Last month we released the results from our 10th annual Greater Philadelphia Manufacturing and Distribution Survey. The survey was intended to gauge the economic results and outlook of middle market manufacturers and distributors in our region, as well as provide owners, executives, and industry leaders a snapshot of industry trends and best practices.
This year’s survey found that while 2022 revenue growth expectations are generally positive, more than 70 percent of respondents expect profit to either stay the same or decrease from 2021’s numbers. Unsurprisingly, survey respondents noted that the industry is still grappling with a significant lack of qualified workers and skilled labor as well as rising inflation and supply chain disruptions.
In light of these considerable challenges, and in an effort to provide a peer-to-peer networking resource to our clients and friends in the industry, in early October Kreischer Miller hosted a Manufacturing & Distribution Industry Executive Roundtable. Discussion topics for the roundtable centered around the impacts of labor shortages and rising inflation and interest rates, as well as the strategies companies are employing to overcome these issues.
Below are some of the perspectives shared by participants during the roundtable.
Qualified Worker and Skilled Labor Shortages
Participants agreed that finding qualified talent continues to be a major struggle, and one that spans both technical and non-technical positions. They are experiencing increasing numbers of candidates who fail to show for scheduled interviews despite their best efforts to create tailored job descriptions that sell the benefits of working for their companies. Several have turned to using recruiters for open production positions – with mixed success – and most talked about boosting incentives for employee referrals.
The consensus of the group was that the challenge of finding qualified applicants doesn’t seem to stem from unattractive compensation or benefit offers. In fact, participants felt that compensation isn’t currently a key driver in employment decisions. Rather, as one participant described it, there seems to be a general “funk” in the labor market at the moment, perhaps spurred by the lingering impacts of the pandemic.
Some of the incentives these companies are offering to try to entice more workers to apply for jobs as well as stay once they’re on staff include:
- More creative incentives to retain on-site shop workers, including bonus plans, profit sharing, and profit pools. One company is offering monthly bonuses/gain sharing tied to achieving productivity targets, quarterly bonuses for on-time delivery, and discretionary “spot” awards
- Quarterly skill attainment bonuses for trainees who earn certifications as well as for the employees who train them in order to encourage skill sharing and cross-training
- Remote and hybrid work models for employees whose jobs don’t require them to be onsite (i.e., non-production workers)
- More flexibility with time off requests
We also asked roundtable participants whether they are planning to increase automation as a way to combat labor shortages. Here are a few of their responses:
- “We struggle to implement any more automation on the shop floor due to the nature of our product.”
- “We have capacity issues. We don’t have the shop floor space for any more machines even though we’ve tried to do our best to reorganize and create room. We’re in the process of looking for a larger space that will allow us to grow and to increase automation.”
- “There are a lot of variables and it’s a difficult equation – it comes down to the type of process you’re trying to automate and the volumes you run on it. If you’re a job shop environment you need an AI robot that can function like a human, which can be difficult to implement and is often cost prohibitive. You also need to have the tolerance and ability to fund capital investments. Sure, if you can reduce your labor component it makes the automation a valuable one-time investment. But you still have to find the funds for the up-front investment.”
- “We’ve found that implementing automation can be more of a challenge than trying to determine what we could or should automate.”
- One participant noted that their company has successfully implemented automation that allowed them to thrive over the past 10 years. However, this was possible because their largest client is Amazon.
Impact of Rising Inflation and Interest Rates
The roundtable participants agreed that while the cost of borrowing is certainly increasing, it’s important to maintain perspective. While there have been several interest rate hikes this year, rates aren’t high in historical terms. Plus, companies that received Paycheck Protection Program loans and tax credits such as the Employee Retention Credit should have some extra cash on hand to offset higher borrowing costs.
The group also discussed whether rising inflation and interest rates are leading to price increases, both in terms of the prices they charge their clients as well as supplier pricing. One participant noted that they try to view rising costs in terms of how it will impact their business decisions as opposed to automatically passing price increases along to customers. So far, this company has not experienced any declines in customer orders or projects in the current economic environment.
The group did note that they are seeing a slight pullback on inflationary pressure in terms of supplier costs and are starting to see lower prices in the commodities and raw materials markets. However, they are seeing more price sensitivity from clients, so they are being ever more mindful of their pricing strategies.
While this market remains a challenge for our region’s manufacturers and distributors, it was clear to us both in the survey as well as the roundtable that companies are willing to get creative, try new things, and make the best of things. Companies are looking forward and focusing on the areas within their control, as opposed to dwelling on the things they’re unable to change.
We would welcome the opportunity to continue these conversations. If you’d like to join our mailing list to be notified of future roundtable discussions or would like to talk one-on-one about your company’s circumstances, please don’t hesitate to reach out.
You may also like: