Positive Churn #3 - Variable Labour Cost Does Not Exist

By Clive Birnie | April 22, 2019

Originally published by Clive Birnie on the Positive Churn Blog, 12th April 2007

I went to the Zoo on Tuesday and became trapped in the Lemur enclosure with Ilan Nissim , Supply Chain Director from Reckitt Benckiser Israel.

Whilst trapped with the Lemurs Ilan and I talked business of course. He is concerned that I think too much like a marketer and not enough like a manufacturer. I countered this by saying that I am very much a manufacturer but that Variable Labour Cost Does not Exist.

An Error message from his brain caused much frowning and furrowing of the brow. So I explained another of Martyn and Clive’s fundamental theories of survival.

For the most part we employ our manufacturing people on permanent full time contracts. This means they are paid for being employed. If we have orders for 1 million units a month they are employed to make 1 million units a month. If we have orders for zero we still have to pay them. They are a fixed cost so we treat ALL people costs as… Total People Costs, and as an “Overhead”.

Having worked in companies where bonuses were paid for “Variable Labour Cost Variance Improvement” by essentially making mountains of stock (which is of course the enemy) and of course for “Purchasing Unit Cost Variance Improvement” by essentially buying a mountain of stock (… enemy) we were clear we needed another approach.

Now I like to sell stuff. Orders are good. So this example from the old company explains the theory:

A large piece of potential new business was turned away because the margin was considered too thin. The capacity was there to supply but the product costs on which the decision was based included both Variable and Fixed Labour Cost allocations. I thought these were ghosts and put this to Chris, the FD or as he was also known, Director for Business Prevention:

“Are we delivering the budget volumes.” I asked knowing that the allocations were included at rates established in the annual “Budget”.

“Yes”

“And do we have the same number of people as budgeted?”

“Yes”

“And we have the capacity with current head count?”

“Yes”

“Then the labour cost for this extra business is Zero.”

”?” Error message.


© Clive Birnie, 2007 - published with permission