Talent stability and productivity are critical challenges in manufacturing today. With over 4.7 million worker separations in 2023,1 representing one-third of the industry’s workforce, the need for change is evident. A survey of 4,000 employers identified talent retention as the top operational priority, surpassing revenue concerns.2
Additionally, US manufacturing labor productivity has declined significantly in the last two decades. In value-added terms, labor productivity growth in the sector has stagnated over the past three business cycles, with the sector achieving ~0.5 percent labor productivity growth (CAGR) while the US has achieved an average of ~1.4 percent (CAGR) over the same time period (2015-2020).3 This trend continues to threaten investment in a sector that is primed for growth due to recent macroeconomic trends (such as nearshoring).
To develop an effective talent strategy that improves workforce stability and productivity, leaders must evaluate their organizations through five critical lenses.
1. Understand frontline performance in relation to the local market
It is important to understand talent availability and demographics in the relevant metropolitan statistical area (MSA). Consider current job vacancies, such as the 603,000 unfilled manufacturing positions as of March 2024,4 and workforce demographics, noting that 25 percent of workers are aged 55 and over.
Begin by assessing the projected labor demand and supply growth for all your markets, considering opening or closing announcements by competing employers. Map markets to understand the respective archetypes. For example, if a site is a “growing/constrained” market where demand for labor is expected to grow but supply to shrink, it is important to understand if there are avenues to attract new talent to the market, how big the site’s labor productivity opportunities are, and if there is a business case to relocate the site.
Once archetypes are understood, talent stability and productivity performance trends should be analyzed versus the local market context. For stability, indicators can include attrition, open positions as a percent of total employees, absenteeism, time to fill open roles, and time for new employees to reach full productivity. For productivity, indicators could include contribution margin and throughput volume per full-time equivalent (FTE), overall equipment effectiveness (OEE), and yield.
2. Benchmark the integrated Ops–HR operating model
To create an agile and responsive work environment that supports growth, organizations need a talent management operating model that integrates the operations and HR functions. This integration is crucial to ensure that available skills match operational needs as markets evolve. It is also required to achieve high levels of talent engagement, which is fundamental to realize continuous productivity improvement.
Benchmark the integrated operating model against industry best practices across core processes including work design, talent planning, talent attraction and onboarding, talent development, community building, and talent management.
For example, best practices to look for in talent planning include annual demand/supply projections by skill level, weekly forecasting of labor demand, available labor supply through a mobile app, and daily dynamic scheduling with substitution capability.
3. Assess the strength of the employee value proposition
Understanding how well an organization is meeting the needs of its employees enables prioritization of investments to enhance retention and engagement of crucial workforce segments.5 With five generations now in the workforce, this is no easy task.
To uncover the strength of the current employee value proposition, conduct an annual or semiannual frontline survey complemented by focus groups. Then leverage advanced analytics to create employee clusters based on level of performance, engagement, and turnover intent. Our research shows that the average manufacturing organization6 has 51 percent “reliable core” employees, 24 percent “frustrated quitters,” 13 percent “coasters,” and 12 percent “let-go quitters” (exhibit).
These clusters usually vary by generation, shift, and skill level, and each cluster has different preferences and unmet needs. For example, Gen Z workers look for flexibility, career advancement, and meaningful work.7
4. Reimagine the work on the shop floor
To achieve sustainable change, manufacturers must continuously reassess shop floor work and process design balancing the top-down vision with bottom-up feedback by gathering insights from the ground level.
Walk the lines and engage directly with frontline operators and supervisors to identify unsafe, ergonomically uncomfortable, non-value-added, noncore, or repetitive activities. These are usually signs of opportunities to eliminate, outsource/centralize, automate, or redesign processes that can then leverage new digital and automation technologies for the shop floor. For example, companies that deployed robots and equipped supervisors with AI copilots saw improved labor productivity and higher frontline retention. Other tools such as digital work instructions can help operators and supervisors perform their roles more effectively.
These technologies in turn create opportunities for capability building, allowing frontline workers to close skill gaps and support various organizational agendas, including digital transformation. This comprehensive approach to reimagining work processes opens possibilities for implementing advanced solutions that were once considered out of reach for frontline operations, driving productivity and innovation across the manufacturing floor.
5. Reflect on your current mindset around labor investments
In a world where talent is scarce and most technology investments are not yielding capital productivity, leading companies are viewing their workforce as a valuable investment capable of generating positive returns to the project or company, instead of as a cost.
These companies strategically modulate the mix of capital and labor (the production factors) to find the optimal combination that maximizes value. And by extending beyond traditional metrics such as return on invested capital or internal rate of return, they can measure the magnitude and impact of their talent investments, enhance workforce stability and productivity, and drive overall organizational performance and health.
Reflect on whether your company sees labor as an investment and if it understands how to optimize the mix of capital and labor.
Bringing it all together
Organizations that apply these five lenses are then well-positioned to craft a frontline talent strategy that creates a competitive talent advantage. Companies leading on talent have strategies that start with a quantified aspiration around talent stability and productivity impact, a set of talent innovations and enabling initiatives, and an actionable road map that sequences the implementation.
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1 U.S. Department of Labor, Bureau of Labor Statistics, Job Openings and Labor Turnover (JOLTS) Survey, accessed on July 8, 2024.
2 2023 US workforce trends report series: Organizational wellbeing, Gallagher.
3 For more, see “Rekindling US productivity for a new era,” McKinsey Global Institute, February 16, 2023.
4 Bureau of Labor Statistics, JOLTS, May 2024, accessed on July 2, 2024.
5 Aaron De Smet, Bonnie Dowling, Marino Mugayar-Baldocchi, and Bill Schaninger, “‘Great attrition’ or ‘great attraction’? The choice is yours,” McKinsey, September 8, 2021.
6 Manufacturing worker roles included are: frontline/shop floor worker, frontline supervisor, back-office roles (such as HR, finance, IT), and middle manager.
7 Tyler Freeman, Marino Mugayar-Baldocchi, Fernando Perez, and Julian Salguero, “From hire to inspire: Getting—and keeping—Gen Z in manufacturing,” McKinsey, May 6, 2024; Aaron De Smet, Mario Mugayar-Baldocchi, Angelika Reich, and Bill Schaninger, “Some employees are destroying value. Others are building it. Do you know the difference?” McKinsey, September 11, 2023; Aaron De Smet, Bonnie Dowling, Bryan Hancock, and Bill Schaninger, “The great attrition is making hiring harder. Are you searching the right talent pools?” McKinsey, July 13, 2022.