Memo to manufacturers: What are your priorities for 2018?
INSIGHT ARTICLE |
Last year, I asked manufacturers what they were going to do differently in 2017. I was interested in knowing how they were going to leverage technology, manage inventory and supply chains, address commodity hedging, invest in innovation and manage the sales process—but in ways that were aimed to enhance the effectiveness of these challenges.
As we look forward to 2018, it’s encouraging to see continued strength in the U.S. economy, along with improvement in emerging and European markets. Employment levels are very strong in spite of a long-term challenge of managing labor shortages that the middle market is facing. Washington appears focused on regulatory reform and enacting the most significant tax changes in 30 years. Interest rates remain low but the costs of business acquisitions are rising, but there is plenty of funding to buy fundamentally strong companies. Revenues have been increasing, but the primary focus has remained on driving incremental increases in profitability and cash flows (often described in terms of EBITDA).
In spite of these strengths, challenges and issues remain that middle market manufacturers need to address if they are to grow and retain their share of the market:
- Innovation: The pace of change is growing more rapid as technology is continually evolving. New and innovative products can become old very quickly and companies cannot afford to be complacent. Management must establish realistic R&D budgets; collaborate with customers to develop products and services their customers really need; consider partnerships with non-traditional partners (as auto OEMs and suppliers have done with technology companies); and think about acquisitions to expand product offerings, geographic footprints or customers.
- Technology: Technology is far more than capturing data or creating a new way to reach new customers. Manufacturers must develop a plan that analyzes and adjusts to the impact of technology, and how customers do business with them. Massive amounts of data are being created through customer interfaces, manufacturing processes and the delivery of goods. By harnessing this data in real time, companies are improving their product mix and increasing margins. A holistic, company-wide approach to technology is needed to drive performance and make investments in the right areas. It’s not easy and may require the help of specialists. But not taking a comprehensive approach to technology may have negative consequences for the long-term value of the business.
- Revenue growth: We recently posted key questions companies should answer as they look for new sources of revenue. These questions are designed to help a company develop a sales approach that is focused, forward-looking and invested in the right areas. We see opportunities for continued sales growth, but sustained growth requires planning and discipline. The process starts with an analysis of data and profitability by product, getting feedback from customers and helping them solve their problems.
- Acquisition integration: From our 2017 research as well as the number of transactions in the manufacturing industry overall, we have seen an increase in companies making acquisitions to expand their product portfolio or expand into new territories. We expect this trend to continue. Companies are generally performing well, with EBITDA growth in excess of revenue growth. In order to drive significant value, a company must increase its revenues, and the most efficient method may be to buy a lower-performing entity, either one that is closely held or a carve-out of a non-core subsidiary. If properly integrated, a company can ultimately bring more value to its customers as well as to its owners. For those looking at acquisitions, performing detailed and focused operatinal due diligence is critical to ensuring an investment achieves its expected returns and to avoiding surprises after the deal closes. While not easy or inexpensive, preparing for and integrating an acquisition’s operations, systems, customer relationship management and product portfolios can deliver stronger returns.
- Supply chain management: The term “supply chain” can mean different things to different companies. In an ideal world, a company is in control of its material sourcing and delivery, production process management, inventory movement, warehouse and facility design, product shipment, and inventory management. Many companies are looking at their footprint to ensure they are close to their customers and their suppliers to reduce costs, lower inventories and drive customer engagement. The “reshoring” trend of the past five years has shown that it’s worth examining bringing offshore operations back into the United States.
- International plans: There are many signs that navigating the worldwide economy is a challenge, but history shows that our economy and its major sectors run in cycles. When business improves in certain parts of the world, is your company ready to reap the rewards? As global markets expand and grow, we think companies should look at their options. With a strong U.S. dollar, exports may not be the best option and the country’s trade deals may or may not support a company’s desire to simply sell abroad. Global expansion through acquisitions has its pitfalls, but it can be the key to faster growth. We are also seeing some companies slowly increasing foreign activities to tap into those new markets. Now might be a good time for a formal examination of international opportunities, even if you ultimately conclude not to undertake such a move. Through this process, you will be better prepared when you are ready to realize the opportunities that exist and to respond effectively when uncertainties arise.
- Risk management: While the largest companies have a very formal enterprise risk management process, we see more middle market companies engaging in a formal risk management process. Senior management, in conjunction with the board of directors or outside advisors, should annually identify the key risks to the business and develop solutions. If there are key suppliers, are you working with both of them to ensure continuity of product? If labor is an issue, what is your long-term strategy to address the problem? Technology-related risks, even for manufacturers, are a reality and must be addressed by skilled team members or advisors. Our research shows that middle market companies are starting to invest in a risk management process and then update them annually.
We wish you all the best as you navigate 2018 and realize the opportunities in front of your organization.
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