We would suggest an auto-evaluation of the competencies of auditors/assessors on several points (regrouped into 5 situations) where their objective approach to the work observed will create value for the audited/assessed companies.
Situation 1 : Is direct labour always the appropriate « work unit » in production ?
In India, in a factory manufacturing electronic components, two types of production process, similar with regard to the materials used and in the technical functioning of the product, are possible :
- « Professional » components produced for many years for the manufacture of relay devices for the distribution of electricity and in the manufacture of locomotives. These are complex components of which several thousand units are produced each year,
- components intended for the general public, a new technology for the company, and used mainly in the manufacture of televisions, automobiles, Hi-Fi equipment. These are small, standard components produced by the million each year.
The production cost structures can be analysed thus (in %) :
In the first case (« professional » electronic products), the overall cost of the product is calculated from the main cost item : direct labour. The cost is put at 3 times the cost of the manpower (3*33% = 99%). In the case of the production of « general public » components, should the overall cost also be calculated from the direct labour item ? That is to say 33 times (33*3 = 99%) the cost of the workers ? Or should the calculation system be changed and therefore modify the place of manpower management ?
Suggested answer to situation 1 :
The cost of labour is no longer the essential element in the production cost in the case of the « general public » components. It is more important to concentrate the attention of the managers on the major added value items :
- the machines : essentially, the number of breakdowns and time in use,
- materials used : waste, importance of the production « outstandings », for example.
Production management that continued to focus on labour time would bypass the real elements of added value in the company, because the structure of added value can change radically.
Situation 2 : how to increase the economic performance of the production material (output) ?
In this Indian « general public » manufacturing workshop, the automatic machines were working at 50% of their theoretical capacity when they first came into operation. Two years later, they were operating at 75%. How was this significant improvement in the machine’s output achieved ?
Suggested answer to situation 2 :
According to the engineer, this 50% increase in output came about through unspectacular, slowly won gains, acquired as a result of the resolution of a series of minor dysfunctions in the man-machine relationship. Three management principles are indispensable in achieving this type of success : • the hierarchy and process planning department must listen to what the production staff (workers) have to say : the production operators are those who identify the problems, and – above all – the origin of the breakdowns, quality defects, etc.
- xi) improvements in the workers’ qualifications : new apprenticeships (writing, calculation, elements of statistics : tally of the defects/mistakes/dysfunctions, calculation of percentages, graphs, etc.) operators have made it easier for them to communicate and progress in their control of automatic machines.
- xii) a dialogue between the different professional categories present in the workshop : engineer, supervisor and workers have been vital in identifying errors and their solutions. As usual, it is a question of a joint contribution of competencies : the knowledge of the engineer, know-how of the supervisors and information from the operators.
Material investment (automation, computerization) should always be accompanied by a major « immaterial investment » (staff training, quality circles, etc.).
Situation 3 : is the intensity of « direct » labour enough to ensure that the company remains competitive ?
Four cases of problems encountered in the production process :
- In Thailand, a producer of corrugated sheeting for the building industry lost market shares to a competitor in Malaysia. The production engineers accused the « sales team » of being incapable of taking large orders (3,000 – 4,000 metres) and of being content with small orders of 300 – 400 metres which meant the lamination and pressing tools had to be constantly adjusted.
- The factory realised that the Malaysian competitor produced small series of short lengths (300 – 400 metres) for the same cost as the Thai factory produced big series (3,000 – 4,000 metres). The main problem involved the change of tools : changing the cold roller cylinders called for the use of gantries and clearly took too long to acquire the flexibility required by the various product ranges demanded by the client.
- Competition forced the factory to reduce the tool-changing time from 2 days to half a day, in other words, a reduction factor of 7. This result is common and was obtained by trial and error.
- In Pakistan, a cart manufacturer’s premises were cluttered with a highly diverse collection of spare parts needed to satisfy the very varied demands of farmers during the ploughing season. His cash-flow was undermined by advance production. To diversify production and reduce his bank loans, the forge had to be capable of producing short runs. But a tool change lasted three hours, which was negligible when the production of long runs required 2 changes a week, but proved a handicap when demand required 12 changes a week. In this case, launch times were dived by 9, falling from 3 hours to 20 minutes.
- The market forced him to organise « rapid » tool changes, to install a machining centre to link operations and reduce intermediary stocks, and to reduce the correction of defects (blasting – sanding).
- In Turkey, an agri-food company producing tinned vegetables acquired its first automatic machine to put the lids on the tins. For the food engineers, conversant with health-food safety issues, mastery of this new electronic tool was problematic, output was no higher than 40%, the manufacturer’s maintenance technicians were 80 kms away and it cost a lot of money to call them out.
