As the COVID-19 pandemic persists, manufacturers continue to face significant disruptions due to supply chain and workforce challenges. In its fourth quarter Manufacturers’ Outlook Survey, the National Association of Manufacturers (NAM) found that manufacturers are optimistic regarding their company outlook (86.8%); however, this optimism has declined since the second quarter of 2021, likely due to these ongoing disruptions.
Supply Chain Delays Persist
According to the survey, nearly 85% of responding manufacturing companies reported that they continue to contend with disruption from their supply chains. Nearly 54% expect these disruptions to resolve in 2022, although 28% believe they will linger into 2023 or later.
Manufacturers are challenged not only by struggles to obtain goods on a timely basis but also by rising costs. As a result, manufacturers may be forced to increase their prices in 2022. For some, especially small and medium-sized manufacturers, the process of increasing prices can be challenging. Despite current inflation being well-known and highly-publicized, many companies require suppliers to follow a price increase process that can be burdensome and time-consuming, leaving many manufacturers financing increases in input costs until sales price increases can be passed.
To address supply chain disruptions, surveyed manufacturers reported finding secondary suppliers, increasing inventories, reshoring production, and exploring alternatives to sourcing, production, or transportation.
Workforce Challenges Remain
In addition to supply chain woes, manufacturers continue to face workforce challenges, specifically the ability to attract and retain a qualified workforce. The Manufacturers’ Outlook Survey notes that nearly 83% of responding manufacturers are experiencing shortages in quality labor availability, with over 85% of respondents reporting unfilled positions at the time of the survey.
Manufacturers continue to seek ways to improve employee attraction and retention by increasing compensation, developing or modifying internal training programs, working with educational institutions on certification programs, pursuing temporary employees by using staffing services, and encouraging potential retirees to delay inevitable retirement.
Balancing Lean and Resilience
As manufacturers begin a new year, they should continue to take actions that mitigate supply chain disruptions and workforce challenges. These actions may include short-term actions that “fire-fight”, or extinguish an immediate problem, as well as longer-term strategic actions that can build the resiliency of the company. Manufacturers should consider that due to the unprecedented pandemic and extensiveness of its impact, no action is likely to completely resolve these issues. In fact, the emergence of new COVID-19 variants could further threaten manufacturers’ abilities to quickly overcome these issues. Therefore, ongoing active management of these situations will continue to be critical.
Consider the following actions:
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- Determine what challenges are most critical to resolve. Surveyed manufacturers indicated that they have a growing number of late deliveries to customers, lost current and future revenue opportunities, and delayed capital expenditures, likely prolonging needed upgrades or adoptions of technology that could help to resolve issues or increase competitiveness.
Every manufacturer should understand and identify its greatest challenges and focus its mitigation efforts on resolving or reducing the impact of those challenges.
- Analyze your supply chain to identify deficiencies including in geographic location, capability, or limited duplication. For instance, if a source and the alternative source are both located in the same geographic location, a severe weather event could affect both companies’ abilities to supply. Similarly, if two of a manufacturers’ direct suppliers share a supplier (supplier A), the resiliency in the supply chain is reduced since supplier A’s ability to supply affects both of the manufacturer’s direct suppliers.
- Carefully review your inventory:
- Given supply chain disruptions, are safety stocks and reordering points appropriate for each given inventory item?
- Continue reviews for potential obsolescence or spoilage, but ensure that those reviews identify the reason for the obsolescence or spoilage. Can these goods, especially obsolete goods, be repurposed?
- Do you have similar goods that can be consolidated? For instance, if a custom raw material is used for a specific product, is that custom raw material truly required, or can it be consolidated with a more readily available raw material? This process can relieve potential inventory issues as well as increase purchasing power, which can, in turn, lower input costs.
- Consider your financing options. With popular programs such as Paycheck Protection Program and Employee Retention Credit ending, manufacturers should consider their cash availability. Given the potential need for higher levels of inventory, increasing raw material and employee costs, and any delays associated with passing price increases, companies should ensure that their cash levels are sufficient to support ongoing business needs.
- Just-in-time manufacturing and lean manufacturing have been touted as manufacturing best practices due to the potential for realizing reduced costs.
However, companies running highly effective, just-in-time or otherwise lean practices are some of the companies most heavily impacted by the pandemic. To ensure your manufacturing operation can operate efficiently, effectively, and most profitably, executive management should use discretion in balancing lean practices with the ongoing need for resilience. Continue to review policies, procedures, and strategies to ensure that your actions align with the company’s ongoing mission and financial goals.
To read the entire fourth quarter Manufacturers’ Outlook Survey, visit the National Association of Manufacturers’ website at https://www.nam.org/2021-4th-quarter-manufacturers-outlook-survey/. To discuss challenges facing the manufacturing industry or options to work through these challenges, contact a member of HBK Manufacturing Solutions at manufacturing@hbkcpa.com or 330-758-8613.
