Q: What is your perspective on the manufacturing industry as a whole, given our current economic environment?
A: The manufacturing industry will continue to endure wage escalation and labor shortages and experience an economic slowdown in market activity in 2023. Though falling, inflation remains higher than normal, which will be a drag on production, as will constraints on liquidity. Manufacturing activity contracted in December and January, and we expect activity will remain in contraction territory through the first half of 2023, lagging the Federal Reserve’s interest rate hikes.
Q: What must manufacturers do to address our current economic environment, stay competitive, and thrive once we pass these current economic times?
A: Businesses are facing economic headwinds ranging from higher input costs to rising wages. The current environment presents challenges, but more importantly, opportunities for manufacturers that are proactively adopting advanced technologies to boost resilience against future disruption. Companies that make intentional efforts to prepare now will also have an advantage on the other side of these headwinds. Businesses must analyze and plan for best- and worst-case scenarios in a downturn and understand what a recession will mean for their operational needs. Businesses must carefully throttle activity while not sacrificing future capacity when activity increases in subsequent periods. Automation and digitalization will continue to be central to filling labor shortfalls and could be disruptive in the mid-term for businesses that fail to harness the opportunity. The current environment is an excellent opportunity to find efficiencies in business models where productivity enhancing projects can help businesses emerge from a recession in a position of strength.
Q: The labor market continues to be a challenge for many manufacturers. What is your perspective on the current labor market, its impact on manufacturers, and things that companies should do in order to address these challenges?
A: Access to labor will be a persistent challenge – unemployment overall was at 3.4% in January and in the manufacturing sector it fell to 1.8%. This will cause continued upward wage pressure to persist in the manufacturing sector in near term. As of 2022, there were as many as 4 to 5 million fewer people in the U.S. workforce than in 2020. That includes early retirees who will not return, COVID-19’s long haulers, and those who died during the pandemic. While the pace of hiring remained positive at the end of 2022, we expect that to reverse by the second half of 2023. In order to address this labor shortage, high performing manufacturers must double down on their capability to attract, train, and retain
top talent and critical labor as the battle for talent continues. Companies should seek out opportunities to use automation and digitalization to fill worker shortages, and invest in such technologies, especially for repetitive tasks and processes. As this labor shortage persists, and the landscape of manufacturing continues to evolve, we find that our clients that recognize the changing dynamic of the workforce and train labor to be more technologically savvy continue to outperform their competitors.
Q: With the current geo-political landscape, what strategies have you seen manufacturers take in order to address risk within their production facility footprints?
A: Evaluating and implementing alternative manufacturing strategies that consider the consolidation of operations and/or the shifting of production to new locations are disruptive initiatives for many of today’s lean management teams. The substantial level of effort and potential capital investment involved will deter some businesses from considering alternative operating models, regardless of the potential benefits that these models could generate. By evaluating the entire business case for implementing this type of a strategy, manufacturers that diversify their manufacturing foot-print should use the opportunity to evaluate what they can do better. Many of our clients who have successfully answered this question have realized significant enterprise value. Through the adoption of new productivity-enhancing equipment and state-of-the-art technology, we have seen leading manufacturers reduce reliance on labor, lower variable costs and maximize long-term capital investments. An effective way to explore these options before making costly decisions is by using digital twin technology to create 3D models of shop floors, equipment layouts, and employee productivity and run myriad scenarios to identify the most efficient use cases.
Q: What strategies have you seen clients take to address their operating effectiveness in an effort to drive enterprise value, and manage costs in today’s current economic landscape?
A: We assist many of our clients in evaluating their operating models in order to streamline operations, enhance product quality and deliver and ultimately drive growth and enhance enterprise value. Much of our work assists our clients in understanding in detail their product strategy and rationalizing where investments should and should not be made within their product portfolio. The ability to leverage vast amounts of data is critical in order to effectively deliver value through this process. We find that many of our clients have significant amounts of data but, ultimately have not historically been able to use this detailed data to drive operational decisions. In our current inflationary environment, we have seen clients realize very near-term value in multiple areas, specifically in strategic sourcing and inventory optimization. The ability to drive a leading practice sourcing program can many times drive savings in the 3-5% range (depending on the category of spend). Additionally, we have seen through optimizing the management of inventory in many manufacturers, the ability to realize significant gains which drives greater liquidity – a vital need for manufacturers in our current economic environment.
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