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While labour may be the most controllable resource for a manufacturer, it is also the most difficult to manage, writes Gregg Gordon in ‘Lean Labor: A survival guide for companies facing global competition' (http://bit.ly/F4TGreggG).
Resources such as machines and inventory are inanimate objects with well-understood attributes, so it is easy to calculate the benefit of reducing inventory in terms of improved cash flow or the return on investment , he reasons. “When it comes to labour however, the analysis becomes murky. There are many attributes that affect performance and as a result the return on investment is difficult to measure. Understanding the potential in an existing workforce, or in a workforce that is about to be acquired is almost impossible to predict.”
The commonly-used metric of unit labour cost – computed as value of output divided by cost – may be easy to comprehend; but it can ignore the unique attribute of the workforce to innovate and develop new ideas and processes, reminds Gordon. Hastening to add that the challenge in measuring the value of the workforce does not mean the workforce does not offer an opportunity for a company to increase its value, he avers that those companies that effectively manage their workforce and the intellectual property (IP) the workforce creates will enjoy higher returns than competitors that do not effectively capture that potential.
Valuable advantage
Importantly, the author underlines that a workforce-based competitive advantage is far more valuable than any advantage based on a temporary gain from something available externally in the market. The reason, as he explains, is that whoever is providing those external resources will see the value they are delivering and begin marketing those advantages to others. “Internally developed intellectual property is much more difficult to duplicate because no one is selling it on the open market. This ability to innovate is a skill and as this skill is used, the workforce gets better at it, increasing the pace and impact of innovation. This workforce-driven innovation is a sustainable competitive advantage.”
Perfect paycheck
In a chapter titled ‘Delivering the perfect paycheck,' the author observes that if employee paycheques were considered a product line, the same would rank as one of the largest products at most companies. But as an expense, rarely is it given the same level of operational scrutiny as a revenue-producing product, he rues. “Like a utility such as electricity or water, payroll is expected to be on time and accurate, with managers only paying attention when something goes awry. While companies are heavily focused on efficiency and effectiveness in their main value-add processes, what they don't realise is that just the mistakes made by producing a paycheque inefficiently can inflate payroll on average by 2.4 per cent.”
The book lists three main categories that provide the best return on investment when it comes to improving the timekeeping and payroll process. First, one learns, is to automate manual processes within the timekeeping system by taking steps such as eliminating paper forms, no longer entering information into multiple systems and calculating values automatically rather than manually. “Second is to eliminate grey areas that cause interpretation in pay and accrual policies. Third, weakness in the processes should be eliminated. These weaknesses allow some employees to game or abuse the system, which lead to higher pay without corresponding increases in output.”
Instructive read on a critical factor of production, whether you are in manufacturing or services.
Focus on the nuts and bolts of the economy
Governments worry about big things such as money supply, balance of trade, and budgetary deficits, but often an economy fails not because of these but because of the malfunction of ‘the nuts and bolts' of the economy, writes Kaushik Basu in ‘An Economist's Miscellany' (www.landmarkonthenet.com). He mentions, for instance, how India trails behind other countries when it comes to the enforcement of contracts, the effort spent by citizens on overcoming bureaucratic hurdles, and the time taken to start a business and, more so, to close one.
The book carries numbers from the World Development Indicators (2004) showing that it takes 88 days to get the requisite clearance to start a business in India, whereas in China it takes 46 days, in Malaysia 31, and in Singapore and the US an astonishing 8 days and 4 days, respectively. “resolving an insolvency case takes 8 months in Singapore, 26 months in Malaysia, and 136 months in India.”
Patent filing
The author notes that patenting inventions is one specific facility the government needs to provide urgently. Stating that in the US every university and large institute provides facilities for filing patent protection on ideas, he says that India needs, as do most Third World countries, to move towards this. “And this is a task that cannot be left entirely to the market; government has to shoulder much of the responsibility.”
Second, there will have to be important labour market reforms, Basu insists. He frets that a legacy of Industrial Disputes Act, 1947, is that it is exceedingly difficult to lay off or retrench workers. “This law was enacted in the belief that it would help employment. But of course a potential employer who knows that he will not be able to retrench his workers may decide not to employ workers in the first place.”
He rues that these laws have caused a bigger problem – spawning a culture of job guarantee, irrespective of performance, leading to a low demand for labour, and thus hurting labour! The antidote, in Basu's view, has to begin by educating the trade unions that changes to labour laws are needed, not for other sectors of the economy, but for reasons of the welfare of the workers themselves. He, however, argues that the liberalisation of labour laws should be introduced in tandem with the implementation of a basic social security and welfare system. “It is possible to have a minimal social welfare system which will provide a floor for workers who find themselves temporarily out of work.”
In a section on the infrastructure imperative for the country, Basu distinguishes between fiscal and revenue deficit, and emphasises that at this juncture of our economy the lid has to be firm on the revenue deficit, not the entire deficit. “It is like a person who has Rs 1,000 but decides to start a new factory by spending Rs 2,000. Of course, he will run up a deficit. Whether this is a good idea or not depends critically on how much faith we have in his ability to run the factory.”
He points out that with all investments, there is what may be called ‘the risk of Gander.' The reference is to how, in 1938, the world's largest airport was Gander International, an essential refuelling stop for planes crossing the Atlantic. “The local government calculated that as air traffic grew, the demand for Gander International would inevitably rise and invested heavily in enlarging the airport. But planes became fuel efficient in ways that could not have been anticipated, and Gander is today one of the most underutilised airports”
Friendly discussion that you may enjoy enduring, even if you hated economists.
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