Amid headwinds, Iowa manufacturers see strong demand ahead

Panel: Talent shortage drives new investments, higher wages for workers

By Joe Gardyasz

Silicon chips have become the manufacturing industry’s equivalent of how toilet paper disappeared from store shelves during the early supply chain bottlenecks sparked by the COVID-19 pandemic shutdowns. In manufacturers’ scramble to stockpile as many scarce chips as they can for their operations, the scare has helped exacerbate ongoing global chip shortages, says Gabe Glynn, founder of MakuSafe. 

Adding to the supply and demand roller coaster are labor shortages, which help explain why many electronic components used in manufacturing have skyrocketed in cost. For instance, Glynn said, the price of a tiny component the size of a pepper flake that’s used in one of MakuSafe’s devices went from less than 15 cents per unit to over $12 per unit, meaning tens of thousands of dollars in higher production costs just for that one component. 

This nugget was one of the insights shared by a five-person panel of experts the Business Record recently convened virtually for the third annual Manufacturing Forecast. 

Labor shortages, continuing supply chain constraints, hybrid work environments, inflationary pressures and the ever-present question “Are we in a recession?” were among the topics that the panel tackled during the hourlong discussion. 

The current environment for manufacturers is dominated by volatility, uncertainty, complexity and ambiguity, making it tough for organizations to respond and driving leaders to consider new strategies.  

Moderated by Business Publications Corp. Publisher Chris Conetzkey and Senior Staff Writer Joe Gardyasz, the panel included: 

Despite ongoing challenges that include the need to raise wages and boost benefits and dealing with sometimes massive backlogs of orders, Iowa manufacturers are optimistic about their companies’ prospects — saying these are the kinds of problems they prefer to have. 

Below, edited for clarity and length, are responses the panelists had for some of the questions we posed in the discussion. 

What’s the No. 1 issue, or one of the issues, that is really affecting manufacturing right now and reasons why? 

Heather Bruce: The biggest issue for us right now is more to do with supply chain, but more in depth with that, what we’re seeing is the component pieces — the things coming from Southeast Asia and those areas — are becoming the biggest trouble spot for not only a lot of our vendors, but also our customers in order for us to supply people. 

Gabe Glynn: Certainly our technology uses a lot of electronic components. To give people a real-world example: We’ve seen the cost of a component for our technology that’s about the size of a flake of pepper [purchased on a reel of 3,000 components] went from $400 to $36,500 for that same reel of components. And so all of those costs have to land somewhere.

And on top of that, because we do a lot of work over in Southeast Asia, and areas of the world outside of the United States … have handled the pandemic very differently. And until just recently, many parts of China where a lot of electronic components are made, produced and shipped, have been locked down. And so we’re seeing facilities over there that are still only running at 20, 30, 40% of capacity, and that’s created a trickle-down effect. The lack of supply obviously is a big part of it. Then there are shipping costs — an example is that something that would cost $800 to ship from overseas is now costing $7,000. And so those costs continue to come out, and you add to that a very competitive labor market and people are doing everything they can to find and retain good talent to their team, it’s just a recipe for rising costs. 

I will say there’s a couple of positive things with this, because I don’t want it to be all about the negative here. But I think we’ve learned a couple of things. One, as business leaders, we recognize the fragility of our company. We’ve found where the weak points are, we found where the single points of failure are, and it’s causing us to think a little bit differently about that and maybe we’ll dig into that a little bit more. And then the other thing is, everybody we’re talking to, everybody that we work with in safety technology is sitting on massive backlogs. I talked to one manufacturer this morning; he said he doesn’t think his entire industry will recover from the backlogs for at least two years, which is a huge positive when you consider the alternative side of that.

Kevin Kacere: I think the No. 1 thing that I hear about are staffing challenges. And whether that [may] be somebody in entry-level positions, assembly roles or warehousing roles all the way up. …  The vendors that the manufacturers have are facing those same challenges. And so, yes, there’s all the offshore challenges that Heather talked about, but even local Midwest challenges of current vendors that have had lead times of eight to 12 weeks are now double, triple that. And a lot of that is related to their manpower challenges. 

Jeff Schick: It really boils down to labor shortages; the unemployment rate in the state of Iowa is extremely low. So it’s really hard — we have to make sure we have a culture inside our operations that’s strong, where we have leaders who are great at what they do. It’s also centered around the employer of choice activities related to flexible scheduling. Another key area is skilled trades — we just do not have enough young folks going into the skilled trades environment, whether that’s welders, pipefitters, electricians, etc. 

