The Hidden Cost of Temporary Labor: What Manufacturers Need to Know

Temporary labor keeps manufacturing lines running, but it can also quietly drain your bottom line if it’s not properly managed. In this video, CK managing principal Deanna Salo and principal Brian Kot draw on decades of experience auditing and advising manufacturing clients across the Chicago area to reveal what’s really happening on the shop floor. They share real client stories that show how temporary labor costs can spiral without the correct oversight. They also talk about the bigger picture: building a skilled workforce through apprenticeships, weighing the trade-offs of automation and AI and knowing when a supervisor or a scheduler could make a difference. If labor costs have you asking questions you can’t quite answer, this video is a great place to start.

Transcript:

Deanna: I’m Deanna Salo, and I’m the managing principal of Cray Kaiser, Limited CPAs. And today I’m here with one of our other principals, Brian Kot. And we’re going to be talking about our manufacturing clients. Cray Kaiser performs a number of services and has for our tenured period of time over 53 years with our manufacturing clients here in the Chicago area. And we want to talk about today some of the key indicators, the key challenges. some of the key observations we have when we’re performing our auditing, advisory, review, tax planning procedures with our clients. The next thing we’re going to talk about is temporary labor. Why don’t you kick us off.

Brian: A lot of challenges in temporary labor as we all know, it’s very hard to get skilled labor. So one thing I’m seeing in temporary labor is having a good production manager. A shop manager is key and very critical to the process because nobody’s paying attention to what’s going on with the hours. And I had one client do a study and they looked into, they were having four temporary people show up every single day and they didn’t know if they even needed a temporary person for that day or not. And they would be there for about two hours and then they would determine their need for the day and they would send some of them home. But they had to pay them for the two hours that they did nothing.

Deanna: Yeah, it’s really interesting. As we go out and audit our clients, we’ll walk the production floor and you just start talking to people, if they allow you to talk to the people. and see people standing around. We had one manufacturer that we were watching the shift change, right. The machines were getting cleaned. It’s actually food manufacturing so they were doing a shift change and they had over 20 people standing around for what was two hours while the shift was getting changed while the machinery was getting changed. And I said, “Who’s running the scheduling on the floor?”

And they said, “Oh, the supervisor’s off today.”

And I went upstairs to the client’s main office and talked to the owner at the time. And I said, listen, I said, you’ve been talking about your labor costs are just skyrocketing. You’re not quite sure why everything was so high. I just was on the floor for 15 minutes and saw 20 people standing there idly waiting for the shift change. You may want to take another look at that. So while temporary labor is so critical to our clients’ success, the seasonality of their businesses, needing more people, needing less people, finding the skilled trades. You know temporary labor is kind of I think part of the brick and mortar of any company right now they need them. They wildly need those people in there. But then how to manage those costs, how to supervise those costs, having a supervisor or a scheduler predictively look at the week’s worth of manufacturing and plan out when those shift changes are, when those people are needed to show up. Clearly, the people can’t just walk in and get on the line. But do we need a 15-minute transition or a half hour transition? Certainly not two hours or three hours and then go home. Right? We also had another client where they were wondering about their labor costs as well. And they had a kiosk for time entry, specifically for the temporary labor and that was connected to the temporary labor company. So the temporary labor workers would come in be logging their time you know key punching in and out and then their full-time employees that work for actually the company had a different keypad that they were keying in their time. And what we found out, we actually did an agreed-upon procedure we actually did a little bit of auditing with respect to the labor and found out that the labor times were not being approved. While their employees’ time records were getting approved by the floor manager, the temporary labor was not getting approved by the floor manager. So really just adding a procedure to verify that all the labor costs, the time entry is appropriate is a huge part of managing that inventory cost as  well.

I mean, right now in today’s market, your labor costs and your rent, your occupancy costs are probably, outside of raw materials, are your single largest cost for any company. Your labor costs and your occupancy costs. Even as people are downsizing in their offices, office space is still pretty expensive, even commercial manufacturing real estate as well. So being able to manage, optimize, and supervise those functions. is another really important part of it, too.

Brian: You know, we’ve talked about skilled labor a couple of times. That term has come up. And we do also have some staffing agencies. And I know that they’re trying to start up actually skilled labor divisions and get people certified in certain areas. But I think you have an interesting story with one of your clients on how are they getting skilled labor inside their plant?

Deanna: Absolutely. So even trying to find temporary employees to come work for their company to then be used as a temporary source. Some of our clients actually created apprenticeships and almost their own little universities to create some skilled training. They’ve gone into high schools, they’ve gone into some of the community colleges, some of the trade colleges that are out there, and actually solicited to them. Hey, you want to get an internship, you want to get an apprenticeship? And it’s a paid apprenticeship, it’s a paid internship to get their certifications while going to school. And then after they’ve graduated, they’ve actually procured their new employees, whether it be for the temporary staffing company or even some of my manufacturers as well. So there’s lots of opportunities to try to build up the skilled workforce. And sometimes it’s just a matter of education. And I can say that from a temporary staffing and even an employee base, getting people excited about working on these lines, which are very sophisticated. They take a lot of skilled labor to do that, is a great career for some of those folks. We talk about the line, the manufacturing line. We’re all dealing with AI, artificial intelligence, and the automation that we see in some of our clients. Brian, speak to some of that automation and some of the AI considerations for some of our clients.

Brian: We have some injection molding clients, and we’re seeing them put in a lot of AI and automated equipment to do that. We see a lot of it in the steel industry as well, too, in welding machines and cutting machines. So that’s replacing some of the employee workforce that is needed.

Deanna: But the CapEx requirements are significant for those. So while you’re exchanging the labor force, you are having CapEx costs. We have some manufacturers that actually do some of the folding and packaging and even cellophane wrapping of the boxes and even as much as rolling it off the line and putting it on a forklift truck. That then an actual human, a forklift truck driver, puts it up on the stack. So you know the automation is not new in manufacturing but I think AI is a definite consideration in terms of even quality control, and food manufacturing, food processing, that’s been there forever. You know, the automation of finding a defect as it leaves the line. But even the packaging and the handling that goes to parts and goods that are coming off of a manufacturing line, automating those processes. You know, you’re exchanging labor with CapEx, but the CapEx needs repairs. The CapEx needs somebody to monitor those improvements. So, you know, each company really has to sit with their own financials and see what are some of the exchanged costs? How can I become more efficient and even provide a better product line with some of that automation? Or maybe I stay to the manual labor piece of it because what I’m making is so fairly procured that I really need that individual hand packing and sorting and moving of items off the line.

Brian: So I would ask anybody listening, think about your manufacturing plan. And if you have temporary labor or not. What if you were to cut out two hours a day for four employees for a week for the whole year? How much would that save you on the bottom line?

Deanna: And I think that’s a really important part to the temporary labor. Again, it’s here to stay. We all need that skilled labor force, no matter what industry you’re in, but really making sure that you’re optimizing. paying for that supervisory manager workflow scheduler to make sure that everybody’s being used at their highest and best use.

Brian: And if you have any questions, please contact us.

Deanna: And you can contact Deanna Salo or Brian Kot at Cray Kaiser at www.craykaiser.com. And we’re here to help. Thanks so much for listening.