In our last post we dove into the technological sophistication of production roles relative to the early Industrial Revolution as well as public perception and specific pain points in the industry where business leaders are struggling to fill open positions. This week we are going to get a glimpse into the multi-part playbook we’ll be releasing in the coming weeks and the steps available to manufacturing business owners and entrepreneurs to secure the future of their companies.

As you might recall, in Post 1 of this series, we discussed nationwide secular labor market trends indicating a constraint in the number of available workers. In Post 2 of this series, we dug into the impact of the broad labor shortage on manufacturing with some disheartening numbers about the true size of the manufacturing labor force. Lastly, in Post 3, we got to discuss how manufacturing leaders haven’t adequately adjusted to the reality of highly sophisticated technologies at every level of the manufacturing process. This week, we finally get to start discussing solutions and everyone seems to have something to say. 

There are a variety of solutions that have been presented over the past few years as the manufacturing labor shortfall has become a serious threat to future growth projections in the industry. From implementing agile scheduling automation and strategies for upskilling existing employees to simply paying people more and investing in underserved communities, small businesses like the ones that Artemis buys and builds can’t realistically engage all of these ideas – at least not alone. Before we begin to get a look at the risk / reward dynamics of each of these strategies and how they can impact small industrial tech manufacturers, let’s take a second to frame the conversation. 

Important to the service, growth and survival of any small manufacturing business is profitability. There are a variety of metrics relevant to this conversation: gross margin, EBITDA, net profit, etc. Gross margin is often used to understand the profitability of production or how much of the selling price is going into creating the product itself. EBITDA, similarly, helps to understand the health of a business more broadly and as such, is often used by firms like Artemis to find the value of a company. Lastly, net profit is the cash take home of the business – after all expenses, taxes, interest, etc. While all businesses consistently manage profitability, this can become more difficult in businesses with smaller top-line revenues. In industries like Technology or Transportation, gross margin can be over 90% with EBITDA’s decreasing to below 20% and 7% respectively. When we see something like this, we can acknowledge that the product or service provided doesn’t cost a lot to create or provide but requires a lot of nonproduction support to facilitate (sales, marketing, etc). 

In manufacturing, there’s a broad range of financial profiles. For example, in Industrial and Commercial Machinery gross margin in 2021 was 32.5% while profit margin was only 5%. Alternatively, in Measuring, Analyzing and Controlling Instruments, gross margin was 55.7% with a -5.5% profit margin. As you can see, those producing analytical instruments might not have the profitability to consider investing in the above referenced labor strategies. All this is simply to say, there’s more to consider than just the solution when going to small businesses with labor management proposals. With that in mind, let’s begin to look at the prospective solutions. 

There are a number of solutions available to business owners that aren’t looking to break the bank. It is easiest to understand these solutions through the three most significant distinctions that can be made. First, internal and strategic solutions that specifically address existing labor, most often in the form of maximizing the productivity of current employees. Second, external and strategic solutions designed to go outside the organization with the intention of drawing new employees into the organization. Third, internal and operational solutions that abandon direct labor strategies and opt for automation technologies to do the tasks previously done by employees.   

Within that first category of internal and strategic solutions, there are a lot of innovative, interesting, and affordable options available to business leaders interested in maximizing their workforce productivity. From using technology to manage scheduling to implementing consistent low-cost upskilling opportunities, the research clearly indicates the priority and effectiveness of focusing on existing labor management tactics. The reason for this is, most simply, that the cost of managing for employee retention and upward internal mobility, is much less expensive and unpredictable than managing for utilizing external labor sources like hiring and contracting. One of the more unique benefits of implementing a combination of scheduling automations and upskilling programs is the alignment with current labor market sentiments. Where the broad or general labor market is looking for career advancement opportunities and innovative and interesting work environments, manufacturers are looking for efficiency and predictability. Scheduling automation simultaneously enables complex short and long-term time-spend objectives to find space for high value production while keeping employees engaged in the various tasks under their purview. Upskilling, when done strategically, can be a great way for increasing the loyalty and buy-in as employees see opportunity, are invested in and feel ownership within the business. These strategies, however, are very common and rarely offer a truly competitive edge against other businesses utilizing the same concepts or technologies. 

In the second category - external and strategic solutions - strategies can become much more expensive. For businesses burdened by consistent turnover and lack of labor availability, the cost per hire can be north of $5,000 per employee with the more qualified and technical roles dominating the high end of the spectrum. Additionally, business owners reliant on these “outbound” labor acquisition playbooks, will be disproportionately beholden to geographic, industry, and other trends well outside of their control. Another strategy in this bucket, this time for generating “inbound” labor supply, is community investment. Referring once again to the second post of this series, manufacturing has backslid as a dominant career opportunity. Larger companies looking for long term competitive viability are investing into untapped communities and demographics to raise the visibility and desirability of the manufacturing industry writ large. For big businesses, the budget for these strategies might be there, but for small businesses with inconsistencies in profitability, this can be much more challenging.

Finally, and most immediately expensive, is implementation of internal and operational solutions in the form of production automation technologies. Where scheduling automation has been found to increase productivity by up to 30%, updating your facility with automation technology can increase company-wide productivity even more. With that being said, there are a number of immediate shortfalls to utilizing automation as a primary or majority growth strategy. First, there is research that indicates productivity increases from automation may actually increase human capital needs in various industries. Second, automation technologies can be incredibly expensive and small businesses would have to seriously tap into their savings account or take on aggressive financing to facilitate rapid companywide automation. Lastly, increasing the sophistication of automatable tasks (generally speaking the simplest of the production processes, like the manufacturing line explained in post 3), doesn’t address the skilled labor gap, or the shortage of available labor sources in those jobs that technology can’t automate just yet. All this to say, automation might not be the long-term small business solution that it’s been made out to be. 

Interestingly enough, when evaluating the ecosystem of strategies that one can entertain to solve their human capital concerns, the more expensive the solution the less it solves the actual problem. Just as a reminder, the problem is that fewer and fewer people - within a smaller and smaller workforce – actually want to pursue lifelong careers in manufacturing and industrial tech. So, what’s the play here? How are small businesses meant to compete for labor against the Raytheon’s & 3M’s of the world? How are they going to attract the best talent when the next generation of brilliant minds think that Tech is the only path for them? Over the next month, we will be wrapping up this series with our “Labor Force Playbook” designed to provide real and practical steps for small business owners in the manufacturing space. We’ll spend time discussing the internal, organizational, strategic, external, and collaborative strategies that Artemis believes will provide the most success for small business manufacturers looking to be competitive against the larger players.

For those looking to prepare, below are the links to the previous three Artemis Insights articles which provide the baseline for the solutions we will be proposing.

• Part 1 - How We Got Here
• Part 2 - The Industrial Evolution
• Part 3 - A 100 Year Skills Gap

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