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Discovering the Keys to U.S. Manufacturing Recovery

Geoff Giordano
By Geoff Giordano Contributing Editor, SME Media

The COVID-19 pandemic clearly proved challenging to the manufacturing industry in myriad ways. As shutdowns began clamping down on all activities in March 2020, issues with supply chains, automation, worker safety and productivity with more personnel working remotely leapt to the fore.

Now, as nations and industries begin to navigate their way forward as restrictions are lifted, manufacturers have an opportunity to put into practice some lessons learned.

A Deloitte post-election poll of manufacturing executives found that 76 percent intend to increase investments in digital initiatives and plan to pilot and implement more Industry 4.0 technologies.

To be clear, the past 18 months or so weren’t filled with just bad news. Medical and other manufacturers turned on a dime to begin producing copious amounts of personal protective equipment for health-care workers and employees in other industries deemed essential. Companies embraced more online training and sales interactions and rolled out enhanced websites to engage with customers. Some automation companies reported having ample product in their pipeline and were still able to fulfill orders while seeing automation projects prioritized.

So, how is the U.S. poised to recover its manufacturing mojo in the near term? How can brand owners, OEMs and suppliers across the value chain forge ahead smarter? Part of the answer is to build back slowly and steadily while rethinking the integral role of automation, communication and even location.

The Big Picture

In the near term, the U.S. manufacturing outlook into 2022 is positive, said Brian Beaulieu, CEO of ITR Economics, Manchester, N.H.

“The leading indicators are strongly positive, and consumers have a lot of money at their disposal,” Beaulieu explained. “Business confidence is rising, and corporations are experiencing a stimulus-related liquidity surge.”

However, he cautioned, “The magnitude of rise coming out from the depths of the pandemic recession can’t be sustained through 2022. The rate of rise will slow. But the indices that reflect macroeconomic manufacturing will rise, albeit with seasonal variations to the trend.”

Clearly, ITR’s pre-pandemic forecasts were “mostly mooted by the magnitude of the natural disaster,” he added. “However, when we were in the early days of the pandemic —from March 15 through March 28 when the stock market was cascading downward and governors were shutting down parts of their states—we altered course.” Weighing data from December 2019 to February 2020 in eight “headline” categories, ITR logged 92.8 percent or greater forecast accuracy across the board before the weight of the pandemic began to be felt at its fullest.

For this year, he continued, “Our forecasts in many cases needed to be raised because of the sheer magnitude of the fiscal and monetary stimulus resulting from the pandemic. We seem to be on track now, having seen the stimulus plans more totally and being able to dial in their probable impact. The stimulus has also caused us to rethink and lower our expectations for the middle of this decade because of the intermediate to longer-term consequences of governmental actions.”

The defense industry leveraged efficient coordination across supply chains during the pandemic, accelerating about $5 billion in government progress payments through to smaller suppliers. Those waivers were granted to keep production sites open, according to McKinsey and Company.

Not surprisingly, faring best were “industries and companies that were designated essential; that catered to medical and food needs (grocery stores, etc.); that foresaw critical component issues before others; could flex to a remote work force for office staff; provided flexibility and pay protection; and more recently have raised wages while passing through price increases.”

Beaulieu is particularly excited by the prospects of re-imagined supply chains. “The trends of onshoring, near sourcing, and shortening of supply chains are very real and provide opportunities going forward beyond those of normal business cycle recovery.”

In terms of protecting the workforce, Beaulieu noted that “we saw manufacturers be generous with safety, flexibility where possible and stipends to encourage the workforce to enter facilities.”

That said, increased automation “was a non-issue through most of the pandemic. It is in the pandemic’s aftermath and the tight labor markets that we are seeing capital expenditures, including automation, ramping up. ITR Economics for years has advocated the necessity of obviating labor input by bringing in new equipment. Some of the most successful companies are going to be the ones that did just that.” This will mean continued exploration and incorporation of artificial intelligence (AI), machining learning and equipment that is “increasingly able to stand on the line with humans.”

Looking Back And Forward

In assessing the manufacturing fallout from the pandemic while outlining a path forward, Deloitte’s “2021 Manufacturing Industry Outlook” report noted that “Manufacturers seek to be disruption-proof.”

For 2020-21, Deloitte projected a decline in annual manufacturing GDP growth levels, forecasting minus 6.3 percent growth for 2020 and 3.5 percent growth for 2021 based on the Oxford Economic Model.

