How Manufacturing Leaders Are Beating Economic Volatility

January 8, 2013

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Manufacturers are navigating rough waters in today's uncertain market, with severe volatility around demand and input costs for their operations. However, hard-won experience – and recent research – shows that manufacturers who place priority on flexibility, as well as make smart investments, can weather the storm more successfully than their rivals.

In its recent Global Manufacturing Outlook, professional-services firm KPMG says that, for manufacturers, “The global economic recovery is proving to be fraught with false starts, market volatility and macroeconomic uncertainty.”

Many respondents to the survey (44 percent) said that input cost volatility is the single biggest challenge facing their business in the short term. As a result, over the next 12 to 24 months, executives plan to increase their focus on cost management more than any other area for expansion and investment. Respondents told researchers that they “do not expect cost pressures to abate over the next 12 to 24 months” and that “cost structure is the area of their business model that will be subject to the greatest change over the same period.”

A 2012 survey of North American manufacturers by management-consulting firm Accenture found that although senior executives at such firms are optimistic about the growth of their companies and the economy as a whole, they do see unpredictable consumer demand and rising commodity prices as potential obstacles. In fact, 67 percent of manufacturing executives were concerned about stagnant consumer demand and 60 percent about commodity prices.

Richard Bergmann, managing director for manufacturing at Accenture, called this “an era of permanent volatility” and warned that “manufacturers need agile operating models to surpass the competition.”

Many manufacturers are focusing on improving their company’s operating model to mitigate such problems. Over 80 percent said they are working on reducing their cost of goods sold and on improving operational efficiency. The majority (52 percent) said they would employ more contract manufacturing to achieve greater operational flexibility and vary their cost structure.

Bergmann noted that “an adaptable, cost-efficient global manufacturing network not only improves financial performance, but can help respond to fast changing market demands and maintain the high levels of customer satisfaction that underpin long-term growth.”

Manufacturers across the board are using relocation as a strategy against cost pressures. Sixty-five percent of executives said their companies have moved at least some operations in the past two years, enabling them to get closer to their target markets or tap into cheaper unit labor costs. While a fair amount of relocation has been taking place within the U.S., reports of closures and relocations show a definite trend toward foreign markets, such as China, Mexico, and Eastern Europe.

Mark Pearson, managing director of Accenture's operations consulting group, says the firm's analysis identified a particular group of companies that came out of the 2007-2009 recession in a stronger position than their competitors and that have continued to thrive in spite of the new volatile business environment. He calls these companies “recovery leaders” because they have seen their revenue recover much more quickly from the recession than other manufacturers.

Recovery leaders, Pearson told IndustryWeek, show some “intriguing differences” in how they “approached their talent, location and capital investment”:

  • While most companies relocated some of their manufacturing facilities, leaders tended to be motivated “not so much to reduce costs...but to take advantage of unique skills in the new location (42 percent versus 10 percent).”
  • When the recession began, the leaders “had a better handle on their talent base than other companies.” They already had the right amount of resources and the right skills in place, resulting in less internal volatility in spite of volatility in the external business environment. This enabled management to remain focused on driving success rather than putting out fires.
  • Researchers found that recovery leaders tended to place less priority on reduction of labor costs during the recession and were better at attracting and retaining the right talent.
  • Beyond skills and talent management, industry leaders were less likely to have deferred capital investment or to have reduced manufacturing capacity during the downturn. Pearson says that Accenture has repeatedly “witnessed the importance of investment during downturns in order to create a 'leapfrog' effect when recovery happens.”
Recovery leaders, who make wise decisions around management of talent and capital investment and who focus on business objectives, find themselves today “aligned with a new business environment in a way that is allowing them to sprint more confidently into the future,” Pearson added.

 

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