Resilience in the manufacturing industry
Manufacturers have faced disruption from many directions, but the industry is showing more resilience than many expected.
The global turbulence of recent years has affected many industries — and it might seem like pandemic shutdowns, global shortages, workforce issues, and other supply chain factors have hit the manufacturing industry especially hard. Manufacturing leaders have needed to become more agile in this new era of change, and a recent Grant Thornton survey indicated that they have adapted as well as, or better than, many other industries.
Every six months, the Grant Thornton International Business Report (IBR) surveys mid-market businesses around the world. The latest IBR survey showed a decline in optimism among business leaders overall, but it also showed that manufacturers are growing exports, controlling their prices and maintaining economic discipline surprisingly well.
"Manufacturing had a couple months that looked soft, but the latest numbers show an uptick in manufacturing activity."
“Manufacturing had a couple months that looked soft, but the latest numbers show an uptick in manufacturing activity,” said Grant Thornton US Manufacturing Industry National Managing Principal Robert Hersh.
“There continues to be strong global growth in manufacturing, especially from countries with competitive labor costs,” said Oliver Bridge, Operations Consulting Partner in Business Consulting for Grant Thornton UK. “There is no doubt that manufacturing locations are changing but, rather than bringing manufacturing ‘on shore,’ we have seen a trend of bringing supply chains closer to home — this reduces working capital, freight costs and lead times. However, it could increase overall unit costs.”
16:56 | Transcript
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Steady selling prices and economic discipline
In spite of increases in the price of production, distribution and other factors, manufacturers have maintained surprisingly steady selling prices. Most manufacturers in the IBR survey do plan to increase selling prices in the coming year, but they appear to be staying in line with predictions across other industries.
By contrast, 90% of respondents in healthcare and life sciences expect to increase or maintain their prices this year, while all respondents in the oil and gas industry expect to maintain or increase prices.
“Manufacturer prices were higher than previous years, but I would have expected selling price increases to be greater,” Bridge said. “There is a lot of inflation in basic commodities, and overall inflation running at over 9% in the UK.”
“Economic uncertainty is causing problems, including volatile exchange rates, commodity price rises and shifting end consumer demand,” Bridge noted. “These are problems not easily solved and often add cost.” This economic uncertainty will continue to be a constraint on manufacturers, but survey respondents indicated they are no more concerned than the leaders in other industries.
The survey showed that economic uncertainty is a greater constraint in the financial sector, where 75% of respondents in banking and 73% in financial services said it was “some or significant.”
“Many manufacturers have been well-disciplined in managing their working capital to minimize these volatility impacts. Others have increased the flexibility in their costs, reducing fixed headcount and changing manufacturing processes to ride out the problems,” Bridge said. “Many have focused more on profitability, moving away from measuring revenue as a primary success measure.”
That flexibility could pay off, as manufacturers expect to grow their exports in the coming year.
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Exports are least likely to grow in the mining and quarrying industry, where 23% anticipate a decrease, and 47% expect to stay the same.
Bridge noted that some manufacturers are even overcoming some political hurdles that might slow exports. “The increase in the number of countries that UK firms expect to sell to is more positive than many other European countries — this is surprising, as Brexit has added complexity to exporting to many of our closest neighbors, the results suggest many manufacturers are looking further afield.”
Manufacturers are growing exports worldwide, but leaders can look to some countries as leading indicators. “There is a lot of change in manufacturing across the globe, many countries or areas have built strength is certain areas,” Bridge said.
- North Sea (UK, Norway, Belgium, Netherlands in particular)
“The North Sea is one of the best sources of wind energy in the world,” Bridge said. “Energy independence from global markets will make them more cost competitive and attractive as environmental standards get tighter.”
“India’s manufacturing base has a growing reputation for competitiveness, with a lower lead time than other Asian countries that supply Europe,” Bridge said. “Its stability and close ties to Europe can make it an attractive option that reduces working capital and freight costs.”
Apart from growth in these regions, what other trends will define the manufacturers that are most resilient this year?
Future considerations and resilience
Bridge outlined three key considerations for future resilience in manufacturing:
“Cost profiles for many products are changing on a regular basis,” Bridge said. Energy, labor and raw material costs have changed the profitability for many products, customers and countries. Manufacturers must closely monitor profitability so that they can react quickly. “That builds greater resilience and steers away from the vanity of increasing revenues,” Bridge said.
Many manufacturers are looking at their supply chain and making sure their practices follow the right environmental and ethical standards. “The transparency of supply chains is becoming more important, to build a plan to improve standards and reduce risks,” Bridge said.
- Geopolitical pinch points
The war in Ukraine has highlighted the reality of geopolitical issues. Manufacturers are now more cautious with their global supply chain expansion. “Many are looking at potential global flashpoints and planning for the impact they may cause — wire harness manufacturing in Ukraine stopped some EU car factories for a number of months,” Bridge said.
“Manufacturers have had challenges with supply chains and workforces from the shop floor up to the C-suite — you're not going to see those go away,” Hersh said. “I think we're going to see volatility in the manufacturing numbers for the foreseeable future.”
In spite of these concerns, leaders are looking to make targeted investments. More than half of the survey respondents in manufacturing and across industries anticipate that they will increase their IT investment in the coming year.
“We're already seeing a focus on the operations inside the four walls, because I think managers are realizing they're leaving a lot of money on the table, from a productivity perspective,” Hersh said.
Having weathered turbulence from many directions in recent years, manufacturers have refined their economic discipline and are now positioning themselves to be competitive in their current markets and even grow their customers around the world.
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