Furthermore, the report noted the negative effects of global shutdowns on U.S. manufacturing, including:

U.S. industrial production fell 16.5 percent year over year.

U.S. total factory orders fell 22.7 percent year over year.

Total industrial capacity utilization grew to 74.5 percent in December 2020 from 64.1 percent in April, lagging the 77 percent pre-pandemic level.

The U.S. Industrial Production Index stood at 105.7 percent in December 2020, down from a pre-pandemic level of 110.

Source: U.S. Bureau of Economic Analysis; U.S. Bureau of Labor Statistics; McKinsey Global Institute analysis. (Provided by McKinsey & Company)

“Production and order levels are still below 2019 levels,” the report indicated, “but the trajectory of the decline has slowed.” Notably, 63 percent of the more than 350 executives and other senior leaders polled by Deloitte after the presidential election “are showing a somewhat or very positive outlook on business.”

Deloitte named four critical aspects for manufacturers to master in their drive to recovery:

Solving forecasting challenges. “The events of 2020 may be a warning to develop better systems for navigating disruptions,” the report advised.

Extensive use of “digital twins”—virtual representations of products, processes and production environments—to simulate their performance in the real world.

Expanding supply options to reduce exposure to trade and other disruptions.

“Upskilling” employees for maximum workforce flexibility to weather upheavals.

To those ends, Deloitte’s post-election poll of manufacturing executives found:

76 percent intend to increase investments in digital initiatives and plan to pilot and implement more Industry 4.0 technologies.

20 percent cite managing productivity as their top challenge in the present situation.

44 percent plan to shift more to a regional supply chain model in the coming year.

31 percent plan to nearshore some part of their production back to the Americas.

28 percent said upskilling and building new skills to match evolving work environments—particularly those emphasizing automation, digital solutions and remote work arrangements—are the top challenges.

“Before the pandemic hit, we were tracking along as a manufacturing sector working to retain the momentum that we had built over the last decade that had slid a little bit in 2019,” said Deloitte’s Paul Wellener, U.S. sector leader for industrial products and construction. “And at the beginning of 2020, it started to look like things were getting better—particularly in certain segments. … But looking ahead to 2021 and beyond, the recovery may take longer to reach those pre-pandemic levels, particularly in some of the … harder-hit sub-sectors.”

Some of the hardest hit parts of the industry are connected to commercial aerospace, oil and gas and other extraction industries, and some heavy equipment providers, Wellener added. Other parts of the marketplace are “almost booming” —particularly those making products like home furnishings, paint supplies, outdoor power equipment, fitness equipment and “anything to do with sanitization. … We like to joke (that) a number of things have become the new toilet paper.”

Demand also surged for air filtration systems for restaurants, hotels and office spaces, he continued, “and I think we’re anticipating some very strong demand for things like industrial freezer units as we think about how we transport future vaccination vials.”

Regarding digital twins, Wellener explained some of the benefits from investing in them. Digital twins can prove fruitful for anything from product development to an engineering construction or manufacturing environment, he noted. Investment in digital twin capability can help get products to market faster and help understand “as-built environments” in such operations as power plants or automotive assembly lines. “It gives you a good opportunity to understand how those facilities were put together, and then you can lay out the insides of them in a more productive fashion.”

According to McKinsey & Company, supply chain disruption losses equal 42 percent of one year’s earning before interest, taxes, depreciation and amortization on average over a decade.  (Provided by McKinsey & Company)

With the COVID-19 pandemic exacerbating the workforce shortage and skills gap, Wellener asserted that the changes in store for the post-pandemic workforce and workplace will be unprecedented.

“I have not talked to a CEO of an industrial products or manufacturing company that thinks things are going to go back to the way they were in 2018 or 2019. Everybody is focused on what the future of work looks like, inside the four walls of their factories and inside the four walls of their headquarters facilities.” The so-called “talent ecosystem” will evolve to include more trade organizations, community colleges and different categories of workers not necessarily in proximity to the businesses they serve, he said.

Meanwhile, according to data from the Institute for Supply Management (reported by EPS News in a Jan. 27 article), U.S. manufacturing growth was expected to continue through this year, building on momentum from last summer. Specifically, ISM projected:

6.9 percent net increase in revenues, with growth in 15 the 18 sectors ISM tracks. ISM also noted that 59 percent of purchasing and supply executives it polled expected revenue growth this year.

2.5 increase in manufacturing jobs.

2.7 increase in manufacturing wages and benefits.

