In May 2020, just 34% of respondents to a National Association of Manufacturers (NAM) quarterly outlook survey expressed optimism about their companies' future. That finding, the lowest since the height of the Great Recession in 2009, reflected just how bleak 2020’s series of catastrophes looked to leaders in the manufacturing sector amid supply chain disruptions and sudden, crippling shelter-in-place orders that shut down factory floors.
But by the end of the year, nearly three in four respondents to NAM’s survey had regained their optimism in the outlook on manufacturing, perhaps believing their organizations were stronger for weathering 2020, or merely seeing the light at the end of the COVID tunnel. To be sure, the perseverance of many manufacturers has been remarkable, but industry leaders must make anticipated gains real despite continuing difficulties and new challenges as 2021 begins.
Supply chain problems persist, factory floor capacity remains diminished, consumer needs and spending patterns have changed, and the biggest factor—a once-in-a-century pandemic—remains a potent global force whose resurgence is uncertain and one whose remaining effects have yet to be realized.
We’re writing this manufacturing outlook to help the industry identify challenges and seize opportunities. We see a manufacturing sector where the leading companies will prepare for the unexpected, double down on resiliency, continue to support the health and wellbeing of employees, and accelerate their investing and advancement of Industry 4.0 initiatives. Fast-changing circumstances call for maximum agility and the ability to make strategic decisions in response to events. As always, it’s a story of technology, people, and process.
2020 was a year like no other: A global pandemic collided with simmering social unrest exacerbated by unemployment, economic recession, and political chaos. Add in devastating natural disasters like ravaging wildfires in California and a deluge of floods and tornadoes in the Midwest, and 2020 almost seemed out to prove the old maxim: Anything that can happen, will.
The pandemic hit manufacturing hard. One of the first shockwaves stemmed from government categorization of essential and non-essential businesses. Some manufacturers in the latter category were forced to completely shut down or drastically reduce production. Others deemed essential were stretched to the limit trying to keep up with demand. As the pandemic wore on, consumer needs and spending patterns also drastically changed, causing further disruption in manufacturing trends and response—some experiencing unprecedented demand and success, while others struggled to remain relevant.
Through the gauntlet, manufacturers rose to meet the challenge. Many were able to quickly implement PPE requirements to ensure the health and safety of employees who couldn’t work remotely. For employees who could work from home, management had to move quickly to establish new security protocols and employee operations. And, most critically for the nation, many factories were able to rapidly increase production or retool production lines to fill in the gaps in production for essential products and PPE supplies.
Despite some impressive success stories, we anticipate a challenging 2021, especially in the first half. While recovery is underway and there are glimmers of hope, several factors present obstacles and opportunities for manufacturers in 2021 and beyond:
While every manufacturer is dealing with different challenges, risks, and opportunities, those who powered through 2020 and continue to adapt and remain nimble will see the greatest success. Those who are still hesitating, or waiting for things to return to normal, may never fully recover and will certainly not remain relevant in a post-pandemic world.
The manufacturing sector has seen its share of choppy waters in the past, from the Great Recession to supply chain issues stemming from a prickly trade relationship between China and the United States. Still, after the events of 2020, manufacturers face a long road to recovery.
There are manufacturing trends that represent growth opportunities, including increasing demand for wireless and smart products, more interest in eco-friendly and sustainable production methods and sourcing, and an expansion of demand for new food, beverage, and life sciences categories.
But to act on them, sector leaders must get comfortable—if they aren’t already—with managing the fluid nature of COVID-19. Its effects will be with us for some time, a fact most are coming to realize. In our quarterly executive poll for Q1 2021, a majority of organizations conceded that they plan to be in recovery mode until mid to late 2021.
Of course, companies still must set priorities. Good management also remains crucial along with an inclusive environment that yields diversity of thought. A leadership team without sufficiently broad perspectives will have a difficult time envisioning seemingly unthinkable events.
Managing through uncertainty means building resiliency in systems, confidence with employees, and an agile decision-making process that can respond to changing events in real time.
