High Turnover in Manufacturing - The Hidden Costs
Employee turnover is a common challenge for many businesses, but it can be particularly costly for manufacturing companies. When employees leave, they take valuable knowledge, experience, and productivity with them. Do you know how much it costs your business when an employee leaves? You typically don’t write a check for that amount, so many manufacturing leaders don’t realize the financial impact. If you were to write a check, you probably would be shocked. If that check was for $25,000 would you doublecheck the number? $50,000 or more, would you call Accounts Payable for an explanation? In this article, we will explore the hidden costs of high turnover in manufacturing businesses and how to mitigate them.
According to a 2021 study by the Bureau of Labor Statistics, the average annual turnover rate is 57% across all industries, which includes both voluntary and involuntary turnover.
Let’s lowball the turnover rate for a company to 25% and use a conservative cost of employee replacement of $10,000, a small company employing 100 hourly people will experience a cost that easily exceeds $250,000 per year on hourly turnover alone.
Compensation and benefits account for less than 10% of voluntary turnover. The solution in most cases is not paying people more, it is treating them differently. Yes, some people will always leave for more pay and benefits, but that is a distinct minority if the other elements of employee retention are properly managed. In fact, over 50% of people who voluntarily leave an organization report that their manager could have prevented them from leaving if they had done things differently.
Let’s look at the hidden (and not so hidden) costs of employee turnover:
Recruitment and Training Costs
When an employee leaves, the business must invest time and money into recruiting and training a replacement. This includes job postings, resume screening, interviewing, and onboarding. According to a study by the Society for Human Resource Management, the average cost to replace an employee is 6 to 9 months of their salary. For a manufacturing business with high turnover, this can add up quickly.
Reduced Productivity
When a key employee leaves, it can take time for their replacement to get up to speed. This can result in reduced productivity, missed deadlines, and even lost sales. Additionally, remaining employees may have to take on additional work to cover for the open position, leading to burnout and decreased morale.
Quality and Safety Concerns
In manufacturing, employee turnover can have serious quality and safety implications. A new employee may not have the same level of experience and knowledge as their predecessor, which can result in mistakes or even accidents. This can be especially dangerous in high-risk industries like chemical manufacturing.
Damage to Reputation
High turnover can damage a manufacturing company's reputation as well. If a business is constantly losing employees, potential candidates may perceive it as a difficult place to work, leading to difficulty in attracting top talent. In addition, customers may perceive the business as unstable or unreliable, leading to lost sales.
A number of manufacturers know the negative employee turnover impacts that are outlined above. However, many don't add up the financial impact as a total number, to see what their true expense is. KMS can help you with that! Let us know if you need help calculating.
Now for the good news. There are steps you can take to reduce turnover. Here are a few recommendations for mitigating the costs of turnover:
- One key strategy is to include employee retention in your strategic plan. (You have a flexible strategic plan that is on your desk and not on a shelf, with measurable results and deadlines, right?) A recommendation is to have an objective for improving employee retention through competitive compensation, opportunities for career advancement, and a positive company culture. Additionally, investing in training and development programs can help to upskill current employees and prepare them for advancement opportunities.
- Another strategy is Standard Work Instruction, which is a Lean tool that provides detailed written instructions that describe how to perform a specific task or activity in a standardized manner. Not only does it improve the employee’s moral and performance, and provide the ability for a faster new employee or cross training ramp-up, it can improve productivity.
- A third strategy is to implement exit interviews to gather feedback from departing employees. This can help businesses identify common themes and take action to improve retention and employee satisfaction.
- Finally, using data analytics and metrics can help manufacturing businesses track turnover rates and identify areas for improvement. By regularly monitoring and addressing employee turnover, businesses can reduce costs, improve productivity, and build a more stable and engaged workforce.
High turnover in manufacturing businesses can be a significant hidden cost that can negatively impact productivity, quality, and reputation. However, by implementing strategies to improve retention, investing in training and development, standard work instructions, and monitoring turnover rates, businesses can mitigate these costs and build a stronger, more engaged workforce.
Contact KMS if you are interested in further discussions about mitigating turnover in your manufacturing organization.
Check out our blog article about Employee Retention and the Unstable Workforce Cycle
Also, learn how a Strategic Plan can Help With Employee Retention