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Manufacturers do not see domestic regulations as their biggest challenge

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Regulatory reform dominates the news cycles, and no wonder: A 2014 report sponsored by the National Association of Manufacturers claims that federal regulations are costing manufacturers an average of nearly $20,000 per employee.7

Yet among the factors affecting the industry, manufacturers in the Monitor survey say that domestic regulations are not their most pressing concern. In fact, nearly half (46 percent) say domestic national policy regulations are neither barrier nor benefit, and nearly one-quarter see them as a modest or significant benefit. With little variation, this perspective held true for both U.S. and non-U.S. manufacturers.

External risks

Among the biggest barriers that were cited by survey participants, many were notably out of their control. Downturns in the broader economy, fluctuations in currency and commodity pricing were of concern for a greater percentage of manufacturers than local or national domestic regulations.

Nevertheless, a more reasonable tax and regulatory environment, particularly for middle market manufacturers who make up approximately 40 percent of the GDP, would be welcome. But the likelihood of substantive regulatory changes actually occurring may vary, depending on the sector and the issue. According to the RSM MMBI, many executives believe policy changes on a range of issues—including trade agreements, federal regulations, immigration, infrastructure and tax reform—are likely.8 Manufacturers should follow proposed regulatory changes closely in order to be able to make effective, timely changes to their strategic goals, objectives and plans.

Enterprise risk

Nearly half of manufacturers in the survey (48 percent) are using enterprise risk management (ERM) processes to address operational risks, followed by strategic (36 percent) and regulatory or compliance risks (34 percent). An effective ERM program can address a wide spectrum of risks beyond these areas, so it is somewhat surprising that two-thirds or more survey participants are not using ERM to address risks related to finance and accounting, legal matters and their supply chain. A more holistic strategy can leverage ERM to drive additional business value. Manufacturers may not fully appreciate that ERM is an actionable framework that, when sufficiently leveraged, can provide management with a holistic view of key risks, allowing them to consider risk interactions, develop a risk culture and make business decisions based on a clear understanding of risks.

Workforce

As the labor market tightens, and the number of unfilled manufacturing job openings continues to rise, training and workforce development investments are increasing among more than half of manufacturers in the survey. Attracting and retaining skilled workers continues to be a concern, and that concern is widespread. More than two-thirds of participants in the RSM MMBI survey—representing a wide spectrum of industries, including manufacturing—indicated that it is difficult to find individuals who want to work in their industry; most reported that the cost of training for workers remains a challenge.9

There are a number of culprits in the current environment that make it hard to attract and retain a skilled workforce. While the average, fully burdened hourly compensation in manufacturing for U.S. companies ($37.71 as of 2015) is second only to Germany, growth in U.S. manufacturing wages has been anemic, particularly when compared to other industries such as leisure and hospitality, information, and financial services.10 Compounding the problem, a number of manufacturing sectors in the United States have had to shed employees, some by a significant percentage, over the last decade or so.

In 2013, the average U.S. manufacturing industry turnover rate* was 13 percent; the rate in 2016 was slightly higher at 16 percent.11 Monitor participants report a 20 percent average turnover rate. With unemployment in the United States at 4.3 percent by the end of the second quarter in 2017, hiring and compensation are going to be major challenges for middle market, with automation, training, IT, process improvement and external sourcing as options to increase or supplement productivity.12

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Data security

By now manufacturers should be well aware of the likelihood of hackers gaining unauthorized access to their information systems. Historically, the Monitor survey has consistently identified a small cohort (about 11 percent) of company leaders unaware whether or not their system has ever been hacked. But the majority usually say that they have not been hacked to date and that they have taken steps to prevent system breaches in the future.

Yet the security procedures taken by most survey participants are primarily the minimum required to maintain a semblance of data security. While about one-third hired data security consultants or data security staff, a plurality of these companies enhanced their employee security protocols—such as updating passwords—as a primary form of data security. Few did any due diligence for vendor data-security; engaged in any system penetration testing; or created a post-breach response plan. According to the Monitor survey, only 28 percent of manufacturers have ERM guidelines that address IT and data security issues.

 

What this means for manufacturers 

Prioritizing and managing risks
Risks are an integral part of business growth, but not all risks are created equal. Management and mitigation efforts must be calibrated according to the likelihood of exposure and the potential downside from an incident. A comprehensive ERM approach can help manufacturers shift their risk focus from strict compliance to a more strategic and operational perspective.

Manufacturers should establish a company-wide taxonomy of risk definitions and measurements, enabling risk to be identified and discussed in an objective manner. ERM encourages:

  • Proactive risk management throughout an organization
  • A compass for proper resource allocation
  • Effective employee awareness of threats and opportunities

Attracting and retaining a skilled workforce
As baby boomers retire and younger employees change jobs more frequently, manufacturers face a challenge of ensuring the workforce is skilled, motivated and productive. So it’s important to understand the priorities of each demographic. When asked to define the next most important tools for attracting and retaining talent:

  • Leaders in one industry sector identified an enjoyable work environment, training opportunities and challenging job assignments immediately behind pay.
  • Millennials pointed to work-life balance, personal development and organizational culture as their priorities for selecting one employer over another.13

Establishing a substantive and sustainable work environment that meets the priorities of the company as well as its workforce will be the key to retaining talented employees. Incentives that could benefit both may include:

  • Launching in-house training and apprenticeship programs designed to develop skills that support employee career aspirations
  • Providing workers with attractive project and leadership opportunities
  • Training existing employees to step up to more highly skilled jobs through internal apprenticeships
  • Offering coaching and mentoring programs
  • Setting up networks of peers14
     

* Voluntary and involuntary separations as percentage of typical staffing level
7Crain, W.M., Crain, N.V., “The Cost of Federal Regulation to the U.S. Economy, Manufacturing and Small Business,” (Sept. 10, 2014), National Association of Manufacturers
8RSM US Middle Market Business Index, (Q1, 2017) RSM US LLP and the U.S. Chamber of Commerce
9RSM US Middle Market Business Index, (Q1, 2017)
10Rattner, S. (June 29, 2017)
112013 and 2016 Turnover Rates by Industry, compensationforce.com
12RSM US Middle Market Business Index, p. 13 (Q2, 2017)
13“Talent Development in the Construction Industry” (2015) FMI
14Williams, JP, “How Manufacturing Can Solve Its Own Talent Shortage Crisis” (Aug. 21, 2014) Industry Week