While the emerging vaccines are promising, supply and distribution challenges and a lack of long-term data on effectiveness are stalling recovery efforts and challenging employers.
In the interim, manufacturers must continue to prioritize evolving health and safety measures required to protect employees and customers while balancing impacts to productivity, service levels, and operating costs.
Executives are grappling with challenging decisions around how, if, or when to get back to full, in-person capacity in the office and on the factory floor. In our latest quarterly executive poll, we found that employers are split on requiring employees to take a COVID-19 vaccine, and just 47% say their workforces will be on-site most or all of the time when it’s safe to return to work.
We believe manufacturers will plan to keep PPE protocols indefinitely, with procedures in place post-pandemic and delaying at least a calendar year the return of previous workplace norms. Many of our clients have stated they plan to keep COVID-19 procedures in place post-pandemic, especially during cold and flu season when they typically struggle with staffing challenges.
Manufacturers will continue to invest in technology to track and optimize their workforce, such as tracing tools to know who was in close contact with other individuals, and labor optimization tools to reduce the number of people on the shop floor while also accounting for those who are unable to come into work due to sickness.
A renewed focus on employee safety and wellness is likely here to stay. Manufacturing leaders will continue to invest in technology that prioritizes worker health and safety while maximizing speed, productivity, and service.
According to the IDC, by the end of 2021, 90% of all manufacturing supply chains will have invested in the technology and business process necessary for true resiliency, resulting in productivity improvements of 5%.
COVID-19 was particularly disruptive for manufacturers’ supply chains. From workers falling ill to dramatic changes in demand, manufacturers had to deal with putting out multiple supply chain fires, often all at once.
But since the pandemic shut down much of the economy a year ago, its impacts have generally stabilized. Ideally, businesses will have been able to use data and analytics capabilities to pinpoint the source of supply chain disruptions. If they haven’t already, organizations should explore supply chain tools (simulation, modeling, and prescriptive analytics) to help make decisions across their organizations amid the transition out of the pandemic and to future-proof themselves for the next disruptive event.
All manufacturers should have an eye toward a stronger focus on demand planning, forecasting, and supplier durability. Simulation and tabletop exercises for disaster planning should be reinvigorated and reprioritized. Planning for worst-case scenarios or unexpected events no longer seems dramatic; it’s this type of operational resiliency that can make the difference between surviving, thriving, or not making it out of the next crisis.
Even as COVID-19 further complicated successful digital transformations, it has been a catalytic event for many. Most notably, companies digitized many activities 20 to 25 times faster as a result of COVID-19. Additionally, manufacturers were prompted by the pandemic to move at faster speeds towards I4.0 capabilities as they adapted to workforce constraints, supplier constraints, and customer constraints.
This embrace of I4.0 technology in order to adapt should be acknowledged and celebrated. But it isn’t the end goal. Many are still in an experimental or early stage of deployment. For example, while 82% of manufacturers have either implemented, piloted, or considered IIoT, 70% have not moved past a pilot. In many cases, these efforts lack a clear business objective or measurable business case tied to an expected value.
2021 is the year to focus on maximizing the newfound momentum for building digital capabilities past the pilot stage to start driving real impact on the bottom line.
Investing in and properly implementing transformative digital tools and processes is an ongoing challenge. Those hit hardest by COVID-19 may think of themselves as least able to make long-term bets on tech, but they may have the most reason to do so.
Our recommendation is to accelerate the transformation already underway by leveraging manufacturers’ most valuable but underutilized assets: the data already produced by their operational technology. Doing so will be a benefit to optimizing revenue, expanding production capacity, reducing cost, and driving toward sustainability.
To increase revenue, improve operational efficiency, reduce costs, or respond to new customer needs, manufacturers must navigate through the complex and rapidly evolving array of technologies such as artificial intelligence, machine learning, visualization, simulation, blockchain, and 5G networks—and many more.
