This is article is part of a series of monthly articles produced by Harbour Results for PMA’s MetalForming Business Edge e-newsletter. Click here to view the full collection of articles.

Headcount = Forecast

Have you ever been in a situation where someone is telling you one thing, but their body language, voice and facial expressions are telling you something completely different? Sometimes this happens when people are delivering bad news or telling a white lie. Regardless of the message the outcome is usually never good. In reviewing the results of the Winter 2023 PMA MetalForming Insight Study more closely, we are wondering if something similar is happening across the metal forming industry.

In the study it was clear that overall sentiment was down in Q1 2023 and it has slowly been trending down since Q3 2021. Additionally, only 36% of shops indicated they expect to grow revenue by 5% or more and 22% expect EBIT to grow in 2023. However, when asked – In 2023, what direction is your headcount changing? – 62% of respondents plan to increase headcount with 38% hiring to fill open positions and 24% hiring for growth. Many businesses are looking to add headcount but are not expecting the same level of revenue and profit growth, yet sentiment is decreasing.

 Hmm. Let’s take a closer look at growth. In 2021 and the beginning of 2022, raw material prices significantly increased, and shops worked with customers to increase their pricing to cover the additional expense, and, in many cases, this increases overall revenue. Unfortunately, that improvement in revenue was primarily material price pass-throughs and not an indicator of increased business or utilization, which has averaged between a high of 64% and a low of 57% over the past two years.

Why is this a problem? If your decision to hire is exclusively based on revenue, you may be adding costs or overhead when business conditions are not improving.

To better understand if you need to increase or decrease headcount, leaders need to understand if you are increasing unit volume or machine-hour volume. A best practice is to build a monthly projection based on expected sales volumes and convert it into machine hours. This is a better indicator of the amount of work you will be performing and allow you to build a staffing plan that is aligned with forecasted work and not forecasted sales or revenue. By focusing on volume, businesses have a clearer understanding of the work that needs to be completed regardless of project pricing.

Additionally, the volume or hours metric will be important as raw material pricing decreases or stabilizes which will likely impact revenue but not the amount of work conducted annually. For PMA members we do expect raw material pricing to normalize a bit in 2023 and again, based on the responses from the MetalForming Insight study, manufacturers are less concerned about raw material pricing and availability today than they were in mid-2022.

As we have stated before – company leadership must use data to make better and more informed business decisions, however, it is critically important that you use the correct data. Data that aligns directly with the business levers that can be pulled and influence change. It also is important to make sure all business behaviors align with your overall sentiment as well. As the manufacturing industry continues to manage through ebbs and flows, it will be important for leadership to be continuously working on the business and be mindful of your cash.