Today’s manufacturing sector is experiencing more growth than it has in the last 30 years. Approximately 12.8 million Americans are employed in the sector, contributing $2.4 trillion to the U.S. economy. Manufacturers generate revenue by physically, mechanically, or chemically converting raw materials into new products for the purpose of distribution and sale. Products and people are the drivers of their profitability.
Too often, however, industrial employers are so intensely focused on production and output that human capital and employee relations initiatives can be overlooked. Two key opportunities for improvement in this area are: (1) the way organizations attract, onboard, develop, engage and retain talent; and (2) the process through which they purchase employee benefits.
Why is this significant? Because the two largest expense items on most P&L statements are people and premiums. A strategic employee value proposition is critical to the success of every company.
Employers in the manufacturing segment must focus on human capital and total rewards programs to ensure that they translate to a long-term organizational culture of advancement and employee satisfaction.
The 4 Ps are directly linked to a manufacturer’s success — Manufacturers focus on the end result, which of course is "profit." However, profitability in the sector is only achieved after their products have been efficiently manufactured and distributed, and after their employees and bills have been paid.
People represent the largest line-item expense for employers. Today, more than ever, the manufacturing sector is characterized by a multigenerational and multicultural workforce. This diversity brings challenges to employers on many fronts. Finding ways to attract and retain the best people with desirable benefit packages that fit within budget is critical.
Insurance premiums typically represent the second- or third-largest expense incurred by industrial employers. Health-insurance premiums continue to trend upward, with a range of $8,000 or more for single coverage and as high as $27,000 for family coverage. These costs do not include dental, vision, disability, life, retirement, workers compensation or liability coverages.
In addition, employees significantly underestimate the full cost of these premiums, because they only consider the portion that comes out of their paycheck and overlook the larger portion that is funded by their employer.
Employee value propositions must be strategic and specific — A unique Employee Value Proposition (EVP) must be developed by every manufacturing organization. An EVP is a defined and measurable offer made to employees that articulates the benefits of employment with that organization on a long-term basis. To attract and retain top talent, employers must thoughtfully develop their unique EVP. The average employee will spend more time working for their company than they spend with their own families. Each one must be able to clearly identify “what’s in it for me,” short-term and long-term. Many manufacturers claim to provide competitive pay and benefits, but an effective EVP must encompass much more. Every company must create an enjoyable, productive, and safe work environment where opportunities for growth and advancement are present. Good employees want to make significant contributions in their workplaces and strive to achieve their personal and financial goals. When a vibrant, positive work culture exists, thriving manufacturers find that their current employees become their best recruiters for potential new talent.
America’s modern economy has experienced a significant workforce shift from the manufacturing, engineering and construction sectors to the professional and intellectual services sectors. More than ever, manufacturing employers must demonstrate that they value the varying needs among their diverse workforce. In addition to creating a culture of inclusion and gratification, they also must offer a benefits package, or “menu” that allows employees to choose what fits their individual needs and circumstances.
There are five generations present in today’s workforce — one size does not fit all anymore. Each generational group has completely different needs and expects their individual benefit package to directly address those needs. Manufacturers that have not strategically developed their unique EVP are at risk of losing out on the best available talent, particularly in the Millennial and Generation Z populations. The struggle to attract these younger employees to the industrial sector has been well documented. Once developed, the EVP must be communicated effectively and consistently, and it must be measurable. Without measurability, organizations may succeed in attracting good people, but will struggle to retain them.
A dollar saved is greater than a dollar earned — It costs money to make money. The time and effort dedicated to producing, selling, and distributing manufactured goods all carry specific costs. The average U.S.-based manufacturer’s gross profit percentage is between 25 and 35 percent for low-cost goods. This means that the value of a dollar earned through the manufacturing process is between 65 and 75 cents.
Forward-thinking organizations are laser-focused on decreasing costs. Three critical tactics to achieve this objective are:
(1) reducing employee turnover,
(2) controlling rising insurance expenditures, and
(3) managing workforce productivity.
