It’s no surprise that inflation continues to be top of mind for everyone, particularly as it relates to employment costs. Manufacturing and distribution companies continue to struggle to find skilled workers and fill the current labor gap. The economy has lost an unprecedented number of workers since the pandemic for various reasons, including retirement and switching industries.

Below are a few strategies that middle-market businesses should consider to help mitigate the pains of a shrinking workforce:

1. Evaluate compensation benchmarking: Utilize your human resources (HR) department to proactively build a network and gather information on comparable compensation and company culture. While it may be perceived as a sensitive topic, open discussions regarding your compensation can offer valuable benchmarks from other companies that are not obtainable through standard benchmarking. To begin, reference benchmarking from dependable sources that are pertinent to your organization's industry, size (in terms of both personnel and revenue), and geographic location. Additionally, take into consideration factors such as length of employment with the organization or time spent in the role. Subsequently, broaden your knowledge by accessing supplementary data through HR networking to comprehend what comparable organizations are doing. Naturally, it is imperative to consider benchmarking as a whole, ensuring that confidential employee compensation and personally identifiable information is kept private.
2. Explore added benefits: Manufacturing and distribution companies can only pass a finite amount of increased salary costs onto their customers to remain competitive in the marketplace, so it is vital to build an environment that provides other perks outside of compensation alone. These can include improving leave policies for maternity and paternity leaves, launching internal initiatives that drive a sense of community, and perks that employees may not have had previously, like flexibility in working hours or childcare.
3. Evaluate suppliers: Labor shortages have a significant impact on all aspects of a manufacturing and distribution business. Therefore, it is essential to compile a list of alternative suppliers and establish relationships with them as backups. This preparation is necessary to mitigate any unforeseen disruptions that may arise with current suppliers. Manufacturers and distributors should remain vigilant by continuously assessing their suppliers for potential risks and identifying secondary and tertiary suppliers as necessary.
   
   To properly evaluate suppliers, companies should classify them into different categories based on their role within the organization. Within these categories, suppliers should undergo routine analysis for financial risk, recalls (both related and unrelated to the product), and other factors. Additionally, companies should assess their ERP systems' ability to support the identification of primary, secondary, and tertiary vendors as part of the MRP planning processes. This evaluation will enable an efficient transition from primary to alternative vendors, should the need arise. Overall, manufacturing and distribution companies should always be assessing their suppliers for risk and identifying secondary and tertiary suppliers, where necessary, to ensure the continuity of their operations.
4. Develop relationships with staffing agencies: When you're staffing a plant for the day, you now have to anticipate and respond to more people not showing up to work by increasing the number of people who are on call to fill inevitable spots. Establishing relationships with staffing and recruiting agencies is a helpful approach many manufacturing and distribution companies are using to bring in temps on an ongoing basis to handle continual call outs. It is important to note that staffing agencies aren't just helpful in filling positions on the "shop floor" but can also help the organization fill unexpected or temporary gaps in other areas of the organization such as finance, HR, marketing, and IT.
5. Assess your cost model: Investing time in improving the visibility of your costs is crucial not only for internal performance improvement but also an opportunity to remain transparent and reliable to customers. By being transparent about costs, companies are meeting the changing demands of the customer while providing better stability in their anticipated profits. Cost-plus pricing is an approach that some companies are taking to achieve this goal.
   By implementing a costing model, companies can identify opportunities to improve costs and justify passing additional costs along to the customer. This approach not only benefits the company but also improves transparency to the end consumer, who may either sell the product or incorporate it into their processes.
   It is imperative that any costing model is fully developed and vetted in order to effectively evaluate manufacturing processes, improve costs, and justify pricing decisions. Overall, by being transparent with costs, companies can build a stronger relationship with major customers, improve trust and credibility, and maintain a competitive edge in the market.
6. Leverage technology: Now is the time to make financial investments in improving your company’s technology. Whether it is upgrading your enterprise resource planning (ERP) system, evaluating boundary systems (such as CPM, AP Automation, Close Process automation, etc.) that are supplemental to ERP systems, automating rote tasks, or standardizing processes to make it easier for a potentially revolving workforce to onboard to your company, technology can help to fill some of your gaps in labor. Although companies may not need to upgrade their ERP systems, modern ERP systems enable significant efficiencies across the organization from finance to the shop floor.
7. Remain agile: Perhaps most importantly, remain agile and proactive to respond to the current marketplace and unpredictability in staffing. Staying ahead of possibly losing employees to larger businesses with more resources and better pay or losing employees to issues like FMLA or illness, is paramount. Consider your most valuable employees and positions, like your supply chain manager, and have a strategy in place for if they leave. Having contingency plans for critical resources across the organization involves institutionalizing clear policies and procedures, cross-training, and planning.

In the current market, always anticipate and plan for disruption. Though the changing labor force is challenging for any manufacturing and distribution company, there are ways to improve your current processes and build a solid contingency plan to set your business up for success in spite of adversity.

Citrin Cooperman’s Manufacturing and Distribution Practice is here to help you plan for the unexpected. For more information, please contact John Giordano at jgiordano@citrincooperman.com or Peter Emerling at pemerling@citrincooperman.com.