Isolationism’s Effect on Labor for the Supply Chain of Large Food Producer
Changes in the policy of immigration law enforcement have had and will continue to have a negative impact on the ability of some companies to manufacture and distribute goods to customers due to loss of labor. Recently, a large U.S. food producer[1] (hereafter referred to as “LFP”) was surprised one morning when 25% of their workforce was required to leave immediately, as a result of these policy changes. Like many U.S. companies, LFP has been using a third-party agency for more than five years to e-verify workers to ensure that only workers with the appropriate legal documents were hired. Recently, the newly elected administration has been changing the approach to the enforcement of immigration laws, including the increased supervision of e-verify third-party agencies. This led to the surprising scene one morning when LFP’s e-verify agency walked into their manufacturing site. The agency admitted to LFP that they had lied about some worker’s legal documentation and e-verify results. In fact, 25% of LFP’s workers, including both the plant manager and shift manager, were undocumented (illegal) workers. The agency would be required to notify the government if LFP did not escort the workers out immediately, now that they had been notified. The agency itself, however, would face no penalty. As a result of the disruption, LFP lost thousands of dollars in overtime pay and still could not deliver goods to customers on time. This forced customers to delay bringing on new SKUs that were planned and, in some cases, shift their business to LFP’s competitors. These consequences say nothing of the goodwill that was lost with customers.
LFP quickly jumped into crisis mode to manage the situation. They rallied their workers together around doing all everything possible to best serve the customer. Workers committed to large amounts of overtime to keep as much customer business as possible. Next, LFP had to become creative to replace the lost workers. Their manufacturing plant is located in an area of the country where it is difficult to find skilled labor, and they estimated that it would take a minimum of 18 months to find and train replacement labor. It would take much longer to replace the plant managers and shift manager who had each been at the company for over 5 years. Thus, to attract labor, LFP started by increasing starting salaries. They also invested in building robust training and development programs so that they could hire and train less skilled workers. Finally, LFP found a new e-verify third party agency. In the long run, the company is looking at finding production assets in areas with a larger workforce. However, the process to find a good location could prove difficult as the location must also meet many other requirements such as being within a maximum distance from certain suppliers and customers.
In addition to the steps that they have taken, I believe that they could also start recruiting in high schools for manufacturing workers, increasing the size of their labor pool. They are already investing in new development programs to train unskilled labor, and those programs could be expanded to train high schoolers. Also, hiring teens from local schools could have a positive impact on the community due to the training they would receive and the additional income they could bring home to their family. I would also recommend to LFP that they do what they can to impact policy. Changes in the policy of the immigration law enforcement is only one of the many policy changes that are being proposed that will impact labor and supply chain. LFP and other companies should be a part of this political conversation, influencing some decisions in their best interests.
Looking at the political landscape today, it is hard to predict what policies will affect the supply chain in the future. Will there be enough labor to support LFP’s growth or will there be a labor shortage? In what ways could they further prepare for a labor shortage? Also, in light of the problems with the first e-verify third-party agency, should they perform the e-verify process themselves to prevent surprises in the future?[2]
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[1] Note: As the information provided is not public, the company requests to remain anonymous.
[2] Company Source: Director of Supply Chain and Logistics.
Sarah, I appreciate the non-public access to the effect of isolationism on LFP. I suspect that other food producers and businesses relying on low-income labor near the US/Mexico border are facing similar effects. I am surprised that the e-verify agency faces no potential for penalties or legal action. The e-verify agency should owe a duty to its customers that it will not lie about or distort workers’ legal documentation.
It would be interesting to quantify the effect of isolationism on LFP. You mention overtime, increased salaries, switching costs to another e-verify agency, and development programs to train unskilled workers. The total increase in labor costs as a result of isolationism could serve as a focal point for LFP’s policy-oriented lobbying efforts. Politicians may not be considering the full impact of isolationism on businesses.
Hi Sarah,
Thank you for your article. It makes me think a lot about local farms where I worked in the UK for a few years before university. Firstly trying to abide by labour regulations, these farms employed cheap polish labour. However, when tougher regulations came down with the rise of UKIP, it became easier for the farms to reduce their dependence on legal labour and hire in a much less official manner. As opposed to LFP who are large enough to be scrutinised, local farms and producers may often be forced into the black market to avoid the costs you mention.
Furthermore, these result in hiding some of the labour from local residents, further fuelling some of the social unrest seen in results such as Brexit.
You mention some important consequences that isolationism and policy can have on a local, concentrated, work force. Going forward it will likely continue to be difficult to predict the political environment. As a result, I would suggest that as LFP rebuilds its workforce it also focus on managing risks. Are there ways we can get as diverse a work pool as possible? Can we crosstrain employees so they can take on new roles quickly if needed? Can we leverage technology in a way that we can replace some human job processes? Is there a way to use outsourced staffing or incentivize workers to come from outside our local area?