- Return on investment time stood at 5 years and the management ordered this to be reduced to 2 years.
- In Egypt, in a weaving workshop producing fabric for mattresses (white), furnishings (light colours) and jeans (dark blue), the machines are operated by women workers who control 24 machines each. The types of fabrics (white, light, dark) are distributed by groups of 12 machines : certain workers only pilot the production of white material, others the light-coloured fabric, and the remaining workers, the dark blue. Output is very different from one group of machines to another. Breakdowns in the assembly line – the most frequent breakdown – can immobilise from 2 to 18 machines at a time : the time all 24 machines are in use varies from 30% to 90%.
After study, the cause is identified. The dark fabric chains (mainly jeans) are more vulnerable because the dye weakens the thread.
What common defects can be detected in these four (4) production management situations ?
Suggested answer to situation 3 :
In principle, companies try to maintain the costs of « indirect » labour at a low level. This policy, founded on the idea that added value is solely the result of direct labour proves inadequate when logistics staff - maintenance, production study and process planning department, production management - become essential to the quality and quantity of production. The four (4) examples show that logistics has become an essential factor in the overall productivity of the various production factors. Productivity cannot just be measured by the rate of activity of the direct labour force, but by the performance of the production departments taken as a whole, including the various logistics departments.
- ix) Cold-rolling (Thailand) and cart parts (Pakistan) : insufficient technicians and engineers in the research and/or process planning departments.
- x) Food industry (Turkey) : change of production paradigm (for production engineers, mechanical and electronic skills are just as important as those relating to food specialities). The management had introduced electronic equipment (automation) that no worker knew how to operate correctly. The engineers had mastered food techniques (hygiene, safety) but not electronic and information technology techniques.
- xi) Weaving (Egypt) : start-up choices are a major issue in balancing production tasks. This information is important if start-ups are to be made in such a way as to balance production loads – a major issue.
Situation 4 : should the production operators (workers) be judged on their manual activity in the production process ?
Three cases where the company directors consider that low productivity comes a lack of activity on the part of the labour force. Some even complain of having to « pay people to do nothing ».
In Alep (Syria), the head of a workshop in a cold rolling factory making angles and plain bars complains that his workers are often « twiddling their thumbs ». They watch the machines work and walk round them whilst their hands remain inactive. Sometimes, the workers sweep the floor to prevent patches of oil from spreading and injuries from steel particles. The director wonders why he has to pay skilled workers to carry out these tasks.
In a factory making wall-mounted gas boilers in the south of Italy, the traditional conveyor belt assembly line has been replaced by a « flexible » line. This makes it possible to create intermediary stocks to deal with dysfunctions and allows workers over the age of 50 to sit down. This reform was at the request of the company director who wanted to retain his older staff who had been loyal over very many years. The head of the workshop does not understand why the job-cutting that is possible with these new investments has not resulted in staff cuts. He does not understand why the all-round workers who have been freed in this way come to the aid of their colleagues in difficulty from time to time. He nonetheless admits that productivity has risen and defects fallen.
Are the workshop managers of these factories really right ?
Suggested answer to situation 4 :
Do we ask fire-fighters, police officers and security guards in general to calculate the time they spend working solely on the time spent in the field ? No, of course not. We expect of these professionals :
- Availability : that they are not busy with other tasks and know how to listen to requests
- Diagnosis : the ability to implement resources suited to the problem posed
- Rapidity of action : limiting the consequences of the event (safety, unavailability of personnel and equipment).
Modern production is increasingly moving towards these kind of operational methods. Production operators must be available when an event, a disruption or a dysfunction arises. Their timely intervention :
- in a production process in which machine costs have become preponderant,
- in which the continuity of production guarantees overall productivity,
- in which deadlines are ever shorter,
is a guarantee of efficiency.
The importance of the labour force is less ‘to have its hand on the wheel’ than to identify future production problems in good time, to understand the reasons for problems and to intervene rapidly to fluidify production. In management, competence and availability to act are remunerated by comparing the cost of this to the cost of a shut-down in production. Amongst the management tools used most frequently to manage these work-place situations are : the management of queues (control over random occurrences) and the "ABC" method (statistical evaluations of many management phenomena).
Situation 5 : do workers have no professional conscience ?
Some classic complaints heard by various social auditors :
- In Sri Lanka, the personnel manager of a big garment company is at a loss to understand the behaviour of the workers : absenteeism of over 20% and an annual staff turn-over of around 100%.
- In Costa Rica, the manager of a banana plantation finds that workers change employer without warning to go into another activity (factory or plantation) as soon as the wages offered there are a few cents higher.
Do these behaviours have major economic consequences for the companies ? Do you think that these recurring incidents cannot be controlled by the employers, condemned to suffer from such behaviour on the part of their workers ?
