"Employees are our most important asset."
How many company value/vision/mission statements include that? I would guess over 90%… of the companies that actually have such statements. How many really, truly, believe it… and of those how many actually account for their employees as an asset on the books? A handful at most.
Co-blogger Bill Waddell’s new book, Rebirth of American Industry, has a few themes that require re-reading to grasp completely… at least for people like me. This past weekend I spent some time exploring his "valuation of people" concept, and found that it tied directly to situations all manufacturers face. I apologize to Bill for quoting more than a few passages from his book, but he says it better than I ever could.
Most manufacturers operate under the Sloan/Dupont/Brown accounting method that considers manufacturing employees to be variable costs, to be hired and fired in a direct correlation to even small changes in production schedule. Think about that for a minute.
"A new accountant can be hired and pretty much as effective as he or she is going to get within a month or two. A production employee is more likely to take six months or more. Yet the accountant is a fixed expense with a fair amount of job security while the production worker is a commodity."
"Only in the world of F.W. Taylor, Pierre DuPont, Alfred Sloan, and Donaldson Brown can kicking trained, experienced, capable people out of company be seen as a positive move."
How many of us, especially those of us in the high tech manufacturing industries, have grimaced when our "headcount" was decreased due to a temporary change in sales? What was the true value of those people to the company?
"Those variable cost people – the ones Taichi Ohno points out are not even whole people in American cost accounting – are not people at all. They are headcount. That simple fact makes lean manufacturing virtually impossible at Sloan companies."
Bill reinforces his point by making a comparison to a different industry:
"Imagine Google, Yahoo, or Microsoft declaring that computer science is a commodity – basically any warm body from a local temp agency can do it – and that the key to success in running these technology companies is not technology, but finance and marketing. Imagine further that they all but declare war on their programmers and system design folks, classifying them as variable costs and devising a management system aimed at cutting their numbers and minimizing their pay."
Traditional accounting methods do not account for the true value of production employees. Capitalizing training is one method to get some of it officially on the books, especially if it is by person and the company has to take a write-off when the person leaves… which helps tell the investor about the true impact.
Taichi Ohno explained very clearly that the continuous improvement of labor efficiency at Toyota results in cost reduction and excess capacity. The profit from lean manufacturing with a stable workforce arises from freeing up people, then using them to sell more. This is contrary to the Sloan company view. The sales forecast is based on the most marketing believes they can get at the planned price. Any people freed up along the way will be laid off, resulting in lower costs for the planned volume.
Lean manufacturing depends on people. Experienced, trained people that are focused on removing waste from processes. This experience and training has considerable value far exceeding the hourly cost reflected by traditional accounting.
"Just about every company says they want their employees to work smarter, not harder. Few of them understand that people cannot and will not work smarter when they have supervisors hovering over them dictating and measuring their every move. They especially will not work harder or smarter if management has defined the ultimate goal to be a lights out factory and they soar like hawks over the plant hunting for jobs to eliminate and people to lay off. People everywhere will work smarter and harder for the customer. They will not work harder for someone who has defined them as a variable cost."
Creating a lean manufacturing environment is tough. Very tough. There are a lot of hurdles with training, commitment, new tools, and especially traditional accounting systems. We are asking a lot of our employees, especially initially before the full value of lean begins to hit the bottom line. We are in effect asking them to help us streamline and remove waste from processes, which they know puts them at considerable job risk. Far more risk than the manager, or accountant, experiences.
"All employees ask is that management make the same sort of commitment to them as they have been asked to make for the company."
"If the company is willing to risk the possibility that there may be times when profits suffer due to an excess of people, they can anticipate an enormous return when those people commit to driving lean, high-quality manufacturing through the plant."
Think about that the next time you are considering ways to cut costs in the face of short- or medium-term reductions in sales. Especially think about it if you are trying to reduce wage creep or reduce product cost in a stable (let alone growing) business. The value of trained, experienced employees far exceeds their hourly cost, and the impact of those people leaving (and your best and most employable employees are always the first to leave) far exceeds the savings of layoffs or wage freezes or cuts. The culture where employees cannot count on management to provide stable employment with opportunities for growth is a culture where lean cannot succeed. The cost of the waste associated with inefficient processes, which you will need experienced employees to identify and rectify, far exceeds the cost of those employees.
Support, nuture, and then leverage the power of your most important asset, your employees.