Overall, political decisions will be hard to predict. Companies like LFP should continue to plan for the worst.
Great post and something relevant to really any industry that relies on a low-income workforce. Small businesses that rely on low-income workforce to operate are significantly hurt by these more stringent regulations. Advocates of these policies argue that this leads to higher employment of American workers and higher wages. However, there is very little evidence that this is the case and in reality, immigration tends to be a positive for countries and it helps businesses grow as well as improves the overall economy with more labor and spending. I’d be interested to study how towns which had a high percentage of illegal immigrants have been impacted by the changing regulation. My initial thinking is that it would not have helped employment of American workers and could have resulted in higher prices for consumers and hurt economic activity for businesses.
This topic is super interesting so thanks for sharing this info, Sarah! One summer I worked at the corporate office of a QSR restaurant in New York and we also had to use e-verify to ensure all of our employees were legal. I remember thinking that the process of “verifying” these employees seemed very disorganized and ultimately suspicious. I am not sure what ended up happening where I was working but I am not shocked that this e-verify agency was committing fraud. I find it very disturbing that they were not faced with any fines and I would certainly suggest that LFP take appropriate legal action against them.
In response to your suggestions, I totally agree with you that LFP should focus on recruiting teens given it will be beneficial not just to LFP but also to the teens being trained. This summer I was in Israel and we visited a farm that was employing troubled youth (https://www.kaima.org.il/home). Although the concept is not exactly the same, I witnessed first hand the positive impact that giving teens a sense of purpose that is larger than themselves can have on their development.
Great piece, Sarah – thanks for sharing. To echo some of the earlier comments, I’m frankly shocked at the lack of penalty to the e-verify third party agency in this situation and the fact that LFP was forced to bear the brunt of the burden. Personally, I’m not sure what the root cause of the problem is – whether LFP failed to include appropriate clauses in its contract, or whether it’s simply poor policy from above that doesn’t impose enough blame on the agency – but either way, I think it’s a fault of policymakers that in changing the degree of supervision over these third-party agencies, there wasn’t suitable protection built in for the companies at the other end of the equation who, in my opinion, are the least at fault but are paying the highest price.
Interesting article, Sarah. I agree with your points and the comments above that labor supply fluctuations as a result of changing immigration policies every couple of years are a major challenge for US-based companies. A family member was telling me over Thanksgiving that his industrial flooring company is running into the same issues as they have lost a percentage of their laborers and cannot find enough reliable employees to do “unglamorous” work. I am also very surprised that the third-party verifier cannot be held accountable for what is essentially fraud. I would recommend LFP work with the trade organizations of other labor-intensive industries to press for accountability measures for the third-party verifiers on which they rely.
Thanks for your post, Sarah! This is all new information to me and really interesting to read about. I personally believe that LFP needs to perform the e-verify process themselves or put a really good contract in place with third-party agencies to avoid risking a similar disruption in the future. In regards to labor, I think that reaching out to local high schools is a great idea. I also wonder if they should consider building housing (or purchasing existing buildings) and targeting workers from further away. They could create a community of workers (similar to those created by seasonal towns looking to attract temp workers) to help incentivize people to make the move.
Thank you Sarah for a great piece! I really enjoyed learning about this issue. Many of the suggestions to address this labor shortage issue will undoubtedly increase cost for LFPs (e.g., additional training, additional recruitment efforts, raising wages to attract labor). Given many LFPs already have thin margins, they may choose to pass on this cost to consumers. Not only would this hurt the LFPs and their labor supply, consumers may be impacted also.
Great post, Sarah! As I was reading this, I was wondering if LFP ended up suing the e-verify company for their wrong-doing and, in return, would be able to pay for the increased cost (or at least some of it). Either way, I wonder if this experience has led LFP to even shift its labor strategy in the long term. Will they now consider investing in automation where possible to reduce their reliance on labor?
Great post Sarah, really enjoyed reading it! Although we can see the effects on LFP’s operation (part change in immigration laws, part e-verify agency bad practices), I think we should really think about how restricting immigrant workers can affect the US economy. There are many benefits to the US economy that come from its immigrant population. According to this Bloomberg article (https://www.bloomberg.com/view/articles/2017-03-24/immigrants-are-making-the-u-s-economy-stronger) a continuous flow of immigrants can help support the growing retiree population and add to formation new businesses. Also, many studies have found no correlation between low-skill immigration on wages of the local population, which seems to be the main concern of this new legislation.
