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Time to Reconsider a Starting Wage Boost – Again

Wednesday, 26 January, 2022 Written by Adam Snyder

 

Two years ago, manufacturers’ primary hiring challenge was an awareness gap, job seekers unaware of entry-level manufacturing jobs. The solution, though simple in theory, was difficult in execution: grab potential employees’ attention and educate them about entry-level manufacturing jobs. Once people understood the great value proposition of a manufacturing career path with quick opportunities to advance and starting wages ($12-14/hour) that were higher than other entry-level jobs ($9-$12/hour), the sell was simple.

The labor market looks starkly different now. While the same awareness issue exists, the competition to find entry-level workers has intensified. First-time job employers – think fast food, retail and hospitality – have raised their wages by up to 50 % over the past 18 months. These jobs are now paying, on average, $17-$20/hour. While some manufacturers have followed suit, even adjusting their whole direct labor pay structure, many are still only offering $15/hour.

“This is the most significant labor shortage I’ve experienced in my career,” asserted Ward Dumm, Senior Vice President of Operations at Swagelok.

Yet, despite all of this – lack of potential employees plus stiffer compensation competition – I’ve spoken directly with manufacturers looking at wages strictly from the perspective of first-level impact on margins. Essentially, the response is, “If I raise my starting wage from $14 to $18, my profit takes a 3% hit, and what if that doesn’t solve the problem.”

Isolated, that statement is absolutely true. Except, nothing in manufacturing happens in isolation. So, let’s examine two other viewpoints – those of an entry-level worker and holistically for the business – and how these may be more impactful and relevant to a manufacturer’s bottom line.

To illustrate these perspectives as realistically as possible, I will create a sample manufacturer with:

  • 100 employees
  • $40m in revenue
  • 15% direct labor cost
  • 25% gross margin

In MAGNET’s last survey of more than 700 manufacturers, over 80% of our region’s manufacturers stated that a lack of talent is constraining otherwise attainable growth. With that in mind, I will present “growth company” math in which capacity gains turn into additional revenue, overtime reduction and on-time delivery improvements, rather than headcount, and make these additional assumptions:

  • This business has growth potential
  • Its lead times are longer than customers would like
  • It has some backlog of orders

Jobseeker Perspective

First, consider the monthly income difference between a $14/hour and $18/hour entry-level employee. In a full-time, 40-hours-per week position plus four hours overtime each week, a $14/hour worker would pull in just under $2800 while the one at $18/hour makes just under $3600. That $800 difference could be:

  • The ability to afford a car payment
  • Making rent payments on-time
  • The ability to provide adequate food for them and their family
  • Safe, available childcare to be able to go to, and stay at work

Well documented and easy to visualize, the stresses of living in poverty are real. A well-established, livable-wage calculation tool from MIT states that a livable wage for a single-parent household in Northeast Ohio requires at least $29.66/hour, and $16.20/hour for a two-working adult household. Employers who can offer that wage – or more – would also offer a work environment and job that attracts long-term employees who are happy, thriving, energetic, more productive, excellent contributors and even refer other quality employees to your company.

If you’re nodding along, then let’s look at the holistic view and quantify some impacts of higher employee wages on your business, with long-term success and sustainability in mind.

Holistic Business Perspective

As you’re well aware, business owners want immediate metrics, e.g., productivity, on-time delivery, quality, overtime premiums, etc.; and some even want more obtuse numbers, e.g. associate engagement, capacity planning, and sales potential. Using the earlier example numbers established for the entry-level employee, I’ll extrapolate them into business impact (with an expectation that you will innately know which are a little high or low for your specific business). I encourage you to consider that all are relevant to your business at some scale, and they add up.

  • Entry-level wage increases by $4 ($14 to $18); all other direct labor increases $4, too, which you may not have to do fully.
    • Net impact
      • Direct labor increase of 3 points, raising DL% of revenue to 18%
      • -$1,200,000 in GM dollars
  • First 90-day turnover drops from 50% to 33%; Productivity increases by 5% (conservative, I know!).
      • Net impact
        • $2M in additional revenue, gaining $600k in GM dollars
        • Less workforce is “new,” so average tenure, efficiency and effectiveness increase

  • Average overtime decreases from four hours per week to two hours – an 8% reduction in DL cost.
      • Net impact
        • $500k to GM and the bottom line
  • Cost of quality (scrap, rework, returns, etc.), which has run at about 4% of GM, reduces (conservatively) by one-fourth.
      • Net impact
        • $120,000 in bottom line improvement
  • More experienced, tenured front-line employees means supervisors/team leads can increase time monitoring process and driving continuous improvement

  • Total Net Impact: A net P&L improvement of +$100,000!

And, this doesn’t even account for other elements of success manufacturers have experienced from boosting entry-level wages, such as:

  • Eight hours of mandatory overtime decreases to a voluntary four hours. People who want or need overtime are happy to take it; people who don’t need it are happy not to be mandated to take it. Happy equals productivity and retention, and the momentum continues!
  • Retention of your higher skill, higher wage roles increases because you raised their wage scale. While quantifying this is difficult, you and I both know the hard impact of losing a skilled machinist or technician.
  • How much frustration do key but indirect laborers experience because of new-hire turnover and quality? Do you have a recruiter who, rather than continually plugging the same holes, could be developing an internship program? Is one of your supervisors spending too much time onboarding new hires rather than developing their replacement’s leadership skills? Worse yet, have you had supervisors or quality techs leave or become less engaged because they are dealing with nagging problems, rather than energizing improvement projects?

Starting wage is just one aspect of job quality – but a really important one, because you can’t capture revenue without the staff to do so. And if all your potential staff have headed over to an Amazon warehouse or nearby fast-food establishment for a wage $1- $4 higher than manufacturers will offer, this will be a lost battle.

Manufacturers must act and with regard to the seriousness of the labor shortage. Hundreds of thousands of people in Northeast Ohio who were working two years ago are not working today. While they may come back, the fact remains that 30% of skilled manufacturers are 55 and older, again intensifying the urgency to invest in, develop and train future manufacturing workers and leaders.

As a business owner or operations leader, you’re constantly weighing up potential investments of resources. If you knew that the person you were going to hire tomorrow was going to stay and emerge in your organization as a machinist, supervisor, quality technician, etc., would you invest $4,784 in a recruiting fee or sign-on bonus?   Absolutely! As a matter of fact, many of us are paying that in overhead to temp agencies or placement firm fees. That happens to be the six-month difference in pay for that one worker that you pay at $18/hour instead of $14/hour.

Inspired to take action in your business? Have an alternate view of the P&L math? Please respond or reach out, we would love to have a great discussion!

Categories: Insider, Growth, Manufacturing


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