In answer to a request from Martin S. in Arizona "If the new Federal minimum wage increase is put into effect it will put me out of business unless I do something fast to lower my costs. Since I have limited time to spend on this, where do I begin?"

Offsetting A Minimum Wage Increase

Authored By: Darryl Young, Senior Consultant, Gene Levine Associates

Opportunities to reduce costs are always present. They need only a minimum wage hike to give them a priority and to prompt businesses to act.

The Federal minimum wage (2023) is now $7.25 with some states already raising that minimum. For the purpose of my answer, I'm going to limit limit my focus to labor costs. A Federal minimum wage increase to $10.00 per hour would raise some earnings by 38 percent. If your average paid wages are less than $8.00, you will feel the total 38% impact of this increase almost immediately.

To determine your impending costs, let's assume you have 100 employees and raise their wages $2,75 per hour. Your annual expenditure on wages will increase by $572,000 (100 employees x $2.75 per hour x 40 hours x 52 weeks), not including Social Security contributions as well as other benefits now or soon to be tied to gross wages.

To combat this expenditure, try to extricate yourself from the fires you're fighting and begin a continuous improvement program now to offset the increase. As you begin to plan this cost reduction campaign, here are some areas and approaches to consider:

TURNOVER: Be concerned if your direct labor turnover figure is more than 30 percent annually — you could be incurring a replacement cost of $5,900 to replace each fully trained person you lose. GLA has an Ebook that details exactly how this factual cost is calculated.  By comparing a $5,900 cost per replaced person with the cost avoidance realized by not hiring "warm bodies," you hopefully can understand the wisdom of hiring better people and providing them with better training. This will require a professional approach to training and orientation but the ends will justify the means.

ABSENTEEISM: Work force absenteeism is one barometer of the personnel skills of your supervisors. Any absenteeism over 3 percent is unacceptable because it strongly suggests diminished motivation — probably due to morale problems. The rule is; the higher the absenteeism, the more you need to crank up your supervisory training. Absenteeism causes losses in production and profits. Assuming you have 10 percent absenteeism and that it should be 3 percent, your annual loss is your bottom line profit on the additional 7 percent production you didn't receive, plus the higher over­head burden on the remaining production.

It has been my experience that when wages are raised arbitrarily, absenteeism rises and/or production drops. This is contrary to what most managers believe but GLAs experience  proves otherwise. I believe the reason for the production loss is a behavioral one; in an incentive pay environment there are paid incentive workers who have decided how hard they want to work for the money they take home. So when they get paid more, they do less — complete fewer units per hour — or work fewer hours.

If you cannot reduce absenteeism I suggest you embark on an ambitious cross training campaign to create a team of utility operators that will compensate for the people who are absent and keep your production at its maximum level.

PRODUCTION: Wage increases without a corresponding production increase will raise costs and thus decrease your ability to remain competitive. All of GLAs production studies clearly show that the typical manufacturer has  an  unrealized and  untapped source of increased productivity of 30% or more already sitting untapped within his or her present workforce just waiting for some leader to come along and unleash it.

Now is the time to research existing new incentive systems that  have been proven to jumpstart employees to become more motivated and these ideas should be evaluated by you as soon as possible. Many of these programs enable employees to make positive decisions that result in raising their production by giving them a chance to control their on the job destiny and improve their self esteem.

ENGINEARING: Now is the time to put into practice something I've always advocated — that management should work for the workers, not vice versa. You might begin by practicing this question in front of a mirror: "What can I do to help you produce more?" When you finally understand the message I want you to convey, go out and ask the question of your employees. Start listening to their needs, and then satisfy them. I call this technique engin"ear"ing.   Sure its an unusual and controversial approach, but these times call for innovation and bravery. Regardless of whether you believe me or not, be assured that everything you're doing right now will one day be improved upon.

QUALITY: Avoidable manufacturing errors should be no more than 0.25 percent or 2.5 units per 1,000. Rework is just too expensive. Start tracking the points at which the largest number of your manufacturing errors occur and then solve the problems. Poor quality also causes poor morale and poor morale can cause a company to go out of business. Do things right the first time, eliminate rework and watch your profits and morale grow.

WASTED TIME: A recent study GLA conducted revealed that an employee making $8.00 per hour who wastes just one minute of every hour costs his or her company $280 annually (1 minute/hour x 40 hours x $.14 per minute x 50 weeks). If you have 100 employees, your minimum loss is therefore $28,000 annually because you paid for the minutes without receiving a return. Looking at it another way, each wasted minute per employee costs you 33.33 hours of lost production annually ((1 minute/hour x 40 hours x 50 weeks) ÷ 60 minutes/hour)). That's a lot of production per employee and reason enough to begin cutting wasted time.

DIRECT LABOR VARIANCES ("DLV"): Workers under incentive programs have what is known as Direct Labor Variances. These payments that they receive are the sum of makeup to minimum wage when the worker earns less than than the minimum wage, plus all forms of time work plus any half time overtime premium. They are giveaway costs that should never total more than 15 percent of all direct labor earnings. Many of these costs are  avoidable and DLVs should be the target of qualified industrial engineers whose job it is to always reduce them. Perhaps now is the time to put your DLVs under a microscope to pinpoint areas for reduction.

Of course there are many other areas that should receive attention, but discussing them all would take me far beyond the initial key points I've already made. If you end up doing nothing (for whatever reason), and feel that your competition is in the same boat as you are, then you will chalk up a victory for them.

Your customers want only three simple things from you: 1) the highest possible quality; 2) the fastest possible delivery; and 3) the lowest costs. The approaches I've just shared with you will put you ahead of your competition and at the same time give your customers what they want After all, satisfying your customers' wants and needs is the only reason you're in business . . . Isn't it?

In closing, when you limit what you will do, you've limited what you can do.