Your manufacturing price is 30 years old.

What does that blog topic mean anyway?  Here we are in the year 2015, and the hourly labor rates that a machine shop charges its customers for precision machining services is stale at about $75 per hour. This rate will increase slightly if a particular part has more complicated features or tighter tolerances. But generally speaking, for your run-of-the-mill machined part, the rate charged is about $75 an hour for a man’s time making a part with a machine.

That might seem like a lot of money. But the reality is that this was the rate charged in 1985 when my folks were making parts for customers from their garage in Northern California just after they established the business.

In 1985 the cost of energy, materials, freight, labor and insurance were all lower. Therefore, the total costs to make a machined part were much lower and the profit was greater.

So why haven’t manufacturing labor rates increased? Let’s take a look at some of the factors at play.

Since 1985 the internet and email has become mainstream. Why is this important? Back in the garage days, a corporate buyer looking to procure machined parts wasn’t able to send out a “BCC” email and request a price quote from a lot of machine shops at the same time. Beyond email blasts (to our domestic and international machine shop competitors) a buyer can now more easily mouse through other machine shop websites over the internet.

Since 1985 International Trade has changed….including China’s currency peg to the U.S. Dollar. When you hear the news that our nation has lost millions of manufacturing jobs in the last 20 years, you can count straight back the NAFTA trade deal which opened the doors for U.S. companies to buy cheaper goods overseas. Naturally those lesser developed countries had lower labor rates. Even if they were less efficient at producing goods or making parts, their substantially lower labor rates would offset their inefficiencies.

On top of the naturally lower labor rates, countries such as China were pegging their currency lower than the U.S. Dollar. It didn’t matter how the Dollar fluctuated, the competing currency was going to move with it with a built in cushion. Therefore, buying goods in their country would always be cheaper than buying them in the United States.

Since 1985 Computerized Machinery is in nearly every machine shop. simultaneously, along with the aforementioned International trade and internet popularity came more efficient computerized machinery. Although these machines were (and still are) costly to buy, it did not equate to receiving a higher than $75 labor rate. The increased global competition was preventing U.S. companies from raising their rates, even though their costs were (and are) climbing rapidly.

These factors over the past 30 years have suppressed the machine shop labor rates. In a machine shop you’ll find highly skilled journeyman machinists making jewelry (machined parts.) However, they can’t charge more per hour than a local DMV Smog Technician. Why is that? It’s simple: The Smog technician isn’t competing internationally.

So how have U.S. based manufactures survived? Well, unfortunately, MANY haven’t. The companies went out of business and the jobs disappeared too. The natural side affect was less competition among U.S. based manufacturing competitors but this wasn’t enough to cause the hourly labor rates to increase. Obviously, many companies down sized or just couldn’t grow.

Americans are hard-working and ingenious. The companies that survived or were newly started had fewer but more efficient people maximizing the output capability of the automated machinery. In the garage days (before automation,) it required one man cranking the handles on one machine. The machine wasn’t automated and couldn’t move itself!

Since the advent of automated machinery, the highly skilled journeyman machinist (or dedicated machinery programmer) can set up the machinery. Once it’s all dialed in, including having the newly set up part operation verified by another qualified machinist or in-house quality inspector, the job can be run out by a qualified machinery operator.

The operator has specific instructions to make sure that the parts being made don’t deviate from the customer required dimensions and tolerances. A good operator can even change a worn out or broken cutting tool or make adjustments for tool wear. A good operator frees up the journeyman machinist to move on to the next customer job.

NOTE! Extremely complex parts and intensive machining processes cannot be handed off to an operator no matter how qualified they are.

In my business, we are very fortunate. We have some active customers that we’ve nurtured for over 20 years and that is something that we’re appreciative of and thankful for. These customers don’t just retain our services due to our stable (or stale) price. They have come to trust our dependable quality standards and our generally on time deliveries. For many of their parts, we’ve accumulated spares and our excess inventory has become a extension of their own.

When they need a few parts in a rush while we’re ramping up to produce another 100 quantity for instance, we can ship out the spare machined parts the same day. (An unfortunate side effect is that sometimes a customer will change the part design and our accumulated inventory will become obsolete. Sometimes we can re-run a part to salvage it, other times it will be recycled.)

Leveling the playing field…
In my humble opinion, the U.S. manufacturing labor rates will be stale for many more years and will not begin to increase until emerging economies and their labor rates are more on par with the rates in the United States. Then, collectively, the labor rates will move up together globally as workers ask for and can be paid more. In the meantime, U.S. manufacturing companies will eek out profits through increased productivity and diversification.

Source: Jason M LaRock
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