At Veryable, we refer to it as “The Amazon Effect.” If you own or operate a manufacturing business today, you may not be familiar with this phrase but you are most likely experiencing its impact. The Amazon Effect alludes to the rapid increase in customer expectations across all industries and sectors: short lead times, high on-time delivery, customized products and services, shorter product life cycles, and personalized customer service. In short, having a custom product on your doorstep within days is the new bar for customer expectations.
In light of the increasing customer demands, operational flexibility and agility have never been more important. Manufacturers are feeling the squeeze: delighting the customer and continuing to increase productivity are difficult to achieve in parallel and are requiring many companies to rethink their operating models. Successful businesses today cannot survive without doing both.
Impact on Manufacturing Businesses
“The assembly line can only work only if you have a standardized product” – Henry Ford
The ability to efficiently manage fixed assets and human capital with the help of technology enablers is the key to driving productivity and responsiveness. Traditional supply planning methods are about targeting averages – this frequently leaves companies behind the ball during order spikes and with inflated cost structures during the troughs. With many solutions now emerging to improve fixed asset efficiency, we see antiquated labor management practices as the next barrier toward unlocking a manufacturing renaissance in higher cost regions. Operations managers know that that the real key to success is through operational flexibility, i.e., striving for the mythical “infinite flexible capacity.”
The New Paradigm for Labor Supply Management
We believe that the landscape is ready for a new paradigm shift that gets us closer to the operations manager’s aspiration. The on-demand economy gives manufacturers a new option for labor flexibility and Veryable has developed an on-demand labor solution specifically catering to manufacturing and distribution environments. Our vision is to create a real-time marketplace for labor on demand where businesses like yours never have to turn down orders due to labor capacity constraints and never get stuck with an inflated cost structure in a down cycle. Infinite flexible capacity is now a real possibility.
The US economy continues to roar – unemployment, currently at 3.9%, is at a 15-year low. Strong performance from the retail sector indicates a surge in an industry that’s had a tough decade – with some commenting that retail is entering a “renaissance” era. This month the world’s largest retailer, Wal-Mart, reported its best quarterly sales gain in a decade, and Target reported its largest gains in 13 years. Production increases in the manufacturing sector rose .8% in June, and .3% in July. As consumers continue to be optimistic (a 17-year high), logistics and distribution companies will face constraints that have not been present in the market for more than a decade.
These economic metrics are good news for the country – but it only means one thing to those responsible for operational performance behind the good news. The impacts of seasonality will reach crisis mode – companies competing for labor will spike wage rates or offer overtime as an up-front benefit.
The worst practitioners of these tactics will even market seasonal positions as having potential for full-time hire, when they already know a down cycle naturally occurs in Q1. Many companies that enjoy low turnover and high labor retention throughout the year will see workers jump ship for marginal wage increases – effectively starting a bidding war.
There are two paths for operations leaders to take:
1) The status quo: enter the bidding war and hope for the best. This scenario requires businesses to forfeit the maximum benefit and good fortune of a booming economy. Labor costs go up, productivity remains stagnate or declines – it requires giving up profit by over-committing to methods such as full-time seasonal hiring, or utilizing expensive augmentation via temp staffing
2) Embrace change: meet the demands of a new, booming economy with a tech advantage and a labor marketplace that drives individual performance, tailors labor to demand, and meets the needs of customers
The Veryable Solution
At Veryable, we believe operations leaders should be empowered to face challenges presented in this economy. By utilizing Veryable’s on-demand marketplace, your business can post Ops when your full-time workforce reaches capacity. For seasonal hiring, your business can end the annual, predictable cycle of trying to flex capacity through traditional full-time hiring or temp staffing, only to see all the training investment walk out the door in January. The best part of utilizing a marketplace is that you know what you’re getting – businesses on the platform rate the Operators based on performance. When the need arises, you can select your “favorite” Operators to come back to work.
Seize the opportunity to thrive in this economic upturn, and Veryable can help you make the most of it! Get a head start on building your labor pool at company.veryableops.com.
