How corporate strategy is holding hostage millions of dollars in profit: Download Entire Article Here

Recently, I stood before a plant management team sharing labor strategies that could help resolve some serious cost problems associated with inefficient shift schedules. The plant manager talked about some of their greatest achievements. Number one was keeping their overtime below 5 percent. Corporate listed low overtime as a key performance indicator, and minimizing it was critical to plant bonuses.

In environments where demand is flat, overtime is rarely used, typically only to fill vacancies. However, seasonal and variable-demand profiles present a very different problem. Customers want their product or service on demand. However, the fear of excess overtime has led management teams to overlook this mighty tool and make less-strategic decisions. In today’s world, cost competitiveness has magnified the impact of these shortsighted tactical decisions as more management teams are forced to reduce every unnecessary cost. The three most common errors are:

1.       Peak demand staffing: Plant management teams can staff for peak demand and always have enough labor to get the job done on short notice. Additional full-time employees are expensive with all the fixed costs associated with health benefits, vacations and holidays, and taxes. A common practice in today’s environment is management teams carrying additional headcount to avoid what they assume are the high costs of overtime.

2.       Disregarding customer service as a priority: This is not really an option because it results in lost opportunity and lost customers. Management teams can produce at a steady pace and sell out of items if production volumes cannot meet customer demand. This option is an automatic failure in today’s on-demand world, because customers do not tolerate shortages.

3.       Overstocking, high inventory levels: Overproducing to have a “cushion” of extra product in the warehouse to handle volume fluctuations is another option. But this has a variety of problems. Companies may meet customer demand but at a very high cost. The carrying cost of inventory can force charging higher prices and mean losing the competitive edge. Also, obsolescence costs become a reality in a world where tastes change quickly and product expiration is always a concern.