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HOW
SMART IS IT TO EXPORT
DIRECT LABOR JOBS?
By
Andre Odermatt
Notice that I use the word
“direct”, which is sometimes referred to as “touch”
labor, the actual time spent by a worker in actually
manufacturing a product or part of it. This in contrast to
indirect labor, which is time spent to enable to manufacture the
product without ever touching it, respectively adding value to
it in the conversion process from raw material to finished
product. And on top
of that, there is other manufacturing burden, or overhead, as it
is sometimes referred to.
100 years ago, about 40 % of total
product cost was material, 50 % was direct labor and overhead
was only 10 %. Think
about the creation of a wagon wheel with its hub, the spokes,
the rim, and all direct labor hours. The men probably had a roof
over their head and some believe, that this is how the term
overhead originated. Today, material is still may be 40 – 50 %
of product cost but direct labor is typically less then 10 % and
still a declining factor in the total manufacturing cost of a
product. Manufacturing overhead today has become a significant
percentage of total manufacturing cost of a product. Some
companies understand that manufacturing overhead is today’s
competitive battleground, not direct labor. However, many
companies do not understand this and are exporting direct labor
jobs.
Even
the cost of welding, which can be a time consuming job, is a
small part of total cost of most products and fits within the
less than 10 % of total product cost. As Doug Longenecker
mentioned in his article, “Product
Design For Weldability,” in the Fall issue of The
World of Welding, many welding quality problems are directly
related to design issues and he describes six important points
that should be of concern to designers. However, if a designer
of welding joints, frequently a mechanical engineer, had no
practical welding experience, he or she will not appreciate the
importance of these six points and the welder on the factory
floor will create rejects, rework and scrap, the cost of which
becomes all part of “overhead”.
Therefore, a
small investment in welding training can substantially reduce
overhead and help to improve total product cost more frequently
than reducing direct labor time or moving direct labor jobs
abroad for lower labor rates.
The
battleground of competition today is in the reduction of
overhead, not in the reduction of direct labor cost. It all
starts with product design that drives most of the overhead
associated with a product. There are excellent techniques
available today to help all those, who are responsible for the
success of a new product, to reduce overhead.
Why
then is it, that companies continue to export direct labor jobs?
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