While large-scale I4.0 transformation utilizing all of these components may be the long-term goal, in the current environment many manufacturers must find a way to start small and build on initial successes. By focusing on ways to better use their abundance of existing data, manufacturers can leverage their existing assets and investments to accelerate transformation and generate near-term value without a huge investment or long-term initiative.
The good news is most manufacturers have already made significant investments in operational technology (OT) and software. This technology collects constant and unlimited volumes of data from manufacturing lines that can be leveraged to derive actionable insights and drive value if the proper analytical and operational layers are installed.
Manufacturers must prioritize where to invest their limited resources to achieve the greatest balance of benefits across people, operations, and customers. In order to do that, they must start with the business problem, not the technology.
The manufacturing sector is prone to high susceptibility to economic downturns. COVID-19 and the events of the last year have cast this problem in high relief. Manufacturers, particularly those producing expensive CapEx equipment and products, are struggling to take control of their revenue and relevancy.
The growing manufacturing trend of leveraging data from existing sensors and field reports can open pathways to new subscription models and other forms of recurring revenue to offset the impact of sales downturns. Michelin used this strategy to great effect when they transitioned from a company that simply sold tires to one that uses a product-as-a-service (PaaS) model to sell tires with embedded sensors as a full package of maintenance and performance.
Creating throughlines to product usage data will generate insights that can lead to the development of new revenue streams, potentially through the optimization of products or predictive maintenance, ultimately increasing customer satisfaction and retention.
If manufacturers don’t evolve their current business models to generate new and recurring revenue streams, they will continue to be susceptible to boom-or-bust market conditions. The time is now for transformation, moving away from one-time sales transactions and toward sustainable and recurring revenue streams, possibly even subscription-based models. This will lead to increased agility, decreased friction in sales, and decreased customer carrying costs.
In this uncertain and volatile economic and business environment, many manufacturers must take drastic actions to defend their market or financial positions and drive transformational change to remain relevant and competitive. This may include investing in new capabilities, acquiring or divesting assets, or transforming their businesses to thrive in a post-pandemic world.
According to the IDC, by 2022, 70% of consumer-facing manufacturers will leverage direct-to-consumer channels, producing up to 15% more profits, improved customer satisfaction, and business resiliency as a result of COVID-19.
Manufacturers should embrace planning for significant shifts in strategy by focusing on capabilities that help them learn more about their customers, refine segments and personas, and develop specialized e-commerce offerings to achieve organic sales growth.
If they haven’t done so, now is the time to focus on using or collecting the data necessary to identify the most profitable customer segments—as well as segments that are ripe for retention or clusters that should be allowed to move through an attrition cycle.
Before COVID-19, many of the manufacturers we work with had planned to continue the trend toward optimizing digital connectivity between front-end (CRM, CPQ, and eCommerce) and back-end (ERP) systems. These efforts involve automating aspects of the middle office and modernizing their systems to provide necessary data points for sales and order entry teams.
These plans should not fall by the wayside. Rather, they ought to be a top priority for 2021. Integrating front- and back-office systems will lay the necessary groundwork for scalable growth through digital sales channels by standardizing data across the organization.
The importance of clean, consistent, and standardized data cannot be understated as a prerequisite for any scalable e-commerce strategy. With the continued emergence of e-commerce as a viable revenue source for manufacturers, many are identifying challenges related to synchronizing product master data across systems, especially as it relates to product content management such as product brochures, marketing materials, website content, POS systems, and other e-commerce platforms.
A key opportunity for any manufacturer is to assess the current state of product master data and the fidelity with which that data is managed and distributed across other internal systems. Clean and consistent data relating to products across platforms facilitates the ability to more easily stand up and update e-commerce, CPQ, and order entry systems from a single source of truth. Inefficiencies and poor compatibility of existing systems can lead to inconsistent data sets that are required for organizations to make the shift towards AI/ML based pricing models.
