How Can Manufacturing Companies Best Respond to New Work Hours?

Mexico has long held the reputation of having the longest working hours among OECD countries, boasting a standard 48-hour workweek(1) over six days. However, a significant shift is on the horizon. Since 2022, Mexican authorities have actively discussed reducing the working week to 40 hours while increasing the minimum weekly resting days from one to two. Based on recent debates, this reform is expected to be discussed in Congress by April 2024.(2) Although exact dates for its implementation are yet to be confirmed, especially considering discussions around the possibility of a gradual transition, this change will mechanically increase hourly labor rates and significantly impact over 38 million workers exceeding the 40-hour threshold.(3)

Notably, the manufacturing sector, with 75% of its labor force working over 40 hours per week, will bear a substantial share of the reform's burden. The shift to a 40-hour workweek is estimated to increase labor costs by up to 22%,(4) driven by factors like increased overtime and hiring additional workers. This poses substantial pressure to profit margins.

In the face of these challenges, companies in Mexico are confronted with a choice: they can either resort to short-term solutions that escalate costs, or they can seize the opportunity to reevaluate their work organization and challenge the status quo to enhance efficiency. To navigate this transition successfully, our manufacturing clients are currently exploring four levers: redefining the working model to improve productivity, realigning incentive strategies, engaging in strategic workforce planning, and revisiting automation business cases.

1. Redefine the Working Model to Improve Productivity

Historical evidence demonstrates that reducing the workweek positively impacts productivity. For instance, both Portugal,(5) in 1996, and South Korea,(6) from 2004 to 2011, transitioned from 44- to 40-hour workweeks. Portugal observed a 4% increase in hourly productivity in the manufacturing sector. South Korea experienced a more modest but still significant rise from 1.6% to 2.1% in hourly output per worker. For Mexico, gains should be further amplified by the unprecedented amplitude of the working hours reduction (-8 hours), the fact that the reduction comes after a century of status quo, and the current low labor productivity at US$19/hr., the second-lowest among OECD countries.(7)

To nurture this expected increase in hourly productivity, we recommend implementing a robust productivity monitoring system. Such systems typically include a methodology to set and revise hourly goals based on performance improvements, and an actionable tracking of main down times associated to remediation processes involving all support departments.

Such systems routinely deliver productivity increases ranging from 5% to 10% for our clients.(8) While those systems can be board- or paper-based, a wide array of suppliers provide economical solutions to automate data capture with minimal set-up times. 

2. Realign Incentive Strategies to Establish More Ambitious Goals

Implementing a performance tracking system not only enhances employee management but also identifies opportunities for greater efficiency. It serves as a valuable tool for setting ambitious goals, supported by effective performance bonuses. In Mexico, a typical performance bonus equals 10% of base salary paid monthly.(9) As hourly wages and overtime premiums rise, rewards based on results and performance should surpass overtime pay.

To set more ambitious goals, management should grant employees increased autonomy. With automation handling repetitive tasks and now that working time is going to be diminished, performance evaluation needs to focus on adding value at every stage of the production process. Moreover, fostering direct employee involvement in continuous improvement initiatives and problem-solving processes is pivotal, especially within lean manufacturing methodologies. This emphasis on involvement should not undermine the importance of standardization; instead, it advocates for enhancing flexibility within the assembly line. 

Providing employees with transparent progress tracking is crucial and automating performance monitoring serves as a key facilitator for this transparency.

3. Engage in Strategic Workforce Planning

Manufacturing operators in Mexico average 51 hours of work per week,(10) comprising 48 hours of regular work and three hours of overtime. Overtime hours in Mexico have one of the highest premia in the world, paid 200% up to nine hours, and 300% beyond. It is essential to note that the current labor law does not provide much flexibility, not allowing for banked or annualized hours.

The upcoming change in regulation could be the right time to rethink the current work organization: 

(i) When line configuration and labor market conditions allow for it, prioritize new hires, and take the opportunity to cut on overtime. Leveraging new hires would increase payroll costs only 12% versus the extreme of resorting fully to overtime, which would raise payroll 41% due to premia on additional hours.

(ii) Explore compressed workweeks with shifts of four days on weekdays and three days on weekends. While only 5% of manufacturing workers in Mexico currently work compressed shifts, this arrangement allows for 24/7 operations if needed, reduces the number of shift start and finish times, and decreases absenteeism and tardiness by granting employees more days off.(11)

(iii) Optimize the use of downtime between shifts. As much as 15% of man-hours are lost to downtimes (set-ups, line feeding issues, quality controls, maintenance operations, among others). Building up a production schedule with breaks in between shifts allows for support staff to perform critical operations without wasting labor hours. For factories currently running 9.6-hour shifts across five days, this could mean working one hour of overtime if required, and leveraging the remaining 40 minutes to perform nonproductive tasks.

Beyond tactical optimization, the added pressure on labor costs and hiring induced by the Labor Reform creates a good platform to initiate a strategic workforce planning exercise. Such exercise traditionally starts with a zero-base budgeting exercise to understand labor requirements (both in hours and capabilities) at each step of the manufacturing process. Demand projections for the coming years allow to build a trajectory for labor and skill requirements. By comparing current workforce requirements to future labor needs, this process helps identify recruitment and training necessities. Additionally, it aids in reducing idle workforce and helps identify potential candidate areas for automation (when resource availability seems high).

4. Revisit Automation Business Cases

In the long run, technology has proven highly effective in mitigating the decline in productivity resulting from reduced labor hours. Therefore, it is imperative to reevaluate automation initiatives that were previously considered too costly. A report by BCG, titled The Automation Revolution in Manufacturing, highlights recent technological advancements that enable manufacturers to overcome previous barriers to automation, particularly in areas where it was deemed unprofitable.

For instance, innovations like vision inspection systems have become more accessible, thanks to advancements in cloud, Wi-Fi 5G, and artificial intelligence technologies. Additionally, advancements in System-on-a-chip technology allow automated guided vehicles (AGVs) to handle geometric variances, such as those encountered when moving components in assembly lines. These innovations now require smaller investments and offer the opportunity to reduce dependence on labor-intensive processes.

Conclusion

By embracing innovative approaches to productivity, incentives, shift scheduling, and automation, some of the additional labor costs can be offset up to 60%,(12) in contrast to fully resorting to additional hours. The mix of the different measures taken will be unique to each company, and will require deep discussions with multiple stakeholders, including unions. Some uncertainty remains on when the labor reduction law will be passed. Additionally, the path to the 40-hour workweek has not yet been defined and will probably be progressive over several years. Yet Mexico’s journey to reduce its working hours seems ineluctable, and companies should start to proactively assess, evaluate, and plan for this transition. The time to act is now.

References:

1. OECD (2023). Hours worked.
2. Based on press research in Jan ’24, debates are scheduled for the 2nd ordinary session which will take place from 1st of February 2024 to 30th of April 2024
3. INEGI (2023). Encuesta Nacional de Ocupación y Empleo, data available for second quarter of 2023
4. Instituto Mexicano de Contadores Públicos (2023)
5. Asi, Lopes, Tondini (2023). Firm-Level Effects of Reductions in Working Hours
6. Yoonsoo, Wooram (2017). The Impact of a Workweek Reduction on Labor Productivity
7. OECD (2023). GDP per hour worked
8. BCG experience
9.BCG analysis
10.  INEGI (2023). Encuesta Mensual de la Industria Manufacturera (ENIM), data available for August 2023
11.  International Labour Office (2004). Compressed workweeks. Statistics for Mexico retrieved from ENIM
12.  BCG client experience