8 trends in manufacturing to watch in 2016
Volatile financial markets, reduced commodity prices and lackluster growth continue to challenge manufacturers in their pursuit of profitability and, ultimately, value for their organizations. The relatively stable U.S. market is attracting more foreign capital and competition. Because they are falling behind their global competitors in the strategic use of information technology, U.S. companies must integrate technology and data analytics into all facets of their business.
With the promise of a robust industry resurgence in 2015 giving way to a somewhat-tempered outlook for 2016, the need for manufacturers to anticipate and address these challenges is essential.
- Revenue growth and profitability
- International expansion
- Process improvement
- Managing risk (video)
- Policy issues
- Mergers and acquisitions
2016 manufacturing outlook
With plunging prices in commodity and energy markets, the manufacturing industry is seeing growth in some sectors—such as automotive, aerospace and home building supplies—and lethargy in others. In a competitive global market, price is often a primary factor. Companies will need to focus on innovation to drive down costs and enhance customer relationships to increase sales.
Learn more in this short video interview with Steve Menaker, partner and manufacturing industry leader at RSM US LLP.
1. Revenue growth and profitability
In the global marketplace, companies can often win customers on pricing alone—particularly for commodities or less-technologically advanced products. Some U.S. manufacturers are competing in the context of the broader customer experience and a value proposition that is based on the needs of individual customers. Manufacturers are also offering new and diverse sets of products tailored to the needs of the customer as well as streamlined supply chains that can deliver these products to market faster than the competition. Non-U.S. companies are much more likely to use new services as an innovative growth tactic, according to a recent RSM report. In order to compete, U.S. manufacturers will need to focus on the integration of innovation and more responsive customer relationships.
2. International expansion
Many U.S. manufacturers are taking advantage of the strength of the U.S. dollar and are looking outside of the country to extend their client reach as well as to source materials and commodities in new and existing markets. But the challenges of international taxation, business culture assimilation and regulatory issues can be significant. Moreover, weak international economies—coupled with the stronger U.S. dollar—can result in softer growth than anticipated. Diminished global economic expectations have led some companies to conclude that once-promising countries for business expansion are no longer viable options. Alternatively, the relative strength of the U.S. economy has made the U.S. market a prime target for manufacturers outside of the United States. Even if a U.S. company is entirely domestic in its operations and sales, it is competing with manufacturers from around the globe. As such, international expansion should be very strategic and focused, with an emphasis on countries with stable governments, relatively stable currencies, growth opportunities and intellectual property protection.
3. Process improvement and margin management
Margin management has become increasingly important in a period of volatile pricing for commodities and materials. Thriving companies tend to have more defined innovation cultures—strategic investments that can pay dividends by identifying new ideas—across the enterprise. They also set appropriate metrics to measure the returns on investment. Thriving U.S. companies today succeed in part because they continually establish higher benchmarks to force improvements; many of them cite process improvement initiatives as a top reason for their success. These companies also report larger increases in productivity, driven by process improvements, improved labor utilization and enhanced equipment utilization.
4. Managing risk
To manage the risk to profit margins in 2016, companies will need to have a laser focus on three primary components of product costs: materials, overhead and labor. 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. In addition, manufacturers must balance the continuous challenge of attracting and retaining skilled labor with the implementation of newer technologies to manage labor costs and automate functions formerly provided by skilled workers.
Learn more in this short video interview led by Joe Brusuelas, chief economist at RSM US LLP.
Innovation and technology will continue to play key roles in gaining a competitive advantage. However, contrary to the common perception that they are at the forefront of technology and innovation, U.S.-based manufacturers and distributors are lagging behind their non-U.S. competitors in their use of information technology. Overall, U.S. companies are primarily focused on simply maintaining operational and information technology capabilities instead of harnessing technology resources to drive innovation or transformational change. When it comes to IT security, no company is immune to unauthorized access to its data, and manufacturing is among the top targets. As such, manufacturers will need to ensure their IT security strategies remain effective for customer security and protection of intellectual property.
6. Policy issues
Understanding and preparing for the impact of new policies and regulatory issues will continue to be a priority for manufacturers and distributors, requiring companies to stay on top of information reporting requirements or risk being fined for non-compliance. From emissions rules issued by the Environmental Protection Agency to state labor statutes, tangible property regulations to the Trans Pacific Partnership Agreement, manufacturers will be under continued pressure to anticipate a regulatory and trade environment that seems to be in a constant state of flux. Just as important is current tax policy, which has a direct impact on a company’s investment and resource allocation plans.
7. Mergers and acquisitions
With cash and credit more readily available than in previous years, companies are looking with renewed interest at merger and acquisition opportunities as part of their growth strategies. But M&A activity may be challenging due to a shrinking base of attractive and reasonably priced companies and continued troubles in some key international markets. Deal prices are drifting higher and this will mean that buyers need to plan transactions carefully, from the identification of compatible candidates through due diligence to final integration. Some investors are looking downstream at smaller companies, which may carry more challenges. For those looking to sell, it will be important to have a strong management team in place and demonstrate consistent profitability to position their companies for such transactions.
Attracting a skilled workforce, balancing benefits and their costs, and training younger employees as older workers retire are among the continuing personnel challenges manufacturers are facing. Manufacturers will need to continue efforts to position the industry as an attractive career choice. The lack of skilled workers remains a challenge that is limiting growth. As a consequence, many firms are collaborating with local colleges, trade schools and high schools on training programs to attract and retain a skilled and younger workforce. The ever-more international mindset of manufacturers is reflected in their hiring plans, with increases in workforces being driven by the need to add employees outside their home countries. Federal policies also appear to be creating increased regulatory compliance issues and potentially new costs for some companies.
Overall, a thriving company must have a plan for all of these key issues; management must engage the entire organization in addressing the most significant matters. It may require an investment up front but, without a plan, an organization in this quickly changing business environment may not succeed.