Reducing workforce turnover ties directly to the development of a unique Employee Value Proposition. Industrial employers with low turnover establish a successful and measurable employee lifecycle. They identify, attract, onboard, engage, develop and retain their professional talent. Each phase in the
lifecycle of an employee’s tenure is monitored and measured economically to understand the true cost of workforce turnover. A precise dollar amount must be tied to each specific initiative. The engagement and retention phases require manufacturers to make good on their EVPs. If an organization publicizes that it has created a superior culture of inclusivity and advancement, then employees must experience that culture to ensure that they remain in employment.
Successfully managing inflated insurance costs can be extremely impactful to the bottom line. If premium dollars are unsupervised, history has shown that they will continue to rise exponentially. Proactively and strategically managing inflated insurance costs yields significant savings and profitability. It boils down to this: a dollar saved is more valuable than a dollar earned. Remember, the average manufacturer spends 25 to 35 cents on production, distribution, and operating expenses to generate $1 in revenue. This values the earned dollar at closer to 65 or 75 cents. If that same manufacturer saves a dollar on the cost of retaining and insuring employees, that entire dollar can be applied directly to the bottom line.
A strategy is more than a transaction — U.S. employers consistently rank the annual insurance renewal process among the most frustrating and stressful times of the year. This is especially true for employers in the industrial sector. Common complaints from Executive Human Resource and Finance personnel are that insurance has become cost prohibitive and difficult to communicate to a diverse workforce. These issues are amplified by a general lack of transparency in claims and financial documentation. Simply “hoping for the best” at renewal time can be dangerous and expensive for manufacturers.
Take the hypothetical case of ABC Manufacturing: At renewal time, ABC receives an insurance proposal that its broker describes as “good news” – only a 7% rate increase. For many manufacturers, a 7% rate increase represents a significantly negative impact on profitability. After some back and forth with the in-force insurance carrier, the broker markets the program to competing carriers to find a less-expensive option without dramatically altering the current benefits or provider network. The broker finds an alternative option that is less expensive, but the disruption it would cause ABC’s workforce is not worth the change.
Finally, the broker goes back to the current carrier and leverages the less-expensive option against the renewal. It works! The carrier knocks off three points, and ABC heads into open enrollment with a 4% increase, whereby everybody pays more than the previous year. ABC Manufacturing leaders are thankful to have the stressful process behind them. They cross their fingers that next year’s renewal will be better.
For most employers, the insurance renewal process is a transaction that “occurs” once a year, resulting in premiums, payroll deductions, deductibles, and co-pays increasing along with insurance company profits.
Strategic employers view the health-insurance renewal as an ongoing process. They approach it as a critical financial business initiative in alignment with what’s best for their workforce, as well as stakeholders. They seek out a business partner who can develop a comprehensive renewal strategy, not just a broker who can execute a renewal transaction.
Successful manufacturers take control of the process, engaging someone who understands their products, budget, goals, and challenges over a multi-year period, and who is capable of formulating and implementing a comprehensive benefits strategy aligned directly with their objectives. They understand that the renewal process must not be handled like an annual transaction, but as a continual process of managing carriers, optimizing their benefit spend, and maintaining their EVP to drive results.
Beware of misaligned financial incentives — True change in the healthcare and insurance space for manufacturers will not be realized without a total realignment of the financial incentives for each link in the healthcare chain. As it stands now, compensation for medical providers, insurance companies, PBMs, drug manufacturers, and brokers all increase in tandem with rising healthcare and benefit costs. Many local brokers lack the resources to challenge the status quo and effect true financial change for their industrial clients. Larger, national brokerages often choose to keep their knowledge resident in the minds of a few experts throughout the country. They only provide consultation on a retainer or as-needed basis. Industrial sector companies must fight back. They must partner with insurance consultants who understand the compromised system and who will protect their clients’ financial interests without sacrificing the quality of care they provide their employees. That strategic partner will ask the tough questions and aggressively pursue meaningful answers, then develop a comprehensive plan to proactively enhance services and manage costs. Manufacturers must refuse to be satisfied with business as usual. They must stop participating in the costly games that healthcare providers and insurance companies have devised. Instead, they must protect every dollar possible, knowing that it will allow them to increase their profitability and the satisfaction of their people.
Gregg Mellinger is the Senior Vice President of Employee Benefits with USI Insurance Services in Chicago.
Sam Odishoo is an Employee Benefits Consultant with USI Insurance Services in Chicago.
