Myth: “Labour is so expensive we just have to lay off some (more) people.โ
Reality: Labour is 10%-15% of most product costs. Overhead is 25%-40% and material 45%-65% of Total Product Cost.
Labour only seems expensive because Overhead Absorption is driven by Labour Hours. The Fully Burdened Labour Overhead Rate overstates Labour at 35%-55% of Product cost instead of 10%-15% or less.
Risk: A huge 25% cut in head-count might only save 4% in overall product cost.
Skilled people are at risk of being made “redundant” for quite small overall gains.
“Would the last one out of the factory please turn off the lights – theyโre carrying all the overhead.”
Ring any bells?
Have you ever seen good people laid off, just to cut costs, when you needed them the most?
