Grant Thornton industry lens on: Global instability
To keep business flowing, manufacturers need to manage a complex network of inputs and outputs. But it’s hard to know how to manage global instability.
Many manufacturers are still struggling with ongoing pandemic impacts, and global instability introduces more complications. “You’re already dealing with a lot of inflation, but energy costs are now are going to go higher,” reflected Grant Thornton National Managing Principal for the Manufacturing Industry Robert Hersh. “Energy costs are one of the big expenses for manufacturing. With the price of oil doubling since last spring, you’re doubling a key input to most manufacturing and distribution process.”
Higher costs, limited supply chains and workforce issues have all made it harder for manufacturers to sustain consistent prices and quality for customers. While most customer markets have stayed strong, it can be hard to decide whether you can afford to pass along cost increases to your customers — or whether you can afford not to.
“Even after all of this, the consumer and the economy are still relatively robust. But there’s so much stress. Personally and professionally, people are stressed to their limits.”
“Even after all of this, the consumer and the economy are still relatively robust,” Hersh said. “But there’s so much stress. Personally and professionally, people are stressed to their limits.”
To relieve this stress and adapt for the future, manufacturers need to make a mix of short-term and long-term moves.
Short-term moves
Many of the pandemic’s biggest impacts have already passed, but ongoing instability and other risks continue to generate concerns that require quick action.
Manufacturers can consider some swift moves to help maintain profitability:
- Borrowing costs:
Borrowing costs and carrying costs are likely to increase. Consider whether or where it makes sense to lock up lower rates now, in case they go up. “If your finances are relatively sophisticated, it’s all part of the equation,” Hersh said.
- Supply chain alternatives:
Ports in the U.S. and Canada recently refused to accept the Russian ship Fesco Ulis, carrying 8,000 tons of solid pitch that’s used in manufacturing carbon electrodes and graphite electrodes.
Many manufacturers had to quickly evaluate their supply chain alternatives at the beginning of the pandemic, when traditional providers reduced their capacity or shut down. Supply chain pressures continue, and options like on-shoring or developing new production sites are for medium-term to long-term consideration. In the short term, manufacturers can consider moving offshore manufacturing to more secure locations as the map of global stability shifts. You should factor global instability into a regular re-evaluation of supply chain risks, to make sure new risks are on your radar.
Even if your suppliers stay online, consider the risk of regulations or restrictions that could stop your supply chain. Consider how you should develop secondary suppliers to establish relationships you can expand if needed. “When we talk about supply chain re-optimization, that’s part of it,” Hersh said.
“I think what we’ve seen is that we have too many single points of failure in the supply chain. The supply chain needs to be more of a ‘supply web’.”
“I think what we’ve seen is that we have too many single points of failure in the supply chain. The supply chain needs to be more of a ‘supply web.’ Plus, you have to know where your raw materials are coming from and be able to certify that for regulators,” Hersh said. “You have to be ready to deal with that risk, the regulations and that level of reporting.”
- Customer proximity:
Manufacturers need to reconnect with customers. The pandemic forced manufacturers to develop some remote capabilities that make sense to continue, but you also need to re-establish relationships and reduce the risk of further disruption to your inputs and outputs in the short term. “As the pandemic lifts, we’ve got to get back in the mindset of looking your customer in the eye,” Hersh said. “You have to be ready to address issues in real time rather than letting them wait for someone to get back to them.”
Manufacturers also need to look at how they can move inventory closer to key customers. Just-in-time delivery, from production to the customer, can reduce the cost of inventory but we’ve seen that it also escalates your distribution risks, customer retention risks and ultimately your stress level.
In the short term, you still need to put out the fires that arise every day. Some of those fires have changed, and now there are more issues to watch with more ways to address them. “It’s still about the cost and availability of raw material, energy costs — all the input costs,” Hersh said. “Those fundamentals don’t go away, but as a manufacturer you also need to keep tabs on what’s driving everything through your end-customer demand.”
Long-term moves
While manufacturers make some short-term moves to relieve immediate stresses, they should also continue some important long-term measures.
These moves might not be at the top of current budget priorities, but they should be factored into your strategic planning and decision making:
1. Green energy:
Green energy can give you more self-reliance and more resilience to external market risks. However, that self-reliance takes time and investment to develop. There’s no “green energy” switch next to your old light switch, so now is the time to look at what partners or investments you will need in order to meet future regulations, or adapt if your current energy options go away. “The move to green energy is a great thing — however, we’re shutting down some old utility plants without having the equivalent capacity from green energy production yet,” Hersh said.
2. Emerging production technologies:
New technologies like 3D printing can fundamentally re-frame supply chain issues by putting your production closer to your customers and improving responsiveness to customer needs. Emerging production technologies can even create an advantage for mid-market manufacturers, since they can sharply reduce the time to market for new products and bypass some of the traditional constraints on starting up new production and distribution
3. Emerging back-office technologies:
Back-office technologies can help you analyze and adapt to market changes and customer needs before your competitors get to market or force up prices on the inputs you need. Like the move to green energy, the move to these emerging back-office technologies is a question of “when” rather than “if,” but it will also take time. So, it’s important to consider the right moves in your planning now, even if they are not a top budget priority.
“The future of manufacturing is not necessarily in just making the widget. It’s more in where you make it, how you make it, and how you use technology to gain an advantage.”
“The future of manufacturing is not necessarily in just making the widget,” Hersh said. “It’s more in where you make it, how you make it, and how you use technology to gain an advantage. What sort of analytics can you use across your entire business backdrop, not just for parts flowing through the factory or the cost curves of your inputs, but for the market and customer analysis that show you how to adapt?”
Adapt, and keep adapting
Manufacturers need to adapt in both the short and long term to become more agile overall. The faster you can move, the faster you can change.
“Some of these moves were already in flight, but they’re becoming more urgent,” Hersh said. “All crises come to an end, but don’t get caught thinking that the changes are over.” Changes will continue, and your customer relationships will depend on your ability to deliver consistently.
“It’s a question of how you can get product to the point of consumption most efficiently, to serve your customer,” Hersh said. “Are you reacting to demand in a timely way that serves your customers as they want you to?” Global instability and pandemic disruption have been stressful for everyone, including your customers, so show your customers how you are always ready to respond.
“Look at how you can get close to clients through all of this uncertainty, to help them stay out in front of any trends or any challenges that their customers are facing,” Hersh said. “The companies that are going to win are going to be the ones that are not only nimble, but are close enough to their customers they can get out in front of any changes.”
This article is part of Grant Thornton’s quarterly Industry Intersections series, where we examine how key industries are addressing pressing trends. To read how other industries are managing global instability, visit Industry Intersections.
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