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Periods of political transition often raise hopes, but they can also bring uncertainty as politicians settle into the day-to-day routine of running the government. Legislation in Washington has not yet provided the anticipated impetus to drive broad revenue gains in manufacturing. Nevertheless, manufacturers are focusing on a number of areas where they can effect change—and paying close attention to issues outside of their control.
Growth
In general, a number of manufacturing sectors have done quite well, but the markets for others have softened. With some growth in other worldwide markets, overall activity is increasing and having a positive impact on U.S. activities. Many manufacturers are offering new or improved products and expanding into other markets as strategies for growth, but mergers and acquisitions appear to be active as well. Nearly half of manufacturers are offering new or improved products as part of their growth strategies. Many have also expanded—or are planning to expand—in new or existing (but predominantly domestic) markets. Collaboration with customers and investments in innovations―as well as research and development―are accelerating new product introductions. Data are being leveraged throughout the sale and production processes to prioritize products and managing profitability.
Regulations and Trade
A modernization of NAFTA will need to be organized around the middle market for it to be acceptable to a North American business community highly attuned to overall fairness in trade. One area to watch out for is whether rules of origin arise as a potential impediment to an agreement. This could hurt the middle market, with small- and medium-size enterprises potentially losing market share to foreign competitors. While other parts of the world continue to discuss trade deals, the United States appears committed to bilateral deals that may take longer to formalize and be complicated by provisions in other deals being reached by our trading partners.
The sustained optimism felt by manufacturers in 2017 is based in part on the expectation that the current administration will provide regulatory relief and make progress on tax reform, according to the National Association of Manufacturers.1 Progress in these areas will be closely watched, particularly by those operating on a global basis: A 2017 survey by the World Economic Forum found that U.S. executives across industries believe that tax rates and tax regulations are the most problematic factors for doing business in the United States.2 The WEF also found that the United States ranked second out of 137 countries in terms of overall competitiveness.
Supply Chain
The manufacturing supply chain—from product inception to the return of goods—is gaining increasing importance as the most promising driver of profitability and supporting growth initiatives. Middle market companies often address the effectiveness of their supply chain on a piecemeal basis. But the supply chain encompasses much more than simply producing and shipping a product: It spans sourcing the materials that go into products, the logistics of getting those materials to the factory, their movement through the factory and, ultimately, their delivery to the customer. Not taking an end-to-end view can often result in a company optimizing some portions of their supply chain while not improving or even de-optimizing other portions or their supply chain as a whole.
Customers are playing an increasing role with the manufacturer, demanding shorter lead times, asking them to hold or even lower prices and pushing the ownership of inventory back onto the manufacturer. Ultimately, this is creates additional pressure within the manufacturing environment to meet these demands and maintain profits.
In order to identify the process efficiencies that lead to cost savings, manufacturers must analyze all components of their supply chain individually, and ensure that net improvements reduce costs and increase efficiencies collectively. From negotiating raw material prices and supplier contracts to managing maintenance, repair and operations, companies undertaking a comprehensive supply chain analysis and strategy review can drive improvements to create greater value, improve quality and command higher prices.
Workforce
Manufacturers in middle market companies are having difficulty filling open positions, putting increasing pressure on management, margins and existing employees. The Federal Reserve noted that labor shortages and the increased labor costs associated with attracting workers were restraining growth in a number of its districts, notably in manufacturing and construction.3 The difficulties of recruiting in a tight labor market can leave jobs open for longer periods.
Increasing compensation levels is the most common approach to attracting both skilled and unskilled labor. But manufacturers need to focus their efforts on retention as well. A national Gallup poll found that just under one-third of U.S. employees were enthusiastic about their workplace.4 Retention really is driven by job satisfaction. To that end, the companies to watch are those establishing a work environment where employees have opportunities to contribute to company goals and feel valued—and want to stay. In addition, more than half of manufacturers plan to increase their training and workforce development investments.
But what can be done to minimize the impact of labor shortages? While recruiting efforts will be a priority, manufacturers also need to identify what business processes can be automated; investigate partnerships with other companies to share costs; and consider leveraging outsourcing to compensate for a lack of needed skills and services. More than two-thirds of manufacturers are planning to increase their training and workforce development investments.
Technology
As collaboration and innovation technologies become more widespread, they are eliminating barriers for manufacturers and changing how they go to market, interact with their customers and work with vendors. Efforts to improve product quality, reduce costs and increase operations productivity are some of the drivers for technology investments. Certainly, competition makes such investments necessary and the increasingly lower cost of technology makes them viable options for middle market companies.
A majority of manufacturers are using some form of cloud computing as a part of everyday operations, or are planning to implement the technology. More than three-quarters have invested in business analytics or are planning to do so, enabling them to harness the data and react in a timely manner to opportunities and trends.
Blockchain technology holds the promise of keeping proprietary or sensitive manufacturing information secure but accessible to the people who need it. The transparency of real-time inventory data and convenience of up-to-date technical information make this technology attractive to manufacturers and the entire supply chain. The challenge will be making this technology accessible and productive to middle market companies.
Yet despite the use of automation,6 increases in manufacturing productivity improvement have slowed to some of the lowest overall growth since World War II.5 The continued need for skilled workers supports the idea that technology is not significantly changing headcounts in the near-term.
Risk Management
Risks are an integral part of business growth, but not all risks are created equal. Management and mitigation efforts must be calibrated according to the likelihood of exposure and the potential downside of each risk.
Downturns in the broader economy, fluctuations in currency and commodity pricing are of concern for a greater percentage of manufacturers than apprehensions regarding local or national domestic regulations. Manufacturing continues its modest rebound; there are risks, however, including a possible slowing demand for autos and the negative impact of the U.S. dollar appreciation on exports. Manufacturers should follow proposed regulatory changes―such as trade agreements, federal regulations, immigration and tax reform―closely in order to be able to make effective, timely changes to their strategic goals, objectives and plans.
Nearly half of manufacturers are using enterprise risk management (ERM) processes to address operational risks, followed by strategic and regulatory or compliance risks. Yet at least two-thirds are not using ERM to address risks related to finance and accounting, legal matters and their supply chains.
By now manufacturers should be well aware of the likelihood of hackers gaining unauthorized access to their information systems. The security procedures taken by most manufacturers, however, are primarily the minimum required to maintain a semblance of data security.
Prioritizing and managing risks is becoming increasingly important to an organization’s ability to adapt to an ever-changing and global business environment. If manufacturers are not managing risks in a structured process, now is the time to start.
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