As we approach the end of an extremely challenging year, we would like to share our thoughts on a few key issues that we believe manufacturers will continue to face in 2021, and ideas for navigating them. While the road to recovery will be unique for every organization, understanding how these issues will impact your entity and having a proactive plan can play a key role in the future success of your manufacturing operations.
Cybersecurity. What if your manufacturing operations suddenly came to a halt without warning? One of the most frightening risks a business can experience is cybercrime. While the financial loss alone can be substantial, the non-financial impact can be even greater as the loyalty and trust of customers and suppliers can quickly evaporate. Throughout the pandemic, we believe cybersecurity risk has increased as more employees work remotely, which potentially opens more entry points for hackers to gain access to your system.
To combat cybercrime, start with the development of a cybersecurity plan that focuses on strong policies and controls, and imposes restrictions or limitations on e-mail usage, website links, and removable media. Create strong definitions around user access roles, permissions, passwords, and system administrator rights. It’s also important to provide continuous training to employees on how to identify potential attacks such as rogue e-mails laced with malware.
Battling cybercrime does require a certain level of investment in solid technology such as firewalls, network authentication tools, infrastructure, and operating systems that contribute to well-defined perimeter security layers. The continuous testing and evaluating of systems and the training of employees must be part of that investment. Engaging an outside agency to occasionally “pressure test” your system can prove to be a wise investment as well.
Cost & Supplier Evaluation. For many manufacturers, cost control is a major factor that needs to be considered alongside every decision. Of course, factors such as quality and service are also vital in the decision-making process, but unless costs are under control the business will most likely have financial issues. Keeping costs at or better than predicted levels allows manufacturers to remain in control of their operations. Those that lose control can end up making decisions based solely on short-term survival, with little or no consideration regarding long-term performance.
To manage and control costs, consider developing a cost optimization strategy focusing on the elimination of non-value-added activities, consolidation of similar activities, simplification of processes, and the reallocation of resources from lower-value to higher value activities.
One way to get started is by examining every line item on your income statement with the mindset that no historical costs are sacred, and that each item can and should be challenged. In addition, further investigate and validate any significant changes in costs. At a minimum, suppliers should be evaluated annually to ascertain the overall value and service received in comparison to the monies paid. Initiate frequent invoice validation procedures to ensure they match contracts, reflect accurate pricing, and include any incentives, discounts, or deals that have been earned or negotiated. In some cases, sole-sourcing with one supplier in exchange for lower prices can be beneficial; however, be aware of the inherent risks with logistics, financial stability of the supplier, or contracts containing terms that may prove problematic in the future such as auto renewals, favorable pricing expiring before the contract end date, or other factors that may make such an arrangement less than desirable.
Other strategies such as joining buying groups and working with suppliers to reduce costs may prove beneficial, as well. For instance, “If I buy my product in 1-ton tanks instead of 25-liter drums, could you reduce the price by 5%?” or “If I take one delivery per week instead of three per week, could you reduce the price by 9%?” are examples of questions to ask. Finally, evaluating packaging, as well as considering alternative ingredients or raw materials may provide a cost-saving benefit as long as a reduction or change to the quality, size, or amount of these items does not have a negative impact on the finished product.
Diversify Revenues. Significant revenue streams obtained from only a few customers or those tied to a certain industry can undoubtedly be financially rewarding. However, it can also prove to be a significant risk. The risks associated with having a customer concentration issue are twofold. First, doing business with a major corporation may seem like security; however, as a smaller supplier, it can also expose your entity to being “squeezed” in terms of pricing or in some cases, requiring you to take on greater roles or responsibilities within the supply chain that could add costs, compress margins, and drain resources. Second, if your entity obtains most of its revenue from only a small number of customers, this can mean additional financial risk should your company lose one or more of those accounts.
Being industry dependent can also prove costly as volatility typically within the automotive, aerospace, construction, and most recently, the entertainment, travel and hospitality industry due to the pandemic can create significant fluctuations in revenues. In short, your success may revolve around how well certain customers or industries fare in the marketplace or global business environment.
