‘Cocktail of issues’ causing labour shortage for manufacturing SMEs Low staffing numbers are wreaking havoc on UK manufacturing companies. We look at how the industry’s small businesses should react to the emerging crisis. Written by Helena Young Updated on 10 January 2022 Our experts We are a team of writers, experimenters and researchers providing you with the best advice with zero bias or partiality. Written and reviewed by: Helena Young Lead Writer Earlier this week, the CBI (Confederation of British Industry) warned that UK businesses should anticipate two years of labour shortages as the reopening of society post-lockdown has left many companies struggling to fill gaps within their workforce.Recruitment firms are reporting difficulties in hiring across several sectors. However, one of the most heavily impacted industries has been manufacturing – causing severe disruption for the entire value chain.In a press release, Atul Kariya, partner and National Sector Head for Manufacturing and Engineering at MHA, said that a cocktail of issues is causing the problem. Kariya cited both Brexit and the pandemic as the two biggest contributing factors.We spoke to several manufacturing SMEs and industry experts, to find out more about the difficulties they are facing, as well as what small business manufacturers can do to minimise the impact of the labour shortage. This article will cover: What is the UK labour shortage? How is it impacting UK manufacturing? What's causing the manufacturing labour shortage? What impact is the labour shortage having on manufacturing SMEs? What can you do to minimise the impact of the crisis? What support is available? What is the UK labour shortage?In July of this year, the British Chamber of Commerce released its quarterly recruitment outlook, which showed 70% of businesses were struggling to find staff – even those hardest hit by the pandemic, such as retail and hospitality.Business leaders have cited a variety of reasons for the crisis, including new immigration laws which have made it harder to hire international workers. Whatever the main cause, there are concerns among experts that, should the shortage continue, it could lead to an increase in wages and a subsequent rise in inflation. How is it impacting UK manufacturing?According to PwC’s Annual Manufacturing Report 2020, British manufacturers are facing the largest shortage of skilled workers since 1989, with many citing recruitment as their biggest challenge.The labour shortage is a particular problem for the manufacturing industry given the sector’s typically longer supply chains, for which delays can be particularly disruptive.Manufacturing is also a highly skilled industry that requires very specific qualifications from job applicants. This brings lots of added difficulties for hiring. The most pressing need is for skilled production workers and general labour – shortly followed by managerial staff and engineers.Pre-Covid, the issue was already causing chaos among manufacturing companies. Now, employers are struggling even more to find workers for open positions as industries like tech, as well as rival companies, poach the high performers.Another reason the labour shortage is particularly worrying for manufacturing is the critical role it plays in the UK economy’s health. In 2019, the manufacturing sector accounted for 9.7% of total UK economic output (Gross Value Added).However, ONS figures reveal that the total value of UK manufacturers’ product sales was £358.7bn in 2020, a fall of 10.8% compared with £402.2bn in 2019. This is no doubt due to the impact of coronavirus and the ongoing issues caused by the shortage in labour. What’s causing the manufacturing labour shortage?There are a number of factors influencing the labour shortage – one being, as we briefly touched upon, the need for highly-skilled and often degree-educated workers. Here are some of the other key influencing factors:The Brexit problemIn January 2021, as the UK left the EU, imports and exports dropped dramatically as border delays led to a huge increase in cost for shipping containers and paperwork. Shop windows and online stores displayed the extent of the problem, with missing product lines and rising delivery costs leading to empty shelves.The government has also come under pressure to relax post-Brexit immigration rules as changes to the visa system have contributed to a huge shortage in workers. According to ONS data, EU workers make up 11% of the manufacturing sector. Chris Beck is editor of Manufacturing Management, a manufacturing magazine. Beck tells us: “Manufacturing, more than most, is hugely reliant on overseas labour, so the fact firms can no longer attract this talent means they are having to look closer to home. Unfortunately, manufacturing isn’t seen as a desirable job prospect for many in the UK – despite having higher-than-average salaries and some of the best career paths available. SMEs in particular often don’t have the ‘pulling power’ of larger organisations, making it even harder for them to attract the best talent.” The COVID-19 pandemicThe coronavirus pandemic has had a severe impact on the UK economy, particularly exacerbated by the national lockdowns. Social distancing measures reduced staff levels and led many employees to be furloughed. Training and development largely had to be put on pause. Plus, the Pingdemic has led to a huge shortage in HGV delivery drivers, causing delays in the supply chain.There is hope still, as output appears to be bouncing back. Productivity in SME manufacturing grew at the fastest pace on record between May and July 2021. So too did the total volume of new orders. Atul Kariya is partner at MHA, a network of independent accountancy firms. Kariya said: “UK manufacturing is actually suffering from two different but related issues when it comes to finding workers. One is a long-term shortage of skilled manufacturing labour. The second issue is the current supply chain shortage which is being exacerbated by a lack of lorry drivers.”