In the wake of the presidential election, there has been a lot of talk about the loss of U.S. manufacturing jobs and how to bring them back. The issue is heavily politicized so it is nearly impossible to hear an honest and factual discussion from politicians or the media. You will often hear these groups offer explanations referencing the effects trade deals, taxes, and automation – while these factors have had an impact, they are not the main culprit.
Manufacturing jobs have declined by 8M since the 1979 peak
As we discussed in a prior blog called U.S. Manufacturing Boom?, manufacturing jobs in this country are down 40% since the peak in 1979 despite the fact that manufacturing output is currently at record highs across many sectors. To put this in perspective, this represents a loss of approximately 8M jobs over that period, from 19.5M to 11.5M today.
Inconveniently, there is not a single 140-character explanation for what has happened. This blog intends to explore enablers and primary factors in an unbiased manner.
Beware of the technology explanation
From a purely macroeconomic standpoint, the impact of technology tends to get a lot of credit for the decline in manufacturing labor. The evidence cited usually relates to the major labor productivity increases; since 1979 average manufacturing output has increased by approximately 4X per employed person. The natural tendency is to think of technology in terms of robotics and automation – that the jobs on the factory floor have been replaced by robots and this trend will continue to reduce jobs and keep them from returning. Silicon Valley frequently gravitates to this narrative.
The fact is that a very few percentage of manufacturing plants have high degrees of automation. The “lights out” factories shown on the History Channel are exceptions, hardly the norm. Most discrete manufacturing environments are still very manual and rely on direct labor and front line supervision.
The biggest impact of technology has actually been as an “enabler” of a more global supply chain. The major decline in U.S. manufacturing jobs did not accelerate in 1994 after NAFTA – it started around 2000 after the internet allowed enterprise software to provide higher levels of visibility across the supply chain. The internet, however, did not drive outsourcing decisions or higher levels of direct labor productivity, rather it made these easier.
Global trade and tax are also enablers, not core drivers
In addition to technology advancements, many political pundits cite onerous tax policies and unfair trade deals as explanations for the job loss. No business likes higher taxes but tax rates do not usually have an impact on direct manufacturing labor. First, taxes do not hinder labor productivity on the shop floor – this seems like an absurd point to have to make, but indulge me for the sake of logical progression. Second, it is very uncommon for plant closures and direct labor outsourcing decisions to be based on tax rates. Manufacturing restructuring is almost always an operational decision where the business case is contained above the operating profit line. Tax is usually a secondary decision that has more to do with selecting the location of the new plant.
Similarly, trade agreements and policies are never direct reasons for manufacturing job loss. Similar to the tax considerations, trade agreements factor more into site selection for a new facility. Once a decision has been made to close and relocate a plant, decision-makers factor in the risks associated with any new scenario, e.g., lead times, customs, tax, etc. The key point here is that agreements like NAFTA make inter-country trade easier but only represent enablers in the outsourcing equation.
Global labor wage parity is the primary culprit
Increases in labor productivity over the last 35 years has not been the result of getting more efficient on the manufacturing floor. It has been the result of taking a $20 per hour job in the U.S. and replacing it with a $1 to $5 per hour job in Asia or Latin America. This is commonly referred to as labor arbitrage. The 8M lost jobs have not disappeared from the globe due to advancements in robotics and automation or Lean manufacturing efforts; the majority of these 8M jobs exist elsewhere now where labor is cheaper.
To provide some context, here are the typical steps involved for a single manufacturing plant outsourcing decision:
1. Companies itemize the plant cost structure, including a fixed/variable analysis of overhead
2. New scenarios are developed based on industrial logic and business strategy
3. The scenarios are modeled to quantify the savings potential related to direct labor, indirect labor, manufacturing overhead costs, and SG&A
4. Benefits are assessed against a set of quantitative and qualitative risks (quantitative risks include tax differences, customs, freight, inventory, etc.)
