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Manufacturing Wages On The Rise

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

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Manufacturing Wages On The Rise

  1. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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/>.

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