by Dean Prigelmeier, President of Proactive Technologies, Inc.
For expanding and improving businesses that have the capital for the investment in new equipment or processes, attempting to become or remain competitive, the level of investment is not as important as the return on that investment. This consistent practice of determining where to best place capital for the highest return should apply to labor. What is “paid” for labor is not as relevant as the value it adds to the operation and, ultimately, profit; the return on worker investment.
The lack of appreciation for the difference in “training cost” and “training investment” is understandable because it is rarely contrasted. The college textbook entitled Financial Accounting: An Introduction to Concepts, Methods and Uses, defines “direct labor cost” as the “Cost of labor (material) applied and assigned directly to a product; contrast this with indirect labor cost.” Indirect labor cost” is defined as, “An indirect cost of labor (material) such as supervisors (supplies).” There is no mention of an expected return on investment. Generations of cost accountants have been taught that there is no good that comes for higher labor costs, which to them is determined by the level of staffing and wage levels. There is no differentiation between strategic labor costs and uncontrolled labor costs.
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The profit from, and value of, most worker’s labor comes from task-based work, so all inputs that drive workers to high-performance, high-capacity output are investments.
As discussed in many articles in past issues of the Proactive Technologies Report, although labor costs are considered direct costs from an accounting standpoint, they should be more importantly considered as an investment in the operation’s overall level of competitiveness. Operations may vary as to the level of return on investment from labor, but each worker’s cumulative expertise gained while employed becomes an asset to the operation akin to intellectual property and, therefore, wages and compensation paid to develop a worker are an investment.
As many operation managers have found out, drastic moves like reducing the wage rates by 20%, 30% or more, while expecting to maintain the same output quantity and quality, chases off the workers with the gained technical expertise…because they can leave. The investment is lost and so are any returns. Furthermore, it is difficult to find new candidates who are willing and able to “hit the ground running” for an unreasonably low wage rate. And if a good candidate for employment is found and selected, bringing their productive capacity up may be delayed or hindered by the fact that the remaining “subject matter experts” are not as capable of transferring expertise as the technical experts that were driven away.
Scores of competitively run global corporations in the past few decades have withered away chasing short-term numbers to appease shareholders and activist investors, which in the longer run undermined their capacity, purpose, level of service and brand.
Unlike equipment and processes for which empirical data is routinely available to make smart investment decisions, the concepts of “level of investment in workers” and the corresponding “return on worker investment” remains illusive and foreign to most employers. While data-driven capital investment in facilities or equipment decisions are straight-forward and specific, adjustments to labor are usually general; a layoff or addition of 10%, 20% of staffing. Some significant outcomes from undervaluing or overvaluing labor are: Read More
Increasing Worker Capacity – An Alternative to Cutting Workers for Short-term Cost Savings
by Stacey Lett, Director of Operations – Eastern U.S. – Proactive Technologies, Inc.
In business, if you encounter market “softness” and believe that the business level that you were previously operating at is now unattainable for a limited period, you might first find cost cuts that do not erode the business capacity once held in case your, or the pundit’s, forecast was wrong or the recovery is swifter than anticipated. Sometimes investments are made in machinery and technology during the lulls to get ready for the economic up-turn, but too rarely is any effort made to determine the level of each worker’s current capacity (i.e. what percent of the tasks they were hired to “expertly” perform) relative to the job they are currently in and what could be done to increase it to handle not only existing technology and processes, but the new technology and processes as well. One might even think about cross-training workers to build “reserve capacity.”
Too often, in this age where every quarterly report has to be as good or better than the one before – actually earnings per share – even if the economy currently doesn’t allow it, well-run businesses are pressured to cut into the bone; driving down wages, cutting benefits and ultimately eliminating workers. Investment in new technology isn’t permitted. It doesn’t take an accounting genius to make sweeping, ill-informed cuts, but it does take a pretty savvy leader to pick up the pieces after this mistakes have been made.
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“That is the one point missed in all of the cuts to wages, benefits and staff; the first wave affects those who have no choice, the second wave affects the company as those with choice exercise it.”
When the economy recovers and the company stumbles in regaining its capacity, heads roll, more cuts are made and finally the investors pull out – leaving the previously well-run company impaired or near collapse. No good has come from this, and why it is allowed to continue makes no sense – except that it takes little thought to order, gives Wall Street the appearance of something good happening and something to report. That is why stocks rise when layoffs are announced – even in the face of predictable long-term effects of what the cost cutting means. That and the media’s cheering section that naively extols a short-term bump that may turn into a long-term fumble.
