Labor-intensive Manufacturing Advantages and Disadvantages
What is labor-intensive manufacturing?
The term refers to a factory or manufacturing process that involves a large amount of labor to produce the goods or services. The more labor intensive the factory or process is, the higher the proportion of labor costs required.
When you start looking for a new manufacturer, you need to understand more about the manufacturing industry. This may actually help you decide whether you should choose a labor-intensive manufacturer or a capital-intensive manufacturer.
Manufacturing overheads include variable costs and fixed costs. Variable costs change with the volume of output while fixed costs remain unchanged regardless of the production volume. Since labor costs constitute a relatively high percentage of the total manufacturing costs in a labor-intensive factory, changes in manufacturing labor costs can influence your sourcing decisions.
Factors affecting Sourcing from Labor Intensive Manufacturers:
A country of origin’s economic inflation rate is one of the considerations. If a country is experiencing inflation, the factory owner will not increase the wages in the early years in order to maintain the profit margin. It is obvious that the work force’s level of job commitment is proportional to the satisfaction it gets from their wages so, while costs could be contained, the quality of output will be suspect. As a result, when you are sourcing from such countries, you have to check or evaluate the products carefully and thoroughly to see if they are up to standard. Besides that, sourcing costs may eventually be higher when the factory owner becomes unable to maintain the current wage level.
Labor welfare and working conditions
Labor-intensive manufacturers are required to comply with labor laws and regulations. These manufacturers should treat labor welfare as an investment. If the workforce is happy, the quality of products will be maintained. Before starting a long-term relationship with your manufacturers, it would be advisable to make a factory visit so that you can see if the workers have a good working environment, because the goodwill of your manufacturers will definitely have an impact on your reputation.
Comparison between labor and capital
One of the labor-intensive manufacturing advantages relates to the nature of labor itself. Workers will be more experienced and skillful as time passes. However, machines become obsolete or depreciated and the cost of replacement will increase total manufacturing costs.
In addition, the defect rate is generally higher in a labor-intensive factory compared with a capital-intensive factory. You are responsible for delivering clear expectations and boundaries to the manufacturers, so that the manufacturers can provide precise instructions to the workers which will help reduce the defect rate.
Labor-intensive manufacturers suffer greater losses when they face labor shortages. A comprehensive training system should be set up to reduce the training time of a newly joined worker.
Is sourcing from labor-intensive manufacturers cost-efficient? It all depends on your sourcing strategies. You need to pay attention to global economic conditions and other factors from time to time and should always have a back-up sourcing plan as maintaining high-quality products is critical to the success of your business.