Thursday, November 15, 2007

Labor Cost--How Big Is It?

One runs across moronic blather like this all the time:

Since labor is such a big part of both manufactured goods and services, it is reasonable to think that lower wages will lead to lower prices. (Daily Reckoning newsletter 11/15/07)

Sure wish this character actually knew something about manufacturing economics.

Most manufacturing firms will tell you that "direct labor" constitutes about 5% (yes, FIVE percent) of the cost of a manufactured good. Now "direct labor" doesn't include benefits for the plant workers--nor does it include "supervisory labor," nor "managerial labor," nor "sales and marketing labor".

But for the fun of it, let's multiply "direct labor" times two to include the cost of benefits attributed to the plant workers.

Now we're up to 10% of the cost of a manufactured good.

Is that really a "big part" of the cost? Not in my book.

Add in supervisory wages and bennies, and you're up to 15% of the cost of a manufactured good.

Sales, General and Administrative adds another big bunch--probably 25-30%--that's all the salaries and bennies of everybody else working in the Company.

The REAL cost-driver? Usually materials.

Of course, there are taxes and regulatory costs.

1 comment:

grumps said...

Logistics costs are a good sized chunk and growing larger.

Materials in, finished goods to distribution, distribution to retail all add up. Then add in return logistics and expedited delivery (Speed costs money. How fast do you want it to move?) all add costs as well as the IT costs of ordering, fulfillment and payment.

The grunt that makes the widget is small-change in the process.