Suggested answer to situation 5 :
1. Hidden costs, source of savings and productivity
« Hidden costs » are production costs (industry or services) that are not identified by traditional information systems such as the budget, results account, general and analytical accounting, or trend chart. They are characterised by their ability to explain the quality of the way an organisation functions. The definition of hidden costs covers all that is at stake in the management of human resources (HRM) and the organisation through an analysis of costs that have not been properly examined and recorded by traditional accounting systems. Hidden costs correspond to organisational and human problems. Hidden costs are the monetary expression of regulation activities : dysfunctions > regulations > hidden costs.
The following example concerns a frequently occurring issue in staff management, the impromptu departure of staff, known as turn-over. The rate of this is often equal to 100% in many companies. The departure (or hiring) of staff in one year is equal to the number of work stations.
The potential costs of turn-over originate from three distinct types of situation :
- Costs linked to departure : the unexpected absence of an employee causes disruption to the work schedule, resulting in waiting and non-production costs.
- The costs of replacement : the hiring of a new employee occupies the recruitment and staff management department (hiring formalities, opening of new staff files) - the costs, probably higher, of integration : a productivity differential of several days or even weeks exists between the time a former employee leaves and the time a replacement becomes equally effective. -
- Cost of internal apprenticeship : these include the time spent by the staff department and the foreman in advising and assessing the new employee during his/her integration. Efficiency differential : this is the loss of efficiency between the departure of the former employee and the return of productivity to its previous level. Inexperience : during integration, developing competencies and inexperience may produce wastage, loss of materials, a fall in quality, etc.
These three costs together often represent one or two months’ salary, that is for a turn-over of 100% a year, a cost of 15% to 20% of the wage bill.
Absenteeism is also a very high hidden cost. For an absenteeism of 20%, the cost also reaches 20% to 25% of the wage bill.
It is in the company’s interests to identify the causes of the turn-over and absenteeism. It is often a question of low wages. Paying 5% or 10% more than other companies often means a saving of 15% to 20% of the wage bill in « hidden costs ». The description below of worker inconsistency in the industrialised countries shows the advantages of staff management as a corporate resource.
2. High turn-over in workers : the case of the industrialised countries.
From the 1930s in the United States, and from the 1950s in Europe, « hidden costs » have proved very high and are a risk factor in the loss of competitiveness of industrial companies. Hidden costs are the expression of the behaviour of workers who refuse the industrial working conditions of their work station. The principle costs stem mainly from three instances :
- turn-over (staff rotation) : impromptu departure of a worker who must be replaced as quickly as possible,
- absenteeism : absence of a fairly high number of workers (sometimes 10% to 20% of staff) at the beginning of the working day or change-over.
- production quality : the refusal of a station is often expressed by loss of attention to production, meaning production has to be repeated and part of the production goes to waste.
In the first instance, salary increases by companies wishing to retain their staff (reduction in turn-over and absenteeism costs) was a satisfactory response. Rather than leaving the company for a 5% increase, staff paid 10% more than on the rest of the labour market remained with the company.
Later, companies in the industrialised countries – notably under pressure from Japanese industrial firms – concentrated on « the interest of the work ». What changes in staff management were needed for quality to improve ? To attain this second objective, industrial firms invested in improving working conditions, the quality of the intermediary production management, the development of social security cover (health insurance, redundancy payments, etc.), limitation of overtime, etc.
These extra social management expenses were compensated for by the savings made on previous hidden costs.
Ways for auditors/assessors to measure the directors’ competence in social management :
Firstly : identify the management ideas of the company’s managers. Ask various managers (general management, workshop managers, staff managers) to give details of their approach to the competencies needed by their production staff (workers, operators) and their logistics staff (maintenance, process planning department, in particular) for effective and flexible production methods.
Secondly : put forward hypotheses for « costs – advantages » analyses as regards hidden costs, and for improvements in the social management of the balance between direct and indirect labour and in the competencies of the immediate management in their role of supporting production workers.
Thirdly : the auditor/assessor submits these hypotheses to the management as a contribution to the evolution of its ideas on staff management and management in general.
For further information :
Buono, A. F. & Savall H., Socio-economic intervention in Organizations : the intervener-researcher and the « socio-economical approach of management » approach to organizational analysis, Charlotte (USA), IAP (2007)
Frederick S. Hillier & Gerald J. Lieberman, Introduction to Operations Research, McGraw-Hill : Boston MA ; 8th. (International) Edition, 2005
Hamdy A. Taha, Operations Research : An Introduction, Prentice Hall ; 9th. Edition, 2011
Savall Henri, Realising the untapped potential of enterprises through economic management, ILO, 2005