True Cost of New Employees

Many companies struggle with finding the “right employees” for their shops. You can find many companies sending their supervisors and managers to workshops that deal with hiring new employees. Their attention and focus is basically on the hiring phase. Most companies believe that if they can just find and hire the right people, then their shops will run properly and they will have far fewer new hires. I have yet to see what is causing the real problem for many of these companies. Finding the right employees is not the problem; it is keeping them.
Why they leaving??

Think about this for a moment. If a shop’s average employee has been with the company for a year, then you have a 100% turnover rate every year. Of course, some of these shop employees have been with the company for a few years, and maybe a handful have been with the company for several years, but when you find the average time an employee has been with the company to be less than three years, you have bigger issues. Your problem is not finding the right employees; it is keeping them. Simple averages will show you that at least a few good workers will cycle through your shop due to the volume of workers you have hired.

What does it cost your company to hire new employees to fill vacant positions on a continual basis? Every study that looks at this issue finds that the costs are far greater than most managers realize. Think about it: It generally takes an employee at least three to six months to become 90% proficient in a learned skill, such as assembling roof trusses; this is the usually case for an employee who has been with a company for three years. As this new hire is being trained, what do you think his presence is doing to the overall productivity of the shop? Someone has to take the time to show him not only how to do something, but also how to find and fix his mistakes. How much are you paying your supervisors to train someone? Many shops are always training new employees, which makes the expense of training enormous. Remember that with average turnover rates, this training can also be a waste of time. Before too long, you will be starting the process all over again.

Here are the main factors one should consider as a cost for new employees.

Straight Hourly Cost of New Hires
(1) Supervisors are required to spend many hours interviewing new employees.
(2) New employees require hours upon hours of training from a fellow employee.
(3) Paperwork and other administrative tasks required of each employee are costs that should never be overlooked.
(4) The new employee’s salary should also be considered part of the cost. Most mangers I have spoken to feel it takes a minimum of 3 to 6 weeks for a new employee to become productive.

Lost Productivity
(A) When training, the other employees must stop working to guide the new employee through the necessary steps.
(B) Mistakes new employees make must be found and fixed. Rarely is this cost properly understood. This cost of lost productivity, material, and labor is enormous. These problems must be resolved with more than just the individual involved; it often involves the whole group with whom the new employee is working.
(C) Just adding one unskilled individual to a group slows down the group’s productivity. It is not uncommon to find the productivity of a group of three experienced truss builders dropping by as much as 25% to 40% during the first week an experienced builder is replaced by a new, unskilled truss builder. This is true of new designers, new truss builders, new wall panel builders, and any group or team that requires a skilled labor effort. The greater the skills needed, the greater the overall cost involved because the time and effort required to bring the new guy up to speed becomes greater.

Replacing someone who leaves generally costs four times that person’s salary when recruitment and training cost are factored in.
Cora Daniels, Source: Fortune May 3, 2004

This is a commonly repeated statement for executives and managers. However, I have found this statement to be true for a large percentage of employees.

Overall Shop Performance
(I) Do you think the new employees are not detracting from the quality of product they are producing in a shop or design room? You are just fooling yourself if you believe that they are not.
(II) Do you think new employees are not affecting the overall productivity of the whole shop? A production shop can never be at 100% if the members’ skills are anything less than 100%. When you punch in the numbers and find the average employee time with the company is less than a year, then you can expect your shop to be running at around 70% or less than its full potential. Does a 10%, 20%, or even 30% gain in output sound like real money to be gained?

Case studies of companies that communicate well and have good employee relations have on average a 10% to 15% better return on investment.

Source: Watson Wyatt - Case Study 2003/2004

Points to Ponder for Employee Retention
Keeping your employees satisfied is not as complicated as you might think. Most studies rank compensation third or fourth in terms of employee satisfaction with a company. So unless you feel you want to do something other than bribing your employees to stick with you, you may actually have to rethink what is causing their dissatisfaction. They are telling you just how they feel about the company when they leave.
It will take a real effort over an extended period of time to change the negative mindset, but this type of change can only come from the top down. Please do not blame middle management for employee retention issues. More than one company I have helped deal with this issue has tried to blame the shop foreman. This issue starts from the top and ends with the lowest person on the chain of command.

Improving employee issues are part of my Lean Manufacturing Consultations

Questions you should be asking yourself about your employee retention program
1) Want to be able to reward and keep your best employees?
2) Do you really understand how productive any given group or individual has been at any given time?
3) How about posting a scoreboard so everyone can see how all the groups are doing? (Scoreboards are great motivators.);
4) How about an incentive program to reward only the good performers?

Automated System to do these task… Truss Shop Labor Tracker

Testimonial of Service

Todd visited our facilities and spent 2 weeks meeting with our Production, Sales, and Management personnel at multiple locations. Since his visit, we have implemented his principles in our production facilities. It was important to have an impartial perspective on our operations to encourage us to step back and re-evaluate how we operate. I enjoyed his direct approach and extensive knowledge of the industry. It was money well spent.

Michel Carle, GM Winterburn Truss
Division of Nelson Lumber Ltd, Alberta, Canada

See reference page for statements by general managers and owners about services.

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