M&A activity is heating up across all sectors, and we expect to see it as a rising trend for manufacturing, too. According to our quarterly executive poll, 43% are strongly considering M&A in the next 6-18 months.
One reason is that there will be more manufacturers who have not fared well due to the pandemic and will require infusions of cash or will seek exit strategies. While some distressed companies will be forced to find exit strategies, for others—especially ones with strong balance sheets—there will be real opportunities to make targeted, strategic acquisitions that can help them build out desired capabilities, open new revenue streams to important perspective customer bases, or acquire technologies and/or talent to further advance their growth goals.
But the world of M&A moves a little faster than some manufacturers are used to. Most deals are expected to close in a matter of weeks. When considering acquiring another company, be aware that deals are often extremely competitive, especially when they involve investment bankers courting multiple buyers. This competition can drive the price up, so the business case for the decision must be airtight.
There are other considerations, too. Limited access and information—especially during COVID-19 when in-person meetings and assessments may not be possible—make the evaluation process more difficult. It’s important to know which metrics, KPIs, and other analytics are relevant, as well as an understanding of which areas of the business deserve focus and which are simply noise. Leveraging third-party partners can prove beneficial here. Also, a clear investment thesis that states why you are doing the deal and what you hope to get from it will aid in the diligence process and significantly reduce risks.
There are real risks involved in M&A, and it should not be entered into lightly. A fast-moving deal process with limited information and metrics might have harmful effects on value realization, organizational and technology operations, and even lead to the inheritance of cybersecurity vulnerabilities.
Despite these challenges, M&A is a compelling avenue to acquire new talent, add new capabilities and services/products, open new markets, and diversify revenue channels and supply chains—all of which could help organizations increase resiliency and hedge against an uncertain future.
The creative destruction forces of the market have been cranked up to an all-time high. The Volatility Index, a real-time market index sometimes called the “Fear Index” is almost double what it was during the current crisis than it was at its previous high point in 2008.
To survive—let alone thrive—manufacturers must keep pushing for more innovation, growth, and agility. Transformation, with digital underpinnings, is required to achieve rapid, sustainable, step-change improvement in business performance.
The focus needs to be on enterprise-wide value creation efforts that improve shareholder value, which can include expansion into new markets, improving products to meet market demand, enhancing customer satisfaction, or driving efficiencies internally. Aligned transformational efforts drive growth and fuel an organization’s competitive edge.
Transformation is a team sport. The types of seismic strategic shifts can’t be led just by a small digital or technology team within a larger organization. Impactful and aligned leadership from the CEO, C-suite, and board of directors is required to ensure enterprise value is realized and that priorities are set top-down and company-wide. Having a dedicated team managing the ongoing enterprise-wide value plan is critical for sustained transformational results.
To help our clients succeed with transformational efforts, we recognize that digital technology solutions need to be a part of the broader business strategy conversation with the senior-most corporate leaders. We help our clients bake digital transformation priorities into the core, DNA-level of their company so that a commitment to digital enablement and growth are diffused throughout the wider culture.
Where to start? We suggest identifying the most critical business problems facing the company—whether operational, cultural, or growth challenges. Just as important as the problems to be solved, leaders need to be able to articulate the vision of where they want to go. Without a cohesive vision for the future, few will be successful at integrating the digital capabilities, acquiring the key talent, and implementing the data-driven decision making needed to stay relevant and competitive in a fast-moving, disruption-prone business environment.
It felt like the curveballs would never stop coming last year. But manufacturers have come out on the other side better positioned to achieve new levels of growth.
There were many new lessons to learn from 2020’s upheaval, but in some ways the turmoil simply reinforced old, timeless wisdom. While we may not be able to predict the exact events of the future, we know they’ll be unpredictable. We can plan for that.
Managing uncertainty, building resiliency, adopting targeted transformative technologies, and achieving new levels of growth are the key trends for manufacturers to sustain and succeed in 2021 and beyond.
We are optimistic that manufacturers, prompted to action over the past year by necessity, are ready to meet the challenges ahead.
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