Evaluate your customer base for potential risks associated with those industries or customers that are considered volatile, or those that could potentially “pull” their business if certain concessions are not met. Adopt a practice of continuously seeking new opportunities to diversify revenue sources and your customer base. Consider investing in research and development activities with the goal of introducing new products or services that are needed to further mitigate exposure. Know your customers and continuously ask “what else could we provide our customers with either as a cross-promotional or add-on product?” Finally, examine excess capacity and look for ways to turn that excess into a revenue stream.
Supply Chain Evaluation. For many manufacturers, the cost-savings and efficiencies associated with employing “just-in-time” inventory practices have proven to be extremely beneficial as stock levels for raw materials are kept to bare minimums and introduced into production on an as needed basis. Another common strategy to reduce cost is to contract with foreign suppliers to obtain lower pricing on raw materials, supplies, or ingredients. While these strategies should continue to be viable options to consider in 2021, careful consideration must be given to the consequences and inherit risks associated with each strategy such as how tariffs, regulations, and trade agreements might play out under a new administration and how supply chain disruptions like those most recently created by the pandemic may impact these strategies.
For critical raw materials or essential products, consider alternative suppliers, sources, and increased stock levels for key items that are vital to the production process or those that have the potential to be in high demand. While the cost of procurement and storage may be higher under an alternative method, carefully analyze the offsetting cost of potential lost sales and production downtime as a result of not having key items on hand. We also recommend clients consider building flexibility, resiliency, and more responsiveness into their supply chains. The recent pandemic exposed supply chains that were simply too rigid. A prime example was how the pandemic impacted the dairy industry. With the shut-down of schools and other institutional accounts, there was a sharp shift to retail demand. As supply chains were unable to pivot quickly enough from foodservice to the retail channel, farmers were forced to dump milk down the drain while dairy coolers in grocery stores went empty. This resulted in substantial losses in sales and wasted product.
SKU Rationalization. Over the past decades, many manufacturers have focused on broadening their customer base by offering more choices and varieties of products. This shift can easily be seen at your local grocery store as shelves are filled with many varieties of essentially the same product. Even before the pandemic, we advised manufacturing and retail clients to continuously evaluate slow-moving products and scrutinize product assortment by focusing on power SKU’s and those that bring sales velocity, profit, and high demand in the current economy and forecasted business climate.
The benefits of this exercise include opportunities to save on material and labor costs with streamlined supply chains, the reduction of obsolete inventory risks, and freeing up overburdened factories and stores. In short, for some industries, offering less assortment as a result of the pandemic has helped reduce costs and has been a rare upside. While we strongly recommend the continuation of research and development efforts, consider focusing more efforts on new offerings as compared to improving or creating extensions of existing ones, especially if the marketplace is seeking more “need” products as compared to variety at this point.
Workforce Health & Safety. As we continue to navigate our way through the pandemic, the issue of workforce health and safety should remain a top priority. The nation has clearly seen the impact of how a workforce disruption can create havoc with how manufacturers operate in the short terms, as well as how they might need to adjust for the long-term. The bottom line is that people will continue to need protection and will be looking for their employers to ensure their health and safety while at work so that adequate production levels, capacity requirements, and essential businesses remain operational.
In the near term, we recommend our manufacturing clients continue to provide adequate personal protection equipment, enforce social distancing guidelines, continue deep cleaning and disinfecting procedures, and consider remote-based capabilities to limit contact until the vaccines are widely distributed. In addition, perhaps now is the time to consider additional investments in automated solutions and robotics to help prevent costly shutdowns due to sickness and at the same time, realize potential cost savings in terms of labor costs and tax benefits associated with capital investment under the current legislation.
As we all know, manufacturers face challenges every day and, in many cases, must pivot and persevere to overcome. However, survival does not have to be the end goal. Manufacturers that will thrive in these tumultuous times are those that proactively plan, maintain flexibility, and act decisively to take advantage of emerging opportunities. While this guidance is not meant to be an all-inclusive list of challenges, we hope this information has been helpful as we all look forward to a new year.
If you have any questions or would like to discuss how these topics or solutions relate to your manufacturing operations, please contact us.