Manufacturing Wages On The Rise

S E 7 E N S U M M I T S

G R O U P

Fast Rise in Manufacturing Wages

Gabriela AlessioMeredith Leigh

Nirmal ShahBrian Sackey

Cause Analysis and Effects

AGENDA


G R O U P

1. Summary

2. Manufacturing in the U.S.

3. The Disconnect: Perception & Facts

4. Current Situation in the U.S.

5. The Reality

6. Examples

7. What Can Management Do?

8. Operational Leverage

9. Conclusion

10.Bibliography2

SUMMARY


G R O U P

Issue: Manufacturing wages are rising at a rapid pace in some major industrial states

Cause: Shortage of specific skills and falling unemployment rates

• More companies are forced to offer higher pays to attract talent

• Invest in new machinery• Outsource labor & processess

Consequences:

Manufacturing in the U.S.


G R O U P

$ R & D x2.91

$1 of goods produced = $1.32 additional

5 states add over half a trillion dollars a year

75% of private R&D 1 manufacturing job creates 2.91 other jobs

Source: The National Association of Manufacturers, Skills Gap Report 2013

In 2013, manufacturers contributed $2.08 trillion to the economy,

up from $2.03 trillion in 2012. This was 12.5% of GDP.

The Disconnect: Perception & Facts


G R O U P

Source: The National Association of Manufacturers, Skills Gap Report 2013

While Manufacturing is filled with high paying jobs, people aren’t joining the field

Only 30% of parents encourage their kids to enter manufacturing

77% of Americans fear the loss of domestic manufac-turing jobs to other countries

+70%

77%

+70% of Americans view Manufacturing as the most important industry for a strong economy

Only 17% of people consider manufacturing as a top career choice

STEM

17%

?

BUT

Current situation in the U.S.


G R O U P

$21.08 (up 25%)

$19.37 (up 9%)

$24.81(up 6%)

Nationally:$19.56%Up 4%

Change in Factory Wages Aug. 2011 – Aug. 2014

Baby boomers retire

Skill shortages develop

Pay increases spread through the country

Wage growth for:• Machine Operators• Repair People• Electricians• Engineers• Specialists

Even in two-tiered wage scale dominated states, like Michigan, there has been significant recent growth (2.5% in 3 months vs. 1.6% nationally) Serious Skills Gap

The Reality


G R O U P

A 2014 Skills Gap Report from The National Association of Manufacturers shows:

82% a moderate to severe shortage of available, qualified workers

Reported

67% Anticipate the shortage to grow worse in the next 3 to 5 years

Source: Jim Timmon’s Remarks to the SMART Manufacturing Summit, May 20, 2014

Companies are being forced to use temporary agencies at nearly double the cost of staff workers

“Job hoppers” who change companies to achieve higher wages attain much higher wage growth than workers who stay in the same place

What can management do to cope this expenses?

Examples

Sullivan Palatek

(Michigan)

Using welders from temp-agencies at double the cost of staff weldersCEO considering buying robotic equipment or bringing in workers from Mexico

-250 on waitlist for welding school in TX-One student works 55-60 hours a week at $17, but with overtime, takes home upwards of $800 a week.


G R O U P

ThorIndustries (Elkhart, IN)

Strong rebound on engines & recreational vehicles, but still short on staff.

Help wanted signs everywhere, driving wage cost up pinched profit margins in 4th quarter (ending July 31)

LoadcraftIndustries (Brady, TX)

Wages have risen 4-5% this year compared to 2-3% in recent years.

Workers who are offered higher wages across town are suddenly just gone.

What can Management do?


G R O U P

Fixed Costs Variable Costs Wages as Fixed Costs Wages as Variable Costs

$

$$

$

$

Invest in new machinery and automatization

Outsource partial operations

Outsource employees

Pay higher wages

• Tax• Fixed overhead• Depreciation• Insurance• Leases• Interest on loans• Supervisor salaries*

• Direct Materials• Variable overhead• Transportation

• LABOR

FIXED VARIABLE

What can Management do?


