Manufacturing wages are rising at a rapid pace in some major industrial states. Why is this happening?

1. S E 7 E N S U M M I T S
G R O U P
Fast Rise in Manufacturing Wages
Gabriela Alessio
Meredith Leigh
Nirmal Shah
Brian Sackey
Cause Analysis and Effects

2. AGENDA
S E 7 E N S U M M I T S
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.Bibliography
2

3. SUMMARY
S E 7 E N S U M M I T S
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:

4. Manufacturing in the U.S.
S E 7 E N S U M M I T 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.

5. The Disconnect: Perception & Facts
S E 7 E N S U M M I T S
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

6. Current situation in the U.S.
S E 7 E N S U M M I T 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

7. The Reality
S E 7 E N S U M M I T S
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?

8. Examples
Sullivan
Palatek
(Michigan)
Using welders from temp-agencies
at double the cost of staff welders
CEO 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.
S E 7 E N S U M M I T S
G R O U P
Thor
Industries
(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)
Loadcraft
Industries
(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.

9. What can Management do?
S E 7 E N S U M M I T S
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

10. What can Management do?
S E 7 E N S U M M I T S
G R O U P
$
$
$
$
$
Investing on
Machines
Rising Wages
even more
Outsourcing People
or Processes
$
MAXIMIZE Profit
MINIMIZE Cost
$ $ $ $
$ $
$
$
FIXED VARIABLE
OPERATIONAL
LEVERAGE
Manage the
right mix of
fixed & variable
costs
VARIABLEFIXED

11. Operational Leverage
S E 7 E N S U M M I T S
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

12. $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
Operational Leverage
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
High Fixed Cost Company Low Fixed Cost Company
Increased Revenue
(Thousands of dollars)
Revenue Variable Costs Gross Profit Fixed Costs Net Income
S E 7 E N S U M M I T S
G R O U P
35%
33%
65%
13%
35% vs 65%
Variable Costs Fixed Costs
50% vs 20%
Net Income
15% = 15% 35% vs 65%
Variable Costs Fixed Costs
33% vs 13%
Net Income
32% vs 22%

13. $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
Operational Leverage
35%
50%
65%
20%
35% vs 65%
Variable Costs Fixed Costs
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
High Fixed Cost Company Low Fixed Cost Company
Increased Revenue
(Thousands of dollars)
Revenue Variable Costs Gross Profit Fixed Costs Net Income
S E 7 E N S U M M I T S
G R O U P
35%
33%
65%
13%
Net Income
15% = 15% 35% vs 65%
Variable Costs Fixed Costs
33% vs 13%
Net Income
32% vs 22%
∆= 17% vs 7%

14. $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
High Fixed Cost Company Low Fixed Cost Company
Decreased Revenue
(Thousands of dollars)
Revenue Variable Costs Gross Profit Fixed Costs Net Income
$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
Operational Leverage
35%
50%
65%
20%
35% vs 65%
Variable Costs Fixed Costs
50% vs 20%
S E 7 E N S U M M I T S
G R O U P
35%
100%
65%
40%
Net Income
15% = 15% 35% vs 65%
Variable Costs Fixed Costs
100% vs 40%
Net Income
-35% vs -5%
-35% -5%

15. $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
High Fixed Cost Company Low Fixed Cost Company
Decreased Revenue
(Thousands of dollars)
Revenue Variable Costs Gross Profit Fixed Costs Net Income
$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
Operational Leverage
35%
50%
65%
20%
35% vs 65%
Variable Costs Fixed Costs
50% vs 20%
S E 7 E N S U M M I T S
G R O U P
35%
100%
65%
40%
Net Income
15% = 15% 35% vs 65%
Variable Costs Fixed Costs
100% vs 40%
Net Income
-35% vs -5%
-35% -5%
∆= -50% vs -20%

16. Conclusion
S E 7 E N S U M M I T S
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

17. Bibliography
S E 7 E N S U M M I T S
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/>.