Total Cost of Ownership for Contingent Labor
Client: Consumer goods manufacturing plant in TN
Situation: Client was dissatisfied with their contingent labor staffing service provider on several key performance metrics, primarily Safety and Quality, even though the provider was the most competitive in terms of wage rates in said market.
Problem Definition (D): Low-cost staffing service provider has potentially compromised other relevant KPIs like Safety and Quality metrics at the manufacturing plant.
Measure the baseline (M): We conducted detailed interviews with key stakeholders, the Quality team, EHS Team, HR Team and Production Team to quantify key performance indicators (KPIs). We also established, based on historically available data, that incumbent’s Safety TIR and Quality Defects was higher than the previous service provider’s by 2–5%.
Analyze (A): It is evident that bids in the service industry cannot be awarded solely based on lowest cost by comparing hourly wage rates. The cost of poor-quality workmanship far exceeds cost savings from lower labor rates. There are no established models for Total Cost of Ownership in Staffing Services sourcing.
We created a Total Cost – Benefit of Ownership model and broke it down into two phases with Phase 1 analyzing Total Costs and Phase 2 to incorporate Total Benefits as well. Total Costs were further broken down into Direct and Indirect Costs as outlined in the graphic.
The biggest challenge to the model was obtaining reliable data on every Indirect Cost we identified in the model. Where historical data was not available, we used industry standard estimates, or extrapolated based on another client location.
We established that the lowest wage rate provider was indeed highest on TCO while the highest wage rate provider was not optimal on TCO either. When it comes to temp labor, skill level required for the job needs to be matched with the skill level of labor so that clients don’t end up paying for overqualified or mismatched temp labor.
Improve (I): We advised client to utilize the TCO model for upcoming bid events along with usable spreadsheet templates.
Control (C): We established a performance measurement scorecard covering key metrics of Attendance, Quality Complaints, Staffing Service Levels, Cost, and Compliance which were then used to monitor day-to-day performance of the service provider.