5 trends in manufacturing to watch in 2017
With expectations of rising revenue, profits and employment, middle market manufacturers appear optimistic about prospects for the industry and their companies. Yet many companies are experiencing a decrease in demand, limiting their profitability and growth.
For companies to break out of a cycle of diminishing revenues—and for others to achieve their ambitious expectations for growth—a number of trends are worth watching in the coming months:
While a majority of manufacturers have expectations of increased revenue1, growth projections are much lower now than they have been in the past.2 Growth is variable, depending on the sector: Suppliers serving the automotive industry, for example, are coming off a record-setting year, while other sectors such as energy, agriculture and general industrial manufacturing are experiencing flat or declining revenues.
Sales growth is expected to be driven at most companies by the introduction of new products; nearly half of the manufacturers surveyed are planning major initiatives in product development and innovation. But it is not clear if the markets can absorb these new products nor if they will be accretive to total revenues.
Manufacturers need to assess performance, resources and opportunities. Unless they are operating effectively and costs are under control, companies will find it difficult to invest in new products or enter new markets.
Learn more about growth in this brief video interview with Steve Menaker, manufacturing practice leader, and Joe Brusuelas, chief economist, at RSM US LLP.
Increasingly, companies are using information technology to enhance corporate performance. Customer relationship management systems, mobile technologies and supply chain tracking, for example, are receiving the most attention among U.S. manufacturers. But not every company can install new technologies into shop floor machinery, and the measured pace of economic growth in the United States and elsewhere has CEOs investing cautiously. Election-year uncertainties may also factor into investment decisions. Executives may be waiting to dedicate money for innovation until they get a better idea of what tax and economic policies, incentives or obstacles may come their way.
Profitability and margins
To manage the risk to profit margins, manufacturers need to have a laser focus on three primary components of the production process: materials, payroll and related costs, and overhead. Some are effectively hedging key materials in order to mitigate price fluctuations while others are investing in robotics and other equipment to produce products more quickly and efficiently.
But with a general oversupply of production capacity worldwide, the pricing power has shifted to the customer. In almost all cases, the customer can access multiple sources of information on pricing inputs and take preemptive action to negotiate or demand lower pricing. In an environment where sales growth is a challenge, most companies have to negotiate prices to keep the business.
But access to information also means that customers can identify value as well. This opens up an opportunity for manufacturers to demonstrate features and services that distinguish their products from their competitors’ offerings. Hence, innovation and value enhancement will continue to be very important to all manufacturers.
Learn more about pricing and driving profitability in this brief video.
Many manufacturers, however, are ignoring common strategic initiatives designed to address significant business and cybersecurity risks. One-third of U.S. manufacturers have no plans to address product liability or employee fraud issues.3 The impact of fraud and data security breaches can be profound at small and midsize companies.
Risks may be found in customer relationships, reliance on certain vendors, production challenges, material pricing fluctuations, foreign currency; the list is long. Addressing risks only when they become problems is too late. A company must make an assessment of their potential risks and implement strategies to manage them throughout the year and as situations change.
Although the ratio of unemployed persons per job opening varies with the business cycle, by October 2016 there were only 1.4 individuals for every job opening in the United States.4 Manufacturers who are recruiting highly skilled personnel are competing with Silicon Valley as well as industry competitors. As a result, the search for talent takes longer than it has in the past.
Companies need to develop a long-term strategy for recruitment and explore multiple channels in their search for workforce personnel. In recent years, this has meant working with local community colleges, vocational schools and even high schools to attract and retain talent. In the past, immigration policies have offered opportunities to bring in qualified skilled workers, but the current political climate may make this an unlikely resource approach for the time being. Compensation will continue to be a challenge for all levels in such a tight labor market.
Competition has made the skills gap more than just a lack of viable personnel in the labor market. Manufacturers need to find the right candidate for a job opening, then make the job attractive enough—through compensation, but also through challenging job responsibilities, benefits and impact—to get that candidate interested in taking the job.
Learn more about the workforce issues facing manufacturing in this brief video.
1. 2016 RSM Manufacturing Monitor
2. National Association of Manufacturers
3. 2016 RSM Manufacturing Monitor
4. Job Openings and Labor Turnover Survey (Oct. 2016) Bureau of Labor Statistics