Worker capacity will be needed once the economy resumes, and the prudent businessman would not want to miss the recovery while spending too much time rebuilding the organizational capacity, part of which is finding “talent” to the replace the ones encouraged to leave and part trying to encourage the ones currently employed to stay. Additionally overlooked, employee and management morale suffers during wholesale cuts and irrational cost-cutting acts. The workers needed to sustain a recovery and regain market share are affected by what they see happening around them, and those most talented keep one eye on the door because they have the skills other employers might appreciate and always have the option to leave. That is the one point missed in all of the cuts to wages, benefits and staff; the first wave affects those who have no choice, the second wave affects the company as those with choice exercise it.
An alternative to knee-jerk cuts to workers is to assess each worker’s capacity (i.e. what percentage of the tasks of the job they have had a chance to learn and master), then use business “lulls” to raise it to full job mastery. Read More
Your “Resident Expert” May Not Be an Expert Trainer, But Easily Could Be
by Stacey Lett, Director of Operations – Eastern U.S. – Proactive Technologies, Inc.
Just because a worker is informally recognized as a “star performer,” it doesn’t necessarily follow that they can be an effective trainer. Employers like to think it is as easy as that, but seldom does it turn out to be the case. However, with a little structure, some tools and a little guidance these resident experts can, and often do, become expert trainers.
If one thinks about how an expert is measured and recognized, it is usually by subjective, mostly anecdotal measures. The worker performs job-related tasks quickly, consistently and completely. This implies few mistakes, performance that is mostly within specifications and standards of performance, and no one can remember anything rejected or returned as scrap or rework.
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Thinking it through a little further, one might struggle to explain how the expert performer developed these traits. Someone showed them how to perform a task, and repetitive performance developed new, retained skills. They are now operating as a “robot” while performing a task, seldom thinking about the subtleties and nuances of each task (filed in memory long ago), which makes them fast, consistent workers – something the employer can notice an appreciate.
But if we ask “who trained this expert,” “how was he or she trained,” or “what specifications and standards were emphasized,” we come up empty. By just playing the role of a trainee, and allowing one of these experts to train you on a task, will reveal a lot as to what the new-hire or cross-trainee can expect.If we compare this expert’s task performance to other peer experts, we probably will notice slight differences in performance between them, which means workers that each trained may be trained differently on the same task. Sometimes these differences can be subtle and of no consequence, sometimes they become a point of contention, lead to confusion and/or unsafe and incorrect task performance. Read More
Apprenticeships That Make Money? Not As Impossible as it Seems – Part 1 of 2: The European Difference
Dean Prigelmeier, President of Proactive Technologies, Inc.
A few years ago, I had dinner with a friend of many years, Günther Hauser, in his hometown of Neckarsulm Germany. I met Günther several years ago when Proactive Technologies, Inc. (“PTI”) was working on a project in South Carolina that required PTI staff to travel to the LÄPPLE manufacturing plant in Heilbronn, Germany where Günther was the manager of the apprenticeship program. During that dinner, our conversation naturally drifted to an area of shared interest; worker training and apprenticeships and the differences in the United States and European systems of workforce development.
LÄPPLE is a worldwide supplier of press parts, autobody shell components, standard parts and rotary tables as well as automation solutions. They employ over 2000 people and provide exclusive, sophisticated solutions in forming and car body technology as well as the engineering and design of automation systems, machines and tools. Some of their customers include many of the automobile manufacturing companies such as Audi, BMW and Volkswagen.
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While working on the Heilbronn project, PTI staff performed job/task analysis on several job classifications that were being duplicated at a new joint venture in Union, South Carolina including Press Operator, Press Technician, Maintenance, Quality Control, Assembly Operator and Assembly Technician. Günther was kind enough to take me on a tour of the apprenticeship center at the plant. The center had around 100 apprentices at any one time at various stages of progression. Modeled after the manufacturing plant where it was established, the group of young workers were processing in each of their disciplines of choice; CAD-CAM Engineering, Tool & Die, Quality Control, Machining. It was like a mini-manufacturing facility with the LÄPPLE factory.
Those apprentices in their final 2 years of study, I was told, were treated like a part of a Tool & Die Manufacturing center. When an order came in for a die, either from LÄPPLE or one of its customers or suppliers, the process started with designing the die, machining the die components, assembling the die, inspecting the assembly and shipping the die to the customer. Instead of making “key chains and donkey carts” like apprentices are often asked to make in the US as their “hands on” training, these apprentices were producing an actual product that was sometimes priced as high as USD1 million!
Of course, these apprentices were paid while in their program. Much of the wage came from the government, while the company paid for the facility, equipment, instructors. But LÄPPLE, like many European apprenticeship hosts, learned how to leverage the work produced by apprentices in honing their skills for paying for the costs to host the program. And when an apprentice completes the program, LÄPPLE gets first pick of the class. The other apprentices have proved their skills enough to be immediately hired by one of many manufacturing facilities in the area aware of the program and its high standards of apprenticeship. Read More
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