Anne Villamil: I think certainly the labor issues, supply chain issues that you’ve talked about in a very specific way at your firms at the macro level, all of that is feeding into inflation. So we did have a better reading today [with the Aug. 10 news that the consumer price index indicated inflation slowed to 8.5% in July]. You may have seen that the markets went up. My concern about that — even more so after [hearing] what you guys are saying — is that there’s a little bit too much optimism on that because really, there are labor shortages and there are continuing supply chain problems. And whenever you have an imbalance between supply and demand, or too little supply and demand has been high, that’s going to drive prices up. It’s certainly good news; we may be breaking the direction of that curve, but we still have a ways to go. 

Continuing with you, Anne, with your economist hat on, are you concerned the U.S. is entering a recession? What’s your take on the situation right now? 

Anne Villamil: The U.S. is not in a recession. The recessions are called by this nonpartisan group of economists called the National Bureau of Economic Research. The rule of thumb has been two consecutive quarters of negative GDP, and we have had that, but their criteria are broader. They include labor market conditions, and as Jeff said, the labor market is good. The unemployment rate nationally just went down to 3.5%. That is very, very low by historical standards and Jeff’s point was that’s even lower in Iowa. So the labor market is tight. There are jobs out there. But I’m interested to hear from any of you about the backlogs of orders. That’s a good thing for the economy, as Gabe pointed out. So this is a very, very uncertain and really confusing time, because people look at things like the GDP reading, but there are broad measures that go into making such a call [about a recession]. And some of those readings are quite good, like labor. In general, corporate profits continue to be good.

Heather Bruce: Everywhere, all you hear anymore is “we’re in a recession, we’re in a recession,” and this is bad news. It leads a lot of people to be afraid and then leads to more of this [panic buying out of fear] and other things that just compound the issue. … Being in ag, we’re usually the last one to get hit with any sort of economic changes. So once everything really starts to correct itself, we’ll probably be [correcting] about six months after everybody else corrects. We are heavily commodity-driven. Our prices are driven by steel, because it’s 80% of our costs. And we deal in the agricultural sector, and when those prices are high farmers aren’t going to give that money to Uncle Sam, they’re going to be spending the money on new equipment. Well, nobody can get new equipment right now. So they’re going to be spending it on parts, things that they can use to fix up their own equipment. 

Gabe Glynn: I think what we’re seeing is a little bit of an accordion effect. We’re going to have some false peaks, and we’re going to have some false bottoms. I don’t think it’s going to be this nice arcing smooth curve; [it will be] where we see things start to get better and then just eventually stay better. Especially in the electronics component world, we’re seeing this huge lot of people buying up as much as they can. It’s like the silicon chips and the new toilet paper for the pandemic, and so everybody’s out there trying to get as much as they can. And they’re placing orders with three, four or five different suppliers for a million, 10 million of these things, and then they’ll cancel the other ones when stuff comes in. And so the market responded by saying, “OK, we’re not going to allow any cancellations or returns.” Now you have people that are sitting on stockpiles. We’ve seen the semiconductor industry take a massive hit here in the last few days. I think what’s going to happen is we might end up getting a huge flood of all this stuff, which will create some acceleration, as long as we can get the bodies in there to help produce it. 

Jeff Schick: With this VUCA world we live in — the volatility, uncertainty, complexity and ambiguity — it’s really tough to forecast in that type of environment because you can’t predict what’s coming down the road, the Ukraines of the world, the COVIDs of the world and so forth. And so, planning around that, establishing strategies and business practices to deal with that [means] increasing your shock absorbers. Maybe you had a cash level that you normally would try to carry, and now it might make sense to increase that a little bit. So there are different approaches to handling those unpredictable events. But really, No. 1 is: Stay focused on what drives your business. Stay focused on your North Star. What’s your mission and in your how-to-win philosophy, and then address those [VUCA] issues with those shock absorbers that I mentioned.

Given this environment of labor shortages, what sort of effect is that having on wages, and are companies increasing benefits? What is the environment like for attracting and retaining quality workers at this point? 

Heather Bruce: We do things a little differently around our area. I’m sure everybody’s doing some form of hiring or sign-on bonuses, all sorts of different incentives to get people in the door. We’re actually leaning more on our current employees, and we’re going by referral programs instead. And that seems to be helping us a ton, when it comes to getting people to stay. The hard part isn’t getting someone in the door — that was the easy part. It’s getting them to stay past the 90 days. It used to be, pre-pandemic, that I could get someone benefited and they would stay at least three years. Now I’m lucky to get someone … to stay six months. So the referral program has been extremely helpful. 