Looking into the LFP case, the economic cost of losing 25% of their workers overnight is enormous. I fail to see how these new immigration laws are helping businesses, consumers or even native-born workers. As per their action plan, I agree that training lower-skill workers, increasing salary and switching e-verify agencies is the way to go. Given that these actions might not be enough I would look into more flexible schedules to attract part-time employees or students and a relocation program to attract workers from areas with high unemployment. As a local government official in this region, I would also be worried about the impact of these 25% newly unemployed people who are going to have a tough time finding another job. Would this lead to lower economic growth rates, tax revenues or even crime?
Thank you for the insightful post on what I believe to be one of the biggest (and most contentious) issues facing our country at the moment. As you are aware, the margins in food production are quite low and the historical reliance on lower cost labor is now putting many US domiciled companies at risk due to competitive disadvantage. While the human consequences of this hardline immigration policy are clearly palpable and upsetting, I side with Alejandro in his response, that the net-impact of this legislation will be negative for US Food production as a whole. I therefore think this immigration policy is short-sighted, immoral, inherently Un-American, and most importantly, dangerous.
Sarah thanks for your take.
I’m reminded of this piece published by the Journal a little more than a year ago: https://www.wsj.com/articles/small-businesses-lament-there-are-too-few-mexicans-in-u-s-not-too-many-1480005020
The article highlights the plight of a roofer in Texas who has struggled to attract labor even after raising wages to above $20 per hour. Businesses where workers are required to perform labor-intensive jobs in dangerous or otherwise unpleasant environments are not only facing crackdowns on their undocumented workers, but also an increasingly tight labor market where low and moderately-skilled employees have many options. I’ll be interested to see how these firms deal with isolationist in the face of full employment and (hopefully) rising wages.
Great Work Sarah, incredibly compelling look on the real impacts of immediate labor shortages in agriculture and food. I worry that there will be no long term solution that results in maintaining the previous labor rates that LFP enjoyed. Additionally, I’d be concerned about the productivity vs. the costs LFP will see from part time high school workers in comparison to full time employees. I agree that moving into their own verification process is the safest option. That said, if they invest in this now, they may be able to monetize later with competitors or in future shortage situations at least guarantee maximum labor for themselves.
Hi Sarah,
I though this was a really interesting article about isolationism policies. First, I just have to say that I’m shocked that the e-verify agency did not face any repercussions regarding their actions. I am wondering if because this is a private case if LFP is simply unaware of the larger penalties that the e-verify agency is facing. Besides that point, I’m very disheartened to see how this policy has affected valued, long-term employees at LFP. The employees and their families are the biggest victims in this case. But the firm as a whole, it’s customers and the other stake-holders in its value chain also suffer.
The signifacnt labor shortage that you reference makes me wonder if LFP will eventually have to turn to robotics instead of skilled labor. I like your idea of utilizing high school students – but I see a nubmer of issues in that plan. Mainly are they going to be mature enough to cover the responsiblities and will their be untenable levels of turnover due to them leaving for college or other jobs. I’m afraid that LFP and others in their situation will invest in robotics because of the labor shortage caused by these isolationist policies.
Awesome article! To jgrchild and TOM lover – I am a little skeptical about how truly “surprised” LFP actually was to learn that 25% of their workers were not documented. I know from my time in government that corporations often turn a blind eye to regulation until it actually gets enforced. Use of third-party verification can be used as a method of intentionally turning a blind eye and shifting blame to others (though in this case, it seems LFP was held legally liable). The best example of this is in areas like outsourced labor, where large US companies have claimed ignorance on sub-par standards (e.g., use of child labor) because it was done through a third party. So I wouldn’t completely absolve LFP of blame.
Sarah, thank you for this detailed view inside the strategy and operations of an LFP. Given LFPs are a highly influential sector in the U.S., I wonder if educating legislators and/or advocacy organizations on the risks to food prices due to this change might move the needle in the medium term. In the short term, I like your suggestion to identify labor from local communities, but longer term this is a significant threat to the supply chain that all stakeholders should take seriously.
Sarah, super interesting article! I imagine that there are many companies that have experienced a similar situation. I’m a bit skeptical about the company being surprised about it. Illegal immigration usually translates into cheaper workforce (I wonder if you checked their labor costs!). I would imagine that an immigrant with legal documentation would have more labor options and would avoid this type of jobs. I liked your idea about hiring high schoolers, though there are some limitations to the number of hours that they can work per day and per week, among others. Perhaps automation is the solution in the future?
This is a fascinating look at changes in regulatory policy can “reveal” hidden elements of a supply chain. In light of this new regulatory policy, I think the firm has to take on the e-verify problem, given how critical it is to their supply chain. The existing policy of ignoring the documentation issue allows the firm to essentially defer the true costs of operating their business. The high degree of skill involved suggests that the LFP faces particularly high costs losing its laborers and tenured mangers. This decision point reminds me of corruption cases in the United States: a US firm can use bribery to achieve short-term goals in a foreign country, but in the long-run, compliance is lower-cost.