Uncertainty or Opportunity? Four Priorities for Manufacturers in 2013
|Update 7/8/2013: In July 2013, the Obama administration announced the employer mandate provision of the ACA would be delayed one year and not take effect until January 1, 2015.|
Uncertainty or Opportunity? Four Priorities for Manufacturers in 2013
Between the European debt crisis, the fiscal cliff, and raging debates in Washington over regulatory and fiscal policy, watching the drama unfold around the world can become a full-time pre-occupation. Given those uncertainties, it is understandable when business owners and leaders adopt a “wait and see” approach before taking decisive action. However, we believe this period of uncertainty is creating opportunities for proactive leaders, and that now is the time to make sure your business is poised to take advantage.
In periods of uncertainty, flexibility is the key to profitability and sustainability. While now may not be the time to make major bets or capital investments, there are four actions manufacturers can take today to create the flexibility and profitability that will fuel tomorrow’s growth:
- Create a stretch plan
- Control what you can
- Get close to the customer
- Protect profitability
Create a stretch plan
Even in a stable market, shifts in a supply chain (e.g., supplier consolidation) can create significant increases or decreases in revenue for a small- to medium-sized manufacturer. These shifts can be a tremendous opportunity for a flexible and responsive supplier, or they may threaten the very existence of the supplier who is losing the business. In a volatile and uncertain economy, these shifts become more commonplace.
Whatever your budget is for 2013, test your ability to respond to either significant increases or decreases in demand by creating a plus 20 percent / minus 20 percent revenue plan. This exercise should be much more than a financial budget. It should engage operations and sales personnel to challenge how the company can respond to volatility in a flexible and profitable way.
The plus 20 percent plan will test your ability to scale operations without proportionate capacity or working capital investments (while maintaining the responsiveness you have today). The minus 20 percent plan will test your ability to sustain a significant revenue loss as you scale your capacity and cost structure accordingly to maintain profitability.
The stretch plan exercise is a great way to identify areas of inflexibility that can be addressed proactively. Making these changes today will improve current profitability and performance, and significantly reduce the stress and anxiety experienced by employees when there is an unexpected upturn or downturn in business.
Control what you can
The stretch plan exercise can help you identify opportunities to improve your business. Now the key is taking control and making the improvements happen. The strongest manufacturers have a healthy sense of discontent that fuels a continuous improvement culture and sets their performance apart from their competitors.
Here are a few areas of focus that will create an immediate competitive advantage:
Reduce promised lead time — Attack any process that impacts your ability to be responsive to the customer without having to carry additional inventory as a buffer.
Reduce working capital — High working capital levels (especially inventory) are a sign of inflexibility or inefficiency. Reduce them and liberate the cash for other investment.
Manage concentrations — Every manufacturer has them. Concentrations come in many forms, and include industries, customers, products, technologies, and suppliers. Although these concentrations may seem to be a positive approach to growth, they can also create unhealthy dependencies that reduce options during major market shifts, and reduce business value in the eyes of a buyer. For example, the manufacturer that concentrates almost exclusively on producing specific parts for a single manufacturer will have a lower perceived value than one that is diversified in its capabilities and customers. Identify your concentrations and create a plan to reduce them over time.
Re-examine benefits — Beginning in 2014, health insurance exchanges will allow millions of individuals and small employers to access and compare insurance plans. These exchanges are also central to determining whether individuals are eligible for Medicaid or premium tax credits to assist in purchasing health insurance coverage. Also in 2014, employers with 50 or more full-time equivalent employees become subject to penalties if they fail to comply with the Affordable Care Act (ACA). However, in some cases, the total cost of these penalties may be less than the total cost of providing coverage.
Get close to the customer
Every day, supply chains are shifting and consolidating, and global markets represent some of the best growth opportunities available. A dynamic environment like this requires every manufacturer to maintain close and regular contact with customers to understand where the customer is headed and how to stay relevant as a supplier. During major market or supply chain shifts, lack of communication is a business-relationship killer.
Do you understand why your customers do business with you? Do you understand the mid- to longer-term plans your customers have for growth, product development, or global expansion? The answers to these questions are opportunities to deepen customer relationships and anticipate where the customer is going so you can be there to support them.
This is a tough one for business owners. Protecting profitability feels selfish — especially at a time like this. However, ignoring low profitability or attempting to grow your way out of a profitability problem in our current economy can be a dangerous game with potentially fatal consequences.
Profitability creates the capital that is the fuel for future growth, expansion, or reserves during market downturns. The good news is that for many small- to medium-sized manufacturers, the majority of profitability problems are self-inflicted issues that are well within the control of the business owner. Understanding these issues is the first step in correcting the problem.
Profitability is a choice — even in a tough economy. If you’re struggling with this issue and can’t seem to get ahead, you may benefit from an outside perspective. Ignoring the problem will only make it worse.
Despite the uncertain times, leading manufacturers are focusing on matters within their control to improve their flexibility and responsiveness to changing market demands. Business owners who concentrate on the four priorities outlined here can make short- and long-term decisions to build a healthy and sustainable business, regardless of the economic and tax climate. When the environment stabilizes and the economy improves, they will be well-positioned for growth.
Erik Skie, Manufacturing and Distribution Managing Partner
email@example.com or 847-597-1840