“Due to the pandemic the UK has been unable to train new lorry drivers and the Government’s decision not to classify them as skilled workers has also shut down recruitment from abroad. Before Brexit, European drivers would have been drafted in to help shore up UK supply chains. All of these issues are then worsened by the ongoing effect of Covid-19 and the need for workers to be isolated for a period of time.” Image problemThere are still a lot of existing misconceptions about the manufacturing industry which are causing job seekers to look past the opportunities that are available. Outdated images of manufacturers tend to connote Victorian-esque factory lines, meaning they are not viewed as being innovative or stimulating professions.Another issue is that while the industry needs to attract more talent, the incentives for beginning a manufacturing career aren’t being clearly advertised. One poll by The Manufacturer found that less than 20% of parents said they would encourage their children to work in the industry.Young people tend to view the sector as having low wages and poor benefits. This is despite the fact that, for the 2.7 million people employed by UK manufacturers, their average salary in 2020 was £34,538 – 13% higher than the UK average. Gavin Harrison is UK sales manager at warehouse automation specialist, Element Logic. He says: “Brexit is an issue, but it’s a wage dispute as well. The cheaper labour options from Eastern Europe are no longer available and the pandemic made the domestic workforce reassess: they don’t want to do these hard manual jobs in warehouses, or HGV driving for example, for no money, so wages need to increase to make it worthwhile.” What impact is the labour shortage having on manufacturing SMEs?In 2020, there were approximately 288,500 SMEs in UK manufacturing, constituting 98% of the market. The talent shortage has therefore had a huge impact on smaller organisations.Small business owners are already starting to see a decrease in their productivity and output, leading to an inability to meet customer demand. Because of this, operational costs are also beginning to grow, as meeting orders requires more resources and staff have to be employed on overtime. In November 2021, the Confederation of British Industry (CBI) released its report into manufacturing SMEs. The results found that output volumes slowed between July and October 2021 as the labour and materials shortage worsened due to supply chain havoc.Chirag Shah, CEO, Nucleus Commercial Finance comments on the CBI SME Trends Survey: “Although fears of Covid-19 seem to have faded for businesses over recent months, supply chain challenges and skills shortages are significantly knocking SME confidence, particularly in the manufacturing and construction sectors. Adding to SMEs’ woes is the end of the furlough scheme and the knock-on effect this is having on uncertainty in the labour market.“While government measures have gone some way to combat this in the short-term, with steps to resolve HGV driver shortages and extra support measures for certain sectors, we’re not out of the woods yet. Looking ahead, it’s vital that government and industry work together, to provide businesses with the support and access to finance they need to boost their confidence and optimism, invest in their futures and stimulate economic recovery.” The obvious answer is to invest in large-scale recruitment drives and training schemes. However, SMEs typically don’t have a lot of cash reserves. They will ultimately find it more difficult to remain competitive and attract job seekers against the capabilities of bigger enterprises. Peter Lucas is director at Medical Moulded Products, a medical manufacturing company. He says: “The shortage of labour impacts on the ability of SMEs to meet the commitments they have to customers, increases cost due to the upward impact of wage rates, whilst also reducing the efficiency of a business.” Vinny Kotecha is founder and director of First Fence, a Midlands-based temporary fencing leader. Kotecha tells us: “Getting goods into the ports is a challenge. We have tried to mitigate that by partnering up with border companies. However, even on arrival the biggest problem remains how products that are arriving from overseas are transported to the business. As a result of the labour shortages and increased recruitment and salary costs, all costs are increasing, which is being passed to the customers and end users. This has the real potential of forcing a recession, as the continued costs will be unsustainable and cause huge pressure on the financial system.” What can you do to minimise the impact of the crisis?Increase trainingUpskilling staff through training and development courses is a great way to ensure that your workforce continues to keep up with new and emerging technologies and the skills required in their role.Investing in comprehensive training programmes is also a great way to educate new employees who might lack experience in manufacturing. Development opportunities are a great way to promote applications and keep satisfied, long-term employees. Mentorship programs can match seasoned workers with a new recruit, bridging the knowledge gap.Look closely at automationThe labour shortage has created a reduction in productivity, as many tasks are being delayed or left incomplete due to the low volume of workers in place to carry them out.Automation is the process of using robotics and AI to work alongside your existing employees and produce products at a greater speed – often at a lower cost. That might sound a bit