This is not an article about COVID (thank god). What we are seeing now in the economy are the systemic aftershocks. The Great Resignation and national security concerns have fundamentally altered labor availability and where that labor is needed. The question is, can things like labor shortages and inflation be mitigated for competitive advantage?
The Great Resignation reduced the amount of labor in the market. Over 47 million Americans left their jobs. The war in Ukraine, shutdowns in China, and tensions with Taiwan have highlighted the dependencies on global supply chains. Supply chains have historically been built for efficiency. That worked well…until it didn’t. From energy, to chips, to batteries and their raw materials, a country’s economy and its sovereignty are at risk. To reduce this risk, companies and countries are onshoring and regionalizing supply chains resulting in increased demand for labor in established markets. Open positions in US manufacturing are twice that of the available labor. A tight labor market increases pressure for wage increases and employee churn as they seek the most competitive pay.
Fighting Inflation
Inflation is a vicious cycle. One way to break it is to reduce demand for the products produced. This is the provenance of central banks. The medicine can be almost as bad as the disease, raising unemployment and suppressing the economy into a potential recession.
Another path that manufacturers can adopt is to increase labor productivity. For a given level of output, productivity increases reduce the costs of production per unit, helping to offset the rising cost of labor. If it’s that easy, why aren’t all companies doing this? Well, they are trying, but often the way they are treating labor artificially caps the productivity improvement.
Labor vs. Capital
It’s not uncommon for manufacturers to apply the following logic: We need to be as efficient as possible to successfully compete and hit our margin targets. Labor is a significant percentage of our Cost of Goods Sold (COGS). We can reduce the cost of labor through greater automation. High employee churn is another reason to pursue automation over labor. Machines don’t quit.
But the truth is that machines can’t do everything. People are hired to fill in the gaps. People are not machines, yet we tend to treat them the same way. By doing so we are failing to optimize a significant cost driver and limiting the essential benefits of having people in the system, their ability to deal with change and problem-solve. Employee churn is high because we often treat people like machines.
Labor costs as a percentage of COGS is a significant cost driver in manufacturing ranging from 20-35% by industry. Employee turnover in Manufacturing is in excess of 44%. High levels of employee churn can lead to a disruption in the production process, as new workers may need to be trained and brought up to speed on the company’s processes and systems. Employee churn can also lead to a loss of institutional knowledge and experience, as workers who leave the company may take valuable skills and expertise with them.
Disenfranchised employees don’t care. Treat them like a machine and they watch the clock, not the KPIs you care about like throughput, quality, downtime and scrap. It’s hard to compete when you need to run faster and faster, hiring and training inexperienced employees, just to stay in place.
People are Underrated
Significant efficiencies can be gained by enabling the flywheel of empowerment, retention and productivity. Labor productivity improvements directly impact efficiency. Productive and empowered employees increase the effective capacity of your plant and accelerate time to productivity for new employees giving manufacturers the agility to increase production beyond what was previously possible without having to invest in production equipment or new plants, and reduce the amount and impact of employee attrition. Empowered employees with a growth mindset take extreme ownership of challenges that impact their production goals, creating resilience in the face of disruption.
The most effective path to productivity and energizing frontline teams are step changes on the factory floor. New standard work harnesses the collective actions on the frontline, where it matters most.
QAD Redzone’s innovative solutions create an unbeatable culture of engagement and efficiency by working together. Click here to learn more and join a community of manufacturers that have increased productivity by 22%, improved employee engagement by 74% and reduced staff turnover by 32%.
