When does labour become a commodity to be procured?

posted by Mluleki Ntlemeza
22 June 2017

According to the business dictionary a commodity is “a reasonably interchangeable good or material, bought and sold freely as an article of commerce. Commodities include agricultural products, fuels, and metals and are traded in bulk on a commodity exchange or spot market”.

In the procurement fraternity goods and services are referred to as commodities. The striking difference between goods and services is tangibility. Services are intangible, and involve labour in the form of skills, knowledge and experience.

Labour as a commodity

The International Labour Organization states in the preamble of the Declaration of Philadelphia of 1944, that labour is not a commodity. It expresses the view that people should not be treated like inanimate commodities, capital, another mere factor of production, or resources. A view that perhaps may be espoused by the human resources function in an organisation.

Marxists believe labour is a commodity, and that a commodity is a good or service. If the definition of a commodity as a good or service that can be bought and sold in the open market is anything to go by, then labour should fall within it.

Minimum wage for labour

Recently the South African government signed a decree on a minimum wage of R3,500 a month.

This was agreed to at NEDLAC (National Economic Development and Labour Council) with its social partners – business and labour. However, minimum wage laws do not deter labour from being treated as a commodity, but rather necessitates that it is treated as such.

Other commodities in commerce don’t have thresholds as their rise and fall in prices are determined by economic forces of demand and supply. Unlike other commodities, whose rates fluctuate in line with economic cycles, labour rates are constantly on a growth trajectory. This is due to skills and experience that are accumulated over time.

Labour and cost of goods sold

The Chartered Institute of Procurement and Supply defines cost of goods sold as the “costs related to buying or making goods for resale by the business. Cost of goods sold usually includes cost of materials, labour and allocated overheads.”

Salaries form part of the cost of production but are generally excluded in cost of goods sold – especially when determining procurement spend. In income statements salaries of administrative and sales functions are reported as expenses. However, salaries and wages of production personnel are allocated to product costs.

These manufacturing labour costs are reflected in the cost of goods sold, when the products are sold. The unsold products – together with manufacturing labour costs – are then reported as inventory on the balance sheet.

The cost of goods sold concept, which seems to be the standard in contemporary financial reporting, has its roots in the industrial revolution. In service-based businesses this concept becomes impractical as illustrated in the example below:

If you have a legal services business and your company has the task of representing a client in a litigation case that spans a period of three weeks at a rate of R700 per hour, the total cost amounts to R84,000.  In this instance labour becomes a direct cost to the delivery of the service.

The above example undoubtedly calls for a review of cost of the goods sold concept when it comes to service-based businesses. Should it be the cost of services provided? Probably not, because we are trying to come up with a standard that will accommodate both goods and services.

Adam Hoeksema (ProjectionHub: May 29, 2012) proposes cost of revenue. The breakdown of costs in the above example – items such as sales commission, telephone calls, fuel and other administrative costs – would have to be considered.

Procurement of labour

Service-based firms are in the business of selling skills, knowledge and experience in specialised functions. Purchasing organisations are therefore compelled to procure these either for specific projects or operations, as and when they need them – particularly if they don’t have the resources in-house.

While the human resources function in an organisation is still responsible for securing labour for both long and short term contracts, the procurement function is evolving to encompass the procurement of labour. The questions that come to mind, and provide food for thought, are:

At what point should labour be procured by means of procurement, and not through traditional HR processes? Is procurement overstepping organisational boundaries? Is it ethical to commodify labour?

☛ Mluleki Ntlemeza is an e-procurement specialist at PetroSA

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