futuristic, but lots of automated solutions are actually very accessible and affordable for today’s small business owners.As well as referring to technologies like material handling robots – which can help with part selection, packaging and palletisation – automation can also help with your ordering, invoicing and dispatch. This reduces the administrative burden to improve efficiency in your workflow and processes. Atul Kariya said: “[The manufacturing labour shortage] should provide businesses with further incentive to invest in technology, which has been made easier by recent tax incentives (such as the super-deduction), to change the manufacturing process. This is not to advocate a reduction of labour but a better use of technology and skills side by side to enhance productivity and output in the sector.” Gavin Harrison says: “SMEs can capitalise on their ability to pivot quickly and make decisions without a mile of paperwork and a ton of meetings. They need to look at the technological options open to them – don’t just copy the big boys because they’re not always setting the best example.”“[One of our clients is a] Scottish SME. By the time they’d grown to 20 people it made sense for them to reassess their warehouse operation – they were able to speed up fulfilment by moving from a manual warehouse to an automated picking and packing system. This enabled them to hold more stock and increase the SKU range, while still guaranteeing next day delivery. This is a great example of a company using its size and agility to its advantage and ensures they can compete with much larger ecommerce competitors.” Adopt more employee benefitsThe issue of recruitment is a huge one for UK manufacturing. It sounds simple, but the best thing you can do to attract more talent to the industry is to, well, make your advertised job position more attractive.Take a look at your existing employee benefits to identify the areas that you could improve, such as pension plans and insurance providers for services like healthcare and dental. If you haven’t already, you should also adopt the living wage to stay competitive as an employer and minimise the risk of existing staff leaving the industry. Want to learn more about attracting talent to your firm? Read our guide to the top 5 employee benefits and perks. What support is available?The government has recently accelerated its response to support businesses struggling due to the labour shortage, including introducing a range of training programmes to develop the manufacturing workforce. These are made up of a mix of apprenticeships and further education training grants.Training grantsThere are lots of adult and young person educational training programmes to take advantage of for manufacturing, available through the government’s ‘Plan for Jobs’ programme.One of the most well-known is the National Skills Fund. This government-run scheme gives adults training in a huge range of sectors, including manufacturing technologies.Find out more about the fund, and the other opportunities available to employers, here.Updated immigration lawsChanges to immigration laws have been introduced to make it easier for firms to recruit workers. Understanding the new legislation could help you to broaden your talent pool and hire more international workers. Samar Shams is an immigration and global mobility partner at law firm, Spencer West. She tells us: “SMEs can take advantage of changes introduced in December 2020 to the regime for sponsoring non-UK nationals to work in the UK, to mitigate labour shortages. Graduate visas are another option for SMEs. Graduate visa holders can work without having to be sponsored, so some start-ups may find this a useful focus for their recruitment efforts.”“The visa changes in the UK Innovation Strategy, announced in July 2021, will also be advantageous to SMEs. These include a new High Potential Individual visa where no sponsor is required for graduates of ‘top global universities’, a scale-up visa for people who have a skilled job offer from a qualifying sale-up business and changes to the innovator route with streamlined business eligibility and fast track options.”“However, there are also ongoing difficulties faced by SMEs using the sponsorship system. When applying for a licence to sponsor non-UK nationals to work in the UK, a start-up needs to be trading. A start up must submit documentation of a UK bank account with its sponsor licence application. Particularly when setting up from overseas, the process of setting up a UK bank account can be long.” ConclusionLow labour levels are causing issues with recruitment for many UK manufacturing small businesses. Political events such as Brexit, as well as the ongoing global pandemic, have added to the shortfall and are impacting the output and overall productivity of the industry’s significant SME population.However, small business owners can turn the challenge into an opportunity. Take advantage of training grants and new technologies, such as automation, to refresh your operations and showcase the exciting and innovative space of modern manufacturing to new talent. Share this post facebook twitter linkedin Written by: Helena Young Lead Writer Helena is Lead Writer at Startups. As resident people and premises expert, she's an authority on topics such as business energy, office and coworking spaces, and project management software. With a background in PR and marketing, Helena also manages the Startups 100 Index and is passionate about giving early-stage startups a platform to boost their brands. From interviewing Wetherspoon's boss Tim Martin to spotting data-led working from home trends, her insight has been featured by major trade publications including the ICAEW, and news outlets like the BBC, ITV News, Daily Express, and HuffPost UK.