G R O U P

$

$$

$

$

Investing on Machines

Rising Wages even more

Outsourcing People or Processes

$

MAXIMIZE ProfitMINIMIZE Cost

$ $ $ $$ $

$$

FIXED VARIABLE

OPERATIONAL LEVERAGE

Manage the

right mix of

fixed & variable costs

VARIABLEFIXED

Operational Leverage


G R O U P

Degree to which a firm or project incurs a

combination of fixed and variable costs

• High Gross Margin• High proportion of Fixed Costs

High Fixed Cost Company

More Operational Leverage

• High Gross Margin• Low proportion of Fixed Costs

Low Fixed Cost Company

Less Operational Leverage

Pros

Cons

• Magnifies results, making gains look better

• Magnifies results, making losses look worse• Increases risks because it makes returns less predictable over time

$100.0 $100.0

$35.0 $65.0

$65.0 $35.0

$50.0 $20.0

$15.0 $15.0

$-

$50.0

$100.0

$150.0

$200.0

$250.0

$300.0

$350.0

$400.0

High Fixed Cost Company Low Fixed Cost Company

Base Case(Thousands of dollars)

Revenue Variable Costs Gross Profit Fixed Costs Net Income


35%

50%

65%

20%

$150.0 $150.0

$52.5 $97.5

$97.5 $52.5

$50.0 $20.0

$47.5

$32.5

$-

$50.0

$100.0

$150.0

$200.0

$250.0

$300.0

$350.0

$400.0


Increased Revenue(Thousands of dollars)



G R O U P

35%

33%

65%

13%

35% vs 65%Variable Costs Fixed Costs

50% vs 20%Net Income15% = 15% 35% vs 65%

Variable Costs Fixed Costs33% vs 13%

Net Income32% vs 22%

$100.0 $100.0

$35.0 $65.0

$65.0 $35.0

$50.0 $20.0

$15.0 $15.0

$-

$50.0

$100.0

$150.0

$200.0

$250.0

$300.0

$350.0

$400.0





35%

50%

65%

20%


50% vs 20%

$150.0 $150.0

$52.5 $97.5

$97.5 $52.5

$50.0 $20.0

$47.5

$32.5

$-

$50.0

$100.0

$150.0

$200.0

$250.0

$300.0

$350.0

$400.0


Increased Revenue(Thousands of dollars)



G R O U P

35%

33%

65%

13%

Net Income15% = 15% 35% vs 65%


Net Income32% vs 22%

∆= 17% vs 7%

$50.0 $50.0

$17.5 $32.5 $32.5 $17.5

$50.0 $20.0

$(17.5) $(2.5)

$(50.0)

$-

$50.0

$100.0

$150.0

$200.0

$250.0

$300.0

$350.0

$400.0


Decreased Revenue(Thousands of dollars)


$100.0 $100.0

$35.0 $65.0

$65.0 $35.0

$50.0 $20.0

$15.0 $15.0

$-

$50.0

$100.0

$150.0

$200.0

$250.0

$300.0

$350.0

$400.0





35%

50%

65%

20%


50% vs 20%


G R O U P

35%

100%

65%

40%

Net Income15% = 15% 35% vs 65%


Net Income-35% vs -5%

-35% -5%

$50.0 $50.0

$17.5 $32.5 $32.5 $17.5

$50.0 $20.0

$(17.5) $(2.5)

$(50.0)

$-

$50.0

$100.0

$150.0

$200.0

$250.0

$300.0

$350.0

$400.0


Decreased Revenue(Thousands of dollars)


$100.0 $100.0

$35.0 $65.0

$65.0 $35.0

$50.0 $20.0

$15.0 $15.0

$-

$50.0

$100.0

$150.0

$200.0

$250.0

$300.0

$350.0

$400.0





35%

50%

65%

20%


50% vs 20%


G R O U P

35%

100%

65%

40%

Net Income15% = 15% 35% vs 65%


Net Income

-35% vs -5%

-35% -5%

∆= -50% vs -20%

Conclusion


G R O U P

• Manufacturing companies should consider increasing their degree of

operating leverage with the purchase of new machines to maximize profit

in times of increased production

• Increased re-shoring due to wage hikes internationally, including China,

will continue to boost domestic production levels.

• Automation decreases need for high-cost, low supply labor force, and

produces the most beneficial cost structure for companies in the

manufacturing industry considering the economic climate

Bibliography


G R O U P

Hagerty, James. "Manufacturing Wages Rise Fast in Some Areas." The Wall Street Journal. Dow Jones & Company, 8 Oct. 2014. Web. 14 Nov. 2014.

Espinoza, Richard. "3 Trends Affecting US Manufacturing." Environmental Leader RSS. N.p., 7 Aug. 2014. Web. 14 Nov. 2014. <http://www.environmentalleader.com/2014/08/07/3-trends-affecting-us-manufacturing/>.

Jan, Obaidullah. "Degree of Operating Leverage." Accounting Explained. N.p., n.d. Web. 13 Nov. 2014. <http://accountingexplained.com/managerial/cvp-analysis/operating-leverage>.

Schmedt, Fred. "The Concept of Operating Leverage." The Samuel Roberts Noble Foundation. N.p., n.d.Web. 14 Nov. 2014. <http://www.noble.org/ag/economics/operatingleverage/>.

Manufacturing Wages On The Rise

Economy & Finance

Transcript of Manufacturing Wages On The Rise