How to Reduce Labor Expenses Using Six Sigma in Manufacturing Industry
In any industry, when production increases above planned for levels whether due to sudden increased demand or unanticipated constraints in the system contract labor may be brought in as a quick fix. While this makes available some flexibility in operations, increased labor costs is a problem.
Six Sigma techniques can be used to reduce these enhanced labor costs and the attending productivity concerns. Implementation of cost accounting to these productivity enhancements.
Case Background
Four years back a Flavors and Food Additives Company in Asia, Westgate, had a swell in production in one of its product lines (liquids) due to the transfer of production from an associate and, at the same time, an increase in sales. Because of the strict labor laws and strong union power in the Asian country, the company was unenthusiastic to hire additional permanent personnel as that could lead to over-employment within its workforce. Requesting employees to work overtime also held little appeal, due to several penalties related to overtime imposed by the government.
Westgate chose to go with a third option – hiring casual (i.e., temporary) labor to handle additional production loads when needed. The casual labor market in this location is provided by one third-party service provider that has long had a good relationship with Westgate. This practice was supposed to help maintain the cost-effective use of casual labor by Westgate. In its place, Westgate experienced an unreasonably high increase in casual labor cost.
Manufacturing Leverage Index
This index is calculated by subtracting the labor cost percent change from the production change percent change. For example, if production increases 20 percent and casual labor costs increase 40 percent during the same period, the index is -20 percent. Ideally, the percent production change should be higher than the labor percent change; the goal is for the index to be a positive number and reflect “positive leverage.”
In March 2012, the finance and operation teams of Westgate were asked to control their casual labor costs. As part of this struggle, the company initiated using a manufacturing leverage index as a key performance indicator (KPI); this index compared the casual labor costs to the growth in production volume. After four months, the KPI indicated there was no important progress in the relationship between casual labor and production. In a June meeting with internal and external shareholders to address that disconnect, Westgate chose to use the continuous improvement methodology of Six Sigma to reduce the costs of casual labor.
- Define
A process map of the current lay- out (Figure 1) shown that the manpower requirement was based on the product order receipt; any gap was handled by added casual labor. In theory, any rise in casual labor should match a corresponding increase in production volume. High casual labor costs is not a matter of question in and of itself. When the casual labor cost increase is higher than the production volume increase, however, it becomes a problematic condition, as signified by a negative manufacturing leverage index.
- Measure
For the duration of the first six months of 2012, contract hours (and costs) improved while volume remained constant or decreased compared to 2011, as shown in Figure 2. A cause-and-effect analysis was concluded in July to understand better the various factors involved in this labor and production relationship.
- Analyze
Well, ahead consultations with members of the operations team, the Accounting department, and the planning department, the various causes for the contract labor hiring were detailed and measured done with a rating system.
Not suddenly, there were gaps in the planning process. When the organization received a production order, it was processed without checking whether it could be processed and completed within the limited period?.That resulted in needless manpower spent time on cleaning the machines and equipment after producing each order; preparing, measuring and weighing the raw material necessary to produce an order; and paperwork preparation.
The casual labor salesperson was also a participant in improving the manufacturing leverage index. Upon Westgate’ request, it provided all labor request records for 2012 notifying who at the company had demanded the labor, for which work area, for how long, etc. The records showed that the majority of demands were made by team leaders, but there were also unjustified demands made by nonauthorized personnel.
Invoices not being authorized and processed on time. This reduced distinguishability of the problem, allowing more unnecessary casual labor hiring.
Small batch orders that could have been joined with other orders for optimized production. As noted previously, this led to more work than necessary by employees to prepare the production line, and thus, created a simulated need for more casual labor to fill in.
- Improve
Based on the cause analysis, the most important causes were addressed by corrective and preventive actions.
All orders must be checked by the product planning department to confirm the minimum production quantity. If an order does not meet the minimum production quantity, it will be held for consolidation with other orders to reach optimum production levels.
No casual labor request can be made until there is confirmation that there is no idle or surplus manpower available from other internal production lines.
Casual labor authorization was removed from team leaders and given only to production managers. These authorization points were communicated to the salesperson; they are required to check that the person requesting additional labor is authorized to make that request by Westgate. All requests from nonauthorized persons will be immediately rejected.
A formal, documented policy was formed for casual labor engagement.
Also, Westgate asked the service provider to stop sending invoices by mail; all invoices must be sent electronically. This not only helped improve the speed of invoice processing but also helped get payment authorizations completed properly by using the existing workflow system of Westgate.
This progress reduced the labor hours by up to 30 percent after July 2012. The manufacturing leverage index correspondingly improved, reaching as high as 60 percent from an earlier low of -90 percent, as shown in Figure. A revised process map that shows developments in the salesperson invoices, manpower allocations and planning is given in Figure . The developments were measured by using hypothesis testing – a t-test for the mean labor hours before and after the progress. The p-value is less than 0.05 so the null hypothesis is rejected, confirming that there is a significant difference in the mean value, and the performance of the process has improved (Figure 6).
- Control
The progress was reviewed and confirmed as justifiable. The objective of Westgate remains to realize control based on a clearly defined system rather than leaving decisions up to individuals who define their priorities and processes.
To continue to enhance production quantity, the organization established a minimum process quantity in the workflow system. As a failsafe, a warning message will pop up if the minimum quantity is not reached with one order; the product planning team will not let unfinished orders proceed to production. All invoices follow the workflow system so that only the authorized personnel can view and accept the invoices. A follow-up email will be sent routinely to remind those authorized staffers if there is an invoice pending their approval – a further automated tool to help sustain improvements. Finally, the policies for requesting casual labor have been clearly communicated internally across the production team and with the service provider.
Conclusion
This case study exhibits the deployment of Six Sigma tools in finance for improvements in labor costs. The analysis involved four internal shareholders (local operations, planning, finance and the regional management team) as well as one external stakeholder. All data was collected either from the company’s existing workflow system or provided by the casual labor salesperson. Six people actively worked on this project while more than 12 contributed their time during a period of one month. No additional costs were spent on this improvement project.