In the world of manufacturing and distribution, labor costs are usually considered to be a variable cost – that is they vary directly with revenue. In fact, in the short run, direct labor is in reality a fixed cost. While revenue may cycle up and down from month to month, labor generally stays flat. Companies don’t usually lay people off one month and then hire them back the next. So how do you increase the opportunity to reduce costs in down times and yet have the workforce you need for stronger times? The use of temps and overtime is the answer. There are only a few truly variable costs in manufacturing and distribution, and overtime and temps are two of them. I will talk about fixed and variable costs more in future posts.
I have seen companies use temps for as much as 35% of their work force. Many companies prefer not to do that as they believe that temps reduce productivity and quality because of the irregular nature of the resource. In fact, that can be easily managed using several approaches. First, single source your temps. Working with one, or at most two, temp agencies allows you to develop expectations as to the quality and skills you will be getting. Second, have the temp agency pre-train the temps on basic quality and assembly skills. Third, if you provide a positive work environment, even if you release temps, they will want to come back to your company when you need temps again, thus bringing experience with them.
As you can see, with proper management, use of temps can maximize the effectiveness of your variable costs, thus allowing you to manage your labor to significantly increase the profitability of your operations.
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