The manufacturing, automotive, and energy sectors are currently battling tremendous challenges as they respond to the unfolding COVID-19 crisis globally. Manufacturers are responding to extreme changes in normal product demand as well as their internal fulfillment capability impacted by operational and supply chain disruptions.
Critical to an effective response is the ability to understand the near-term demand picture, respond to supply shortfalls for components and commodities and ensure that operations and staffing levels are right-sized for the current environment.
Manufacturers are naturally trying to understand these challenges and the potential impact on their businesses. Longer-term, these same business leaders will be preparing for an altered economic climate.
Each manufacturer’s response will be different, but the following topics are themes consistent across the manufacturing landscape:
The first thing that manufacturers will need to organize is its resources. Cash preservation and access to liquidity facilities (lines of credit) will be a top concern of manufacturing executives as demand remains volatile, supply chains remain uncertain and revenue recognition is strained due to production and logistics challenges.
Many companies may be facing payments or maturity on debt facilities in the near term that will increase the risk of credit defaults and potential bankruptcy. On top of this, variable costs such as salary, advertising, travel and entertainment, R&D and non-business critical expenditures must come under increased scrutiny as cash preservation becomes paramount.
As manufacturers begin to face financial challenges, near-term furloughs and layoffs become a concern for shop floor and operational workers and large portions of the knowledge worker community.
Additionally, many manufacturers have not anticipated remote work to this extent - this includes implementing a remote work infrastructure that both minimizes workforce disruption and justifies labor costs while also focusing on re-skilling existing workers for the next generation of manufacturing.
With staffing challenges, both internally and across the industry, come procedural challenges and material shortages across the entire value chain and will ultimately impact deliveries to dealers, distributors, and end customers. We can expect the mid- to longer-term response will include increased investment in flexible sourcing strategies, in-region sourcing, and the exploration of more flexible manufacturing operations (agile lines, contract staffing, additive manufacturing (such as 3D printing), near-net forgings, etc. The power of flexibility in operations is being surfaced - for example, one collaboration has started 3D printing respirator valves for hospitals in Italy due to COVID-19-induced shortages.
As expected, formal product launches may be delayed, rescheduled, or canceled because of staffing difficulties or large gathering restrictions. Additionally, existing business units may become insolvent or no longer value-add. This will accelerate divestiture decision-making. Conversely, opportunities will arise for certain industry players to acquire competitors and other related businesses at attractive prices.
Diversified business models and revenue streams will receive increased thought and accelerated execution as core product production and delivery methods experience softness. For example, we may see a shift in after-sales services and advanced services involving pay-per-use and integrated solutions.
Crisis situations like this present an opportunity for change - but in the short term, many organizations will be focused on keeping business operations running.
Some important immediate steps that manufacturers should consider making to improve information flow and respond to challenges in a timely manner:
As the immediate crisis subsides, manufacturers will be focused on getting all operations back to normal as fast as possible and an understanding of customer volume and pricing commitments and alignment of operations will be the top priority. Successfully navigating this moment requires agility and responsiveness across the entire value chain.
In prior downturns, companies that invested in customer-facing technologies were able to accelerate profit growth at an accelerated rate versus their peers. In a Bain & Company study key investments in sales, customer/channel, and marketing technologies were integral to maintaining margins both during and after an economic recession (14 percentage point higher growth in nominal EBIT).
How companies respond and strategize will ultimately decide their post-crisis success. Those that choose to lean on technology to help streamline operational efficiency and plan for long-term success will find it. Those that respond reactively, rely on preexisting infrastructure and refuse to take risks will ultimately fall behind.
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