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Upheaval is the new normal

Upheaval is the new normal

By Mark Fagan

Leader, Manufacturing & Distribution at Moore Global

For CEOs in manufacturing, the end of 2022 feels like coming up for air after swimming 10 laps of a pool underwater. Few thought they would manage at the outset, some had to be hauled out after struggling through a few laps but the majority found their stride and made it to the end.

They are now mainly just relieved it is over – only to be told by the personal trainer they have to do it all over again. And this time they don’t know how many laps they will be underwater.

The first stretch of this metaphorical swim was the equivalent of getting through Covid. After the initial shock of jumping into the unknown, companies adapted by reshaping supply lines, refocusing their product offering and selling more online.

Many adapted cleverly and saw financial performance improve. While Covid can never be considered “a good thing” it has had positive unforeseen consequences across the manufacturer and distribution (M&D) sector.

Fundamental changes to business models that had to be rushed through to keep the lights on have become embedded and are now considered best practice. Almost by accident many M&D companies that were ambling along now find themselves more agile, more focused and more profitable.

My firm, Citrin Cooperman, conducts an annual survey that takes the pulse of manufacturing and distribution and the results this year show that the winners in this sector have learned how to live with disruption: many even embrace it as a means of turbocharging growth or entering new markets.

The findings come from the United States but have wider relevance. The whole M&D sector is facing economic slowdown, the era of cheap money is over, while “temporary” supply chain disruption and labour shortages are proving difficult to overcome.

On top of that we have to deal with levels of geopolitical instability, in Europe and the Pacific Rim, not seen since our grandparents were young.

However, successful companies have maintained a sharp focus on four key areas: reshaping their product offering, building their online presence, supply chain resilience and data analysis.

That last factor, data, will prove critical to CEOs as they plunge into the next leg of our metaphorical swimming marathon.

What we can see from our research is those businesses in the strongest position have access to time-sensitive, comprehensive and accurate data – which allows them to take calculated risks with a greater expectation that they will pay off.

However, let’s not pretend that the majority of middle-market companies are getting the most out of their enterprise resource planning systems and automated forecasting tools. Much of their best features go unused because these companies do not have the manpower and talent for best-in-class reporting processes.

Current systems help us identify buying patterns from previous sales periods or pinch points on production lines but they do not help us get inside the heads of consumers and understand their future behaviour.

The main metrics most companies look at are quality control and order fulfilment performance, ie historic data points that are focused internally on the process of manufacturing and distribution rather than the needs and desires of customers.

Although there is general support for the notion that customer service is an important KPI, less than 50% are tracking the key data that would give them advance warning of failings or highlight gaps in demand which potentially could be filled with new products.

While affordable technology that delivers true customer insight may be some years away, much of what we currently consider to be artificial intelligence (AI) or machine learning is focused on supply chain bottle necks and predicting geographic location of product demand.

That makes perfect sense because Covid restrictions remain tight in regions where most of the world’s mass manufacturing takes place. That has impacted production and shipping schedules, meaning it still costs three times as much to ship goods from Asia to the US as it did before the pandemic. Anything AI can do to smooth out peaks and troughs in inventory management can make a difference of millions of dollars to the bottom line.

More than half the companies in our US survey have doubled down on efforts to find alternative or additional manufacturing locations to offset production disruption and increased shipping costs. US M&D companies, like most of their counterparts around the world, have accepted that the era of just-in-time manufacturing and distribution is over.

However, if higher inventory costs and longer lead times are the result, it follows that there will be additional strains on working capital – and that the extra cash required over longer periods will cost more because of rising interest rates.

These are the new realities facing CEOs and leadership teams in these disruptive times. Nobody knows how long this bout of instability will last but the response to Covid has shown that the most agile companies come out on top, whatever the prevailing economic environment.

While we may not know how long the next leg of our metaphorical underwater swim will be, the most open-minded CEOs can dive confidently into the pool knowing they have the strength and a good supply of financial oxygen to see them through choppy waters.