What does the rest of 2020 hold for the U.S. manufacturing industry? It’s critical question – even as the Institute for Supply Management’s manufacturing index rose to 54.2 in July, up significantly from a low in March that indicated a recession in manufacturing as the coronavirus pandemic shut down factories.
Manufacturing executives – from the C-suite to planners — are facing difficult decisions around cash management, workforce, capital allocation, technology investments and even restructuring. Which lines or product offerings warrant continued investments and which ones do not?
In a period of crisis with such ambiguity, decision-making has never been more challenging. However, these challenges can be overcome.
We are seeing many manufacturers not only survive, but thrive, during the crisis by being innovative, nimble and collaborative. In many cases in the current environment, initiatives that have been on agendas for some time now require immediate action for businesses to survive (for example, diversifying distribution or supply, enhancing digital marketing platforms and outsourcing or automating certain repetitive processes).
Many new opportunities have been created through collaborative decision-making as companies have sought to pivot to meet the high demands of the crisis (for example, manufacturing and distributing ventilators, hand sanitizer, PPE and field hospital rooms). We have also seen companies innovate by building relationships with non-traditional business partners and industries. For example, there has been a blurring of the lines between the healthcare, technology and manufacturing sectors.
To succeed through the pandemic, US manufacturers will require collaboration, structure and innovative decision-making within their organizations. It all starts with asking the right questions. Instead of “what is the new normal” going to look like, businesses should be asking “how should my new normal look in order for my business to thrive during the crisis and beyond?”
Manufacturers that had not already been asking about digital transformation, the customer experience, robotic process automation, data and predictive analytics, supply chain diversification, corporate responsibility and sustainability should be asking them now. Although urgency and decisiveness are needed, organizations can't lose track of the long-term implications that each decision will have on their business, culture, mission and society if they want to remain competitive and profitable.
In these unprecedented times, it will be important that management’s decision-making process is based on objective, detailed data. In the current environment, an aggregate view of gross-margin by product, geography, or some other dimension with the objective of growing the top-line across all customers may no longer be the right approach, especially for manufacturers with multiple segments.
Markets are fragmented, and costs and profits can vary significantly by customer or product depending on customer relationships and supply chain integration. In this market, manufacturers should consider tracking data at a granular (i.e. invoice) level to arrive at a true profit that can be analyzed across multiple dimensions; in other words, mapping profits to specific customer segments, products and distribution channels.
The ability to identify, communicate (through visualization techniques) and evaluate the company’s profit drivers will enable the senior management team to set prioritization and resource allocation strategies around the company’s segments, products and channels, and perhaps even decide whether the company must restructure in order to be successful in the long-term.
This type of decision-making is enabled by technology developments in recent years that allow manufacturers to aggregate significant amounts of data (often from disparate systems) and different types of data (structured and unstructured), and to then analyze this information in real-time. The increasing velocity of technology change has been dramatic. To be successful, management will need to embrace this technology evolution and consider the tools and human resources needed to enhance their decision-making process going forward.
These are some of the questions that management should be asking themselves:
- Do we have data at a level of detail to effectively evaluate what combination of customers, products and services will be the most profitable going forward?
- Have we been measuring and managing profit at a level that allows us to make the best decisions possible for the organization (both in the short-term in response to the crisis and in the long-term in anticipation of recovery)?
- What customers are the most profitable? Which customer relationships should we prioritize?
- Which product offerings are most profitable? Where are my greatest risks associated with supply chain disruptions? What third-party suppliers and vendors should we prioritize?
- What are the impacts of taxes and tariffs on my operations?
- Should we close facilities or relocate operations?
- With an increase reliance on technology to operate, will our less technically skilled employees require training to stay relevant, or will we need to hire additional resources?
Prior to the COVID-19 pandemic, studies showed that up to 30 percent of a company’s products or customers may be unprofitable. A quick identification of less profitable business will allow a company to take short term steps to reduce losses and negative cash flow from these identified operations and to prioritize those operations that will lead them into the future.
Michael Poveda is a leader in UHY’s Advisory practice and has over 24 years of professional experience providing accounting, advisory and assurance services to clients in various industries. Contact him at firstname.lastname@example.org