5. Companies select the scenario with the best risk-reward profile, including the ‘do nothing’ scenario
Step 3 is where the rubber meets the road. These four savings categories usually represent the core of the business case. Based on 15 years of manufacturing strategy work, I have seen the direct and indirect labor benefit typically fall in the range of 50-70% of the total benefit. Depending on the level of infrastructure, manufacturing overhead usually accounts for most of the remainder.
To be clear, the 50-70% labor benefit is almost always through labor arbitrage. It is a simple calculation of current wage rates against future wage rates netted against some minor productivity gain/loss.
How can we address this central issue of wage parity?
Our point of view at Veryable is that there is no villain in this story. We cannot fault U.S. employees for demanding a competitive living wage. We cannot fault companies for looking for ways to increase shareholder value. We do not fault the U.S. government for encouraging global trade.
What we are promoting is a more honest dialogue around how to address the root cause. As discussed in prior blogs like New Take on Temporary Staffing, we believe the answer lies in finding a new paradigm around how to manage manufacturing labor in higher cost countries. The key is to embrace the wage parity but use enabling technology to embed more flexibility for workers while building in productivity and lower cost structures for producers. Rather than chasing labor cost out, we believe companies can build this in with an on-demand model.
We think there can be a win-win solution here – one that ultimately makes it more attractive to produce in the U.S. and brings back more work in the long run.
For more information about the on-demand labor for manufacturing and warehouse applications, please view our website: www.veryableops.com
Last week CNN produced a nice summary of the current state of U.S. manufacturing in light of some recent comments coming out of the presidential race. The article succinctly points out that U.S. manufacturing sector is achieving record levels of output across many sectors, while at the same time, Donald Trump contends that “we don’t make our product anymore.” Can they both be right?
Let’s start with the perceptive header statement from the article that says “the nation’s manufacturing sector is actually booming, even if many people don’t realize it.” This is true and there are reasons why.
Starting with the basics, manufacturers want to produce closest to their customers. The closer you are to your customers, the better you can understand them, adapt to their needs, and improve your levels of service. The challenge comes with balancing proximity to customers and favorable economics. Regions like the U.S. where there are more customers are also regions where labor wages are highest.
This challenge has led to large global sourcing efforts over the last 20+ years to reduce cost throughout the supply chain. The examples like Boeing and Airbus cited in the article are great examples. Boeing and Airbus produce the final airplanes but the component parts are manufactured across the globe. Therefore, the cost of the airplane is reflected as US manufacturing output but only a small portion of that cost is comprised of US manufacturing labor. Large OEMs like these are then able to strike a nice balance by performing the asset intensive processes in high cost regions and outsourcing most of the cost structure.
Why don’t people realize the boom?
If you take a lenient interpretation of Donald Trump’s statement, there’s a level of truth to the sentiment that “we don’t make anything anymore.” The numbers show clearly that the value of U.S. manufactured goods have been increasing and are at record levels in many cases, while at the same time manufacturing jobs are down 40% since the peak in 1979. While there have been drastic productivity improvements through automation and Lean, the biggest driver is due to outsourcing down through the supply chain.
So, to say that “we”, meaning American workers, do not make anything anymore is not an irrational point of view. It would be irrational to suggest that U.S. factories do not produce anything anymore. It would also be irrational to suggest that U.S. companies do not want to make anything here anymore. But there is truth to the fact that fewer Americans are making things these days.
Is there an alternative?
The long-awaited U.S. manufacturing renaissance is still not upon us. The fact of the matter is that the labor wage differential between high cost regions and low cost regions justifies global sourcing practices. It is unlikely that we will see the labor wage parity close dramatically in our lifetimes.
In a prior blog, New Demands on Manufacturing, we introduced the idea of a new labor paradigm to reverse the trend of manufacturing job loss. The answer is not about lowering wages but increasing productivity by leveraging the personal value proposition of the individual. The goal is to find the win-win for both businesses and workers. The on-demand economy is the perfect vehicle to keep cost structures low, offer businesses an alternative to low cost country sourcing, and get more people back to work “making things.”
For more information about the on-demand labor for manufacturing, please view our website: www.veryableops.com