How to Manage Rising Labor Costs in ManufacturingDecember 8, 2021
In the last two years, since the beginning of the Covid-19 pandemic, business owners all across the country (and the world for that matter) have been dealing with challenge after challenge. From the difficulties of social distancing mandates and business hiatuses, to the “Great Resignation,” a labor movement that has seen millions of workers quit their jobs, managing a business certainly hasn’t been an easy task as of late.
Unfortunately, another issue has begun to surface; rising labor costs.
As every business owner (should) know, labor costs are one of the most significant driving forces within a company. They can determine large chunks of your annual budget, clue you into areas of lowered productivity, and even help you adjust your product prices to help with your overhead. In short, rising labor costs aren’t good news for any company, and in a year full of uncertainty and change, that’s not something people want to handle.
While many industries have been impacted by the pandemic similarly, one of the largest sectors dealing with increased labor costs has been the manufacturing sector. Manufacturing jobs account for roughly 10% of the United States workforce, including everything from automobile assembly lines to wood shops and bakeries, so seeing a trend of rising internal costs is something that more people should pay attention to.
If you are a business owner or head of a company, this article may just be for you! We put together this list of different ways businesses can weather an increase in labor costs so that you can have some extra help on your side. Here at LACOSTA, we’ve been on the front lines of the workforce throughout the pandemic, and we know the difficulties you’ve been dealing with. Now, let us help you figure out your labor cost problem!
What Makes Labor Costs Increase?
Before we get too far down the rabbit hole, let’s make sure everyone is on the same page regarding labor costs. Labor costs are defined as “the sum of all wages paid to employees, as well as the cost of employee benefits and payroll taxes paid by an employer.” These costs are then further categorized into direct and indirect labor costs.
Direct labor costs account for all labor and materials used to create a product or service. In manufacturing companies, direct costs are most commonly the wages of the employees that are physically producing the products. On the other hand, indirect costs account for the money spent on otherwise running and maintaining the business. Security guard wages and office support staff are two good examples of indirect costs.
Most often, labor costs increase when there is an increased demand for a product and not enough “productivity” to meet the demand.
For example, toilet paper is a product of the manufacturing industry, as it turns raw materials (wood pulp) into a finished product. Producers of toilet paper saw an enormous spike in demand for their product at the beginning of the pandemic. Due to this demand, toilet paper companies had to order more materials, driving up the price of toilet paper.
While the end result for customers is a higher-priced commodity, the business is also paying more money for their labor, hence, an increased labor cost. Rising wage levels and employee shortages (other trends we are currently seeing in the business world) are also tied to increases in labor costs. So what can business owners who are frantically trying to calculate labor costs do to manage this?
Revamp Your Scheduling
An easy way to recoup some productivity is simply reevaluating your current working schedule. Monitor the productivity of your employees for a short period of time, and see if there are any patterns or discernable concerns in the workload.
Perhaps some employees are more productive before lunch than others, or a group is most effective when they are scheduled to work together. Use this insight to create a new schedule that is better adapted to your specific company. Increasing the day-to-day efficiency of your schedule will help eliminate labor costs lost to unproductive work.
Focus on Quality
All of the largest manufacturing companies want to produce the best quality product possible, but they need qualified and capable employees to do so. Surprisingly, extensive employee training isn’t most company’s top priority, but it may quickly become the standard.
In the past, if an employee wasn’t performing up to expectations, companies would often let this employee go and simply hire a replacement. However, hiring someone new can significantly increase the total costs of your business, while investing in more comprehensive training programs for your employees will help cut those costs.
Keep What You’ve Already Got
In a similar vein to our previous tip, so many companies in the world don’t pay enough attention to their employee retention rates! Having an employee signed on for the long term is an excellent strategy for lowering labor costs, as a happy employee will often be more productive.
Take a bakery, for example. Say there is an employee (Person 1) who has been with the bakery for five years; someone who has trained extensively at their responsibilities and is happy in their job.
Now, compare the benefits of that employee (Person 1) to an employee (Person 2) who has been with the bakery for a couple of months. Person 1 likely has:
- A better understanding of the job
- More skill within the manufacturing process (aka the job tasks themselves)
- The ability to train new hires and provide assistance when needed
- A belief in their job, skills, and company
In short, Person 1 will almost always be one of the best assets your company can have. If you focus on employee retention, you can improve your existing workforce to be more efficient and productive.
LACOSTA and You
For over 30 years, LACOSTA has provided industry-leading janitorial services and managed labor solutions to companies across many different industries. Our teams are dedicated to the success of your business, and with our help, you can get back to focusing on the real challenges you might be facing!