Are current limited labor conditions driving technology investments right now? 

Anne Villamil: The answer, as it almost always is in economics, is: It depends. So if these are short-term fluctuations, then you’re just going to try and tighten your belt and sail through them. But if we know that this is a long-term change, then yes, you have to bite the bullet and invest in those new technologies. And that’s why all of this uncertainty and ambiguity that others have mentioned is just crucial right now.

Gabe Glynn: It’s interesting; we’re in the workplace safety space, and we’re seeing companies invest significant dollars into improving the health and happiness and function of the worker because they know that they need to be able to attract people, they need to be able to retain them. Two immediate examples pop into mind. On a call last week with one of our customers, they had just invested in a very large cooling system for their production facility because data that was gathered through our technology told them that their employees were in the extreme risk category for heat exposure. That’s something that maybe five or 10 years ago wouldn’t be an investment that a company would have the ability to make, or be willing to make, is something that they’re absolutely looking at now. 

Another Iowa manufacturer here is investing in robotic technology to improve the risk of musculoskeletal disorders. Losing workers because of an injury or because of repetitive motion or just hard physical labor is a cost that a company can’t take on right now — they can’t even fill the seats that they have. And so we’re really seeing significant investment in improvement of the environment of the job, the job functions and job processes. And I think that’s a complete shift from where companies were looking even just a few years ago.

Kevin Kacere: It’s more of an HR strategy right now because we can’t get folks. Yes, absentee rates have been higher, but they’re getting better now that the pandemic is coming to an end. … So not only are we seeing automation in places where it may be easier to do, on the packaging side of the equation, for example. On the material handling side, [there are] a lot more mobile industrial robots roaming around the factory where you see AGC [automated guided carts] that drive with cameras much like a car drives on the road by itself today. … Which means you can free up somebody who’s doing an indirect role and have them go build windows or doors or other things inside of the operation that might be value-added. 

Also, there are cobots [collaborative robots] out there that can work around people without the big fences and light curtains, and all this leads to things that you might have to have in place when you see those big yellow robots around your factories. Cobots can be a very helpful complement to a team or an area that can then maybe reduce the reliance on folks a little bit. Plus, there is a measure of safety gains to be made.  

Heather Bruce: We are looking into investing into cobots. … We’re working with the CIRAS [the Center for Industrial Research and Services] and with a marketing company in Des Moines to try to help combat [false perceptions] in order to be able to have some of the robotics. It’s just like Jeff said — it’s more to do with how do I take this manual labor aspect out of it and utilize the person for their mind more? Gone are the days of having the 18-to-30-year-old men from the farm basically being able to do this hard labor work. Our industry itself has changed. Fifteen years ago, you wouldn’t have found a single woman on our shop floor, and now we have eight of them. All different races, all different ages. And so it’s been extremely helpful trying to invest in these types of technologies to be able to make the work easier so that I can go after women [or] older demographics instead of just going after the really young able-bodied people. It’s been very helpful for us.

Kevin Kacere: This labor cost issue is a real problem. And the area that we’re leaning into, as some of you brought it up, is on retention. And beyond the cost of acquiring that additional employee, there’s the cost of the loss of productivity, because you’ve got to onboard and train, and so that churn increases that cost, and increases the lack of productivity. So the best solution is to retain those folks. And it’s not just about the common denominator in the wage level. We’re bringing tools to the party to really understand what’s going on with your employees. How are they working together? How can we create an environment that’s more productive for them? And it’s well beyond your common employee satisfaction survey. It’s really understanding. How are they working? What do they need to be more productive, and in doing so increase their satisfaction and their retention?

Acknowledging that manufacturing is largely a hands-on proposition, are there still some accommodations that manufacturers are making for workers with remote work and flexibility where it’s possible? How do the specific needs of manufacturers weigh in on staffing? 

Kevin Kacere: When I think of manufacturing, I don’t think of just on the shop floor — I think of the whole supporting organization, and of course, on the shop floor. We’ve got to be there, but in some roles it’s appropriate to work from home, and in certain instances I’m seeing folks do more of a hybrid environment, [while] trying to maintain a culture as an organization. So one might want some folks in-house at some point during the week, whether it’s two days or or three days in-house and then working from home because depending on their role they might be more productive at home and have less interruptions. … And again, give them the tools and the capabilities to be most productive in each one of those environments.

