Three strategies for manufacturers to thrive in 2024
From rising interest rates to increased material costs to ongoing labor challenges, manufacturers have faced a difficult year. This barrage of challenges is causing industry optimism to dip.
In June the Sikich Industry Pulse: Manufacturing and Distribution found that 57% of manufacturers rated their optimism about business prospects over the next six months at a seven or lower on a scale of one to 10. In a new report Sikich is launching later this year, optimism has decreased. Now, 64% of survey respondents rated their optimism a seven or lower. (Stay tuned for the full report to learn more.)
One of the biggest difficulties with the current economic climate is that manufacturers must invest in talent and continue to prioritize the raw materials necessary to meet customer demand. Yet facing a potential recession and decades-high interest rates, companies may need to cut back on capital spending. Fortunately, there are three strategies that manufacturers can prioritize to not only survive this economic climate but also set their companies up for long-term success.
Navigate through the downturn
Managing spending and reducing debt will be key to successfully navigating the current economic climate and rising interest rates. One way business leaders can improve working capital is by accelerating collections and slowing payments on payables where possible.
Manufacturers can also cut down on costs by reducing their spend on raw materials where possible to maintain cash levels. Raw materials have dramatically increased in cost over the past year; business leaders should look for alternative sources and work with multiple vendors to better compare and negotiate costs.
Further, manufacturers should look to key performance indicators to benchmark their activities against competitors and other organizations.
By looking at KPI data on profit margins, return on sales and more, executives can understand how they compare to other organizations. This comparison can help them prioritize spending -- focusing on where they need to improve and cutting back on other areas. Industry and trade organizations are often a good place to start when looking for KPI data.
Grow the top line
In addition to cutting spending, manufacturers must prioritize growth to improve profits and reduce debt. Just as the manufacturing industry is cutting back, rising interest rates are causing business and consumers across the board to decrease spending. Therefore, to maintain demand, manufacturers must look for growth opportunities.
One way manufacturers can reach new consumers is by exporting their products and selling to markets outside of the United States. The U.S. Department of Commerce is a valuable resource to help manufacturers expand geographies. Manufacturers can work with the Department of Commerce to do market research, weigh the costs to export to various geographies, and identify the locations with the greatest opportunities.
Manage labor costs with automation
The labor shortage has been an ongoing challenge for manufacturers with no end in sight. And, while the current economy is forcing business leaders to delay hiring, manufacturers still must maintain the production necessary to meet customer demand. To maintain production and reduce labor costs, manufacturers should look to automation. There are many low-cost, easy-to-implement tools that allow businesses to automate repetitive activities and redeploy existing talent to higher value activities.
Additionally, automation can be a solution for manufacturers struggling to fill high-skill positions. Robotics are often a cheaper alternative to expensive, difficult-to-source positions, and they require little downtime or training.
Make strategic investments
While it is a challenging time economically, there are simple steps manufacturers can take to set themselves up for success. Managing costs is imperative to short-term success, but manufacturers must also make strategic investments when it comes to long-term success -- such as selling into new markets and implementing automation to improve profits and reduce costs over time.
Grants and local incentives can ease the burden of investment so that manufacturers can implement these high-priority initiatives. For example, Cook County Manufacturing Reinvented is offering grants for manufacturers looking to improve production, grow sales, boost their workforce or develop future leadership. And the Illinois Manufacturing Excellence Center is offering McHenry County manufacturers fully funded projects that provide technical assistance and training programs to rebound from the pandemic, reinvent to be more globally competitive, and become more resilient to future economic and societal shocks.
Additionally, the R&D credit -- which is a tax credit for companies that have invested in the design, development or improvement of products, processes, techniques, formulas or software -- can provide financial support to manufacturers investing in their products.
The manufacturers that focus on cutting costs and making strategic investments to support long-term growth will be set up to thrive in the coming year.
• Jerald M. Murphy, CPA, CMA, CGMA, has more than 30 years of experience providing accounting services and serves as the industry vertical leader of Sikich's Manufacturing and Distribution Services practice. Contact him at Jerry.Murphy@sikich.com.