonvalue-added processes within manufacturing. When implemented efficiently, lean production doubles the labor productivity, reduces inventory, and cuts production-throughput times significantly. Essentially, with a more efficient production process, employees are able to produce more units—thus lowering your labor cost per unit.

In addition to eliminating nonvalue-added processes, lean production also helps eliminate bottlenecks within the typical production line. Bottlenecks will reduce output and cause the productivity of some line workers to decrease significantly.

4. Standardization

Process and part standardization can result in economies of scale and automation. With automation, there are fewer employees on the assembly line, and the equipment manages the assembly. The benefits of this option include more consistent quality, quicker output, and significant savings on labor costs.

Leveraging factory automation, manufacturers can produce around the clock without paying for benefits, hourly wages, sick days, etc. If you decide not to automate but still implement standardization best practices, benefits such as higher production output and reduced labor costs can be realized.

5. Technology implementation

With technological advances that aid in automation, there are some jobs where machines can do the work of a human more efficiently and effectively. Systems such as automated inspection, automated picking of components for assembly, and automated assembly will all aid in reducing labor costs in manufacturing.

With the occasional bit of preventive maintenance for the machines, and maybe a few operators and mechanics to monitor the equipment, you can have an automated process that eliminates the full cost of some humans on the manufacturing line with similar or better output. With countries like China, Indonesia, and other low-wage locations offering competitive labor rates, many companies are modernizing their equipment to keep jobs domestic in order to compete with the low-wage countries.

6. Utilizing part-time labor

By utilizing part-time labor, you are not paying for benefits, 401K contributions, bonuses, and other perks that a full-time employee is receiving. Many companies use “on-call” employees as a method of reducing labor costs in manufacturing. The on-call system involves open scheduling whereby employees can come to work when they need to make money. Employees are trained on specific jobs so they can contribute whenever work is available.

Labor costs are a significant portion of the budget for any new launch. However, there are ways to streamline the process, which aids in reducing labor costs in manufacturing. The aforementioned six areas contribute to a solid production foundation that will help.

First published June 5, 2017, on the CMTC Manufacturing blog.

About The Author

Steven Brand

Steven Brand is the strategic communications manager at  California Manufacturing Technology Consulting (CMTC) where he provides strategic communications expertise for all of CMTC’s programs and services. Brand also is an instructor of leadership and management courses at UCLA Extension.