Heather Bruce: We find it in our industry very challenging to have people working from home in the office sector because it actually [creates] more of a morale issue with the people on the shop floor. … I’m curious if there’s people that are doing more of these types of work flexibility hours in the manufacturing sector, because we really can’t get around having a whole lot of work-from-home type things going on.

Jeff Schick: We do think flexible schedules [are] key to opening the pool of candidates, for operations. We don’t think there has to be one schedule; there are multiple schedules inside of our operations to be able to accommodate that. … For example, someone might work four [10-hour shifts] and then they’re off, and then work four 10s, and they have to work a weekend and then they have a weekend off every three weeks, that type of schedule. … But we are getting very creative in how we think about schedules and how we think about each area. 

What are some things that you wish your suppliers or customers knew about your operations, or ways that they could help make your life easier as manufacturers? 

Heather Bruce: There are a few — one of them being that we’re not Japan. We can’t do the just-in-time [inventory delivery model] in the United States. That theory that came around back in the ’90s and still kind of keeps hanging on. It’s wonderful when you’re on an island and literally all of your vendors are just down the road from you — you can do just-in time like that. … So work with the vendors, don’t just say, “I’m changing my order right now.” That’s one of the things we’re starting to see more and more of is [the suppliers] that have the flexibility in their businesses who are talking to their end users [asking], “Do you really need us?” There are still a lot of purchasers that will just [buy out of fear]. 

Kevin Kacere: I do think particularly on parts and in the servicing of parts, there is a bit of panic buying going on, which only exacerbates the problem. It used to be that we would be promoting [sales of] parts and let’s go get those big parts orders. But it just has this effect that cascades through the rest of your parts customers and your manufacturing operation. So communicating that the parts are going to be there and we’re going to have that availability can make a positive impact for you to manage your inventory levels. 

Jeff Schick: I’m just going to weigh in on what Heather said earlier, that it’s about the supply chain. Not necessarily just manufacturing, but everything about the supply chain — plan, source, make, deliver. The planning piece of it, I think, is really important, especially in these times. And not only developing it internally, but that communication back to the supplier. So the amping up of our S&OP [sales and operations planning], which now many folks refer to as IBP —  integrated business planning — is really trying to help us strengthen those relationships with facts and data around what our business outlook is going to be going into the future. 

Give us a feel for how optimistic you are about your business and the manufacturing industry going forward. 

Gabe Glynn: I’m very optimistic. If the situation wasn’t backlogs of orders and still high demand and consumer spending still good, I would feel far less optimistic. It’s such a weird situation that we’re in where we’re seeing these pressures and these inflation numbers, but unemployment is so low. There’s not a problem with jobs and finding jobs — there’s a problem with trying to hire people. So I’m incredibly optimistic for what the future brings. … I would say the most important thing is: Look at the people. Go talk to your people to understand what your labor force is looking for, what will make them happy. 

Heather Bruce: My optimism is right up there with Gabe’s. I think that the ag industry, especially in the Midwest because of everything going on worldwide, is just giving us more and more opportunities to supply the world. We’re really excited. We have a lot of new opportunities with new customers knocking on our doors that really weren’t knocking on it before. The biggest thing is getting that backlog under control, and I think then the world is our oyster. 

Jeff Schick: [The housing market is strong] and that bodes well for the construction industry. I think you’ll see peaks and valleys maybe more frequently. These are predicated on some of the interest rate changes that are going on, maybe some of the other regulatory constraints that might exist, and quite honestly, it will come back to labor. Are there enough people to build the houses, to build the apartments [and to obtain] the materials needed in the building? We’re cautiously optimistic, and our team is laser-focused on what we can control to make sure we can influence our end outcome. 

Kevin Kacere: Everybody I’ve talked to has a consistent story of strong order flow, and trying to figure out how to get orders out the door is more the challenge. … I think there was a lot of inventory that was waiting to get out the door. The optimism for order flow is great. I think this has forced companies and folks like us to think about new tools and new ways of doing things. 

Ann Villamil: It’s an undeniable fact that we had two back-to-back quarters of negative GDP. But when you unpack that, you’re absolutely right, Kevin, the second [quarter GDP] had to do with investment in inventory. Even the first [quarter] had to do with what are called net exports. … During that quarter we had a lot more imports, and that brought GDP down. But people were still consuming, and [consumer spending] is 70% of GDP. If we can keep manufacturing and having the goods that people want, then that’s going to turn that around, because the consumer is there, as other people have said.