Human Capital Costs: The Blind Reality of Financial Shortfalls in Manufacturing

The revolving door of employees is chipping away at company profits, and many are blind to the reasons why. It is time to examine what’s behind your talent crisis and what it’s costing you.

Today’s uncertain economy has manufacturing leaders scrambling to cut costs and conserve cash. But many of the biggest hits to a company’s bottom line are tied to labor costs, with employees leaving and unengaged workers checking job ads not long after the ink on their W4s has dried. With our nation’s jobless rate at its lowest since the 1960s, hoping these labor issues will resolve themselves is not a strategy. And with the ever-increasing cost of capital, neither is simply throwing money at the problem. Without taking a deep dive into what’s driving turnover, employers will face more of the same; a lack of engagement, burnout, poor morale, lapses in workplace safety, and, possibly, a tainted brand. The financial consequences of not conducting a deeper evaluation will be the vicious cycle of recruiting, onboarding and safety costs that will continually chip away at company profits. 

Turnover and low engagement, two sides of the same coin, cost American businesses as much as $1 trillion a year. A Gallup survey of employees across industries found that in 2022, only 32% of full- and part-time employees were fully engaged, while 18% were actively disengaged. And this disaffection comes at a time when the unemployment rate of 3.4% is the lowest in more than 50 years. In this robust job market, workers have plenty of options, including the option to pick up and leave. 

While a scarcity of workers is evident across many segments of the U.S. economy, the talent crisis and labor shortage are more pronounced in manufacturing. Late last year, a National Association of Manufacturers (NAM) survey found that three-quarters of business leaders indicated that attracting and retaining a quality workforce is a primary business challenge. Even in the face of a possible recession, almost 65% of the manufacturers surveyed plan to continue to upskill and train existing employees in the coming year. 

Meanwhile, what often goes unnoticed is the time and cost involved in screening, interviewing, hiring and onboarding a candidate, which accounts for 60% of the costs associated with bringing on a new employee. This process takes time away from accomplishing organizational goals and can exhaust managers. By some industry estimates, the cost to hire an employee is three to four times a position’s salary. So, expect $180,000 in onboarding costs for a job with a $60,000 salary.

Turnover doesn’t just impact costs tied to recruiting and training.

Business leaders end up spending more on retention as the revolving door of workers erodes morale, putting a strain on workers that remain. Disruptions related to an endless carousel of new employees who need to be trained delay customer deliveries and even result in the production of substandard goods, which not only eats away at cash flow but can also damage a company’s brand. 

Regular turnover in the workplace and a shortage of workers also impact plant safety. Lapses in safety and safety issues tied to a lack of training or overworked employees can result in costly lawsuits, as well as increased costs related to healthcare claims. Failure to address talent issues has broad and long-term implications for business leaders focused on their bottom line and expenses. 

Employers faced with high levels of turnover and diminished employee engagement need to re-evaluate their existing talent strategies and other workplace practices. The consequences could be very costly for businesses that fail to address the root causes of employee turnover. Addressing a business’ labor crisis starts with understanding what’s behind the turnover, including lack of engagement, inadequate training and advancement opportunities, and burnout, as many employees work overtime to compensate for insufficient staffing. In some cases, the problem is a lack of clarity in expectations, or employees not feeling any connection to a business. For anyone trying to manage costs in today’s challenging economy, it’s time to explore what’s behind your talent crisis and take steps to fix it and ultimately become that employer of choice and top competitor in the market.