2.4 increase in CAPEX investments over 2020.

A Moving Target

Keeping tabs on winners and losers during the pandemic was a daunting task. So, too, will be reassessing how to do business as the manufacturing world necessarily remakes itself in some key areas like supply chain management and communication across the value chain.

“We saw through the pandemic that it was really hard to generalize how people were doing,” said Dan Swan, managing partner of McKinsey and Company’s Stamford, Conn., office and leader of the firm’s manufacturing supply chain work globally. “It was very industry-specific; if you had a company that made machining products, they had their plant manager at the back of the gate of the manufacturing facility trying to stop supplier trucks arriving last spring because if the supplier inbound materials were delivered, then they owned them and had to pay for them.”

In other industries, “it was the opposite,” Swan continued. “I have a client that makes toilet paper, and they literally could not make enough of it. What happened through the pandemic was a series of ebbs and flows.” In another case of a consumer durables company that makes items sold through a home improvement retailer, “they cut production by 30 to 40 percent in mid-March only to realize that, when people had all this time at home, they did all the home improvements they had been putting off the past 10 years; [the company then] swung it back the other way.”

Meanwhile, the machining products company that Swan said was turning away its suppliers now has its “largest backlog in the past 10 years. So more than being able to say that any one industry did well or horribly—clearly there were some that did better than others—what people have seen is demand shocks unlike anything witnessed before.

Ultimately, he concluded, “leaders probably shouldn’t plan for an every-100-year pandemic as their baseline, but a lot of organizations realized they didn’t have the flexibility in the supply chain that they needed. That comes in terms of inbound material availability; how to scale production capacity up or down; transparency into what your customers are doing; and how your orders are being placed.”

Need Breeds Innovation

When pandemic shutdowns began, the need for remote working solutions became immediately apparent. For companies and industries traditionally slow to move on new technologies, it was a rude awakening and a massive jolt into action. And the results have born fruit that will inform manufacturing communications well beyond the pandemic.

Cambridge Air Solutions in Missouri installed professional audio gear throughout its plant to assist in virtual tours. Cambridge makes air quality and HVAC systems for manufacturing facilities. (Provided by Cambridge Air Solutions)

While keeping workers safe was job No. 1, that imperative paid dividends in other ways, explained Marc Braun, president of Cambridge Air Solutions, Chesterfield, Mo., and incoming board chair of the Association for Manufacturing Excellence (AME).

Braun explained that what turned out to be a tremendous technological leap forward emerged from two critical priorities: Keeping workers safe and conserving cash to ensure payroll was met. The search for innovation and growth followed seamlessly.

“Small and mid-size manufacturers normally don’t have the HR or safety and compliance staff to navigate all the regulatory changes that have occurred over the past year,” Braun noted. “We started to create and rely on what we call consortia of companies in our network, where we could bolster our whole team. We would have the best HR leaders because all the HR leaders would gather to figure out this policy change quickly, then put those policies into place. Our safety and risk mitigation folks were in ongoing community discussion with consortia members, and they could take those and quickly integrate. I wouldn’t have called it a technology innovation, but it is something we will never lose that we gained through the pandemic. You can’t give up that value once you find it.”

AME President and CEO Kim Humphrey, a veteran of multiple industries, including shipbuilding, said the shock to manufacturers’ systems had a clear silver lining.

“Organizations that had never allowed their workers to work from home had to totally revamp their technology departments and provide laptops and secure platforms for people to work from home,” she said. “It created this new thing that nobody expected, and a lot of our companies are finding that they’re not going to be sending people back to their workplace. That’s also requiring employees to be much more vocal on best practices.” In a slow-to-change industry like shipbuilding, it “would have taken years to get people to learn how to let people work from home or design from home; they were able to do it in a matter of months.”

Another unplanned benefit emerged as companies beefed up their online presence to include a range of online training, maintenance and virtual tour opportunities.

At Cambridge now, “we have pro audio gear throughout the whole plant to be able to plug our salespeople in like never before,” Braun said. “The whole plant floor is covered by not only wi-fi but pro audio gear capabilities, so you can have a professional mic on multiple people and show the plant floor to our clients.” The impact? Over the past seven months, Cambridge has entertained 2,300 virtual visitors to its plant floor; normal traffic had been 20 to 30 in-person visits a month. “We never thought we’d need audio engineers, but now we’ve got those skills inside and everybody is mic and video capable on the plant floor to showcase what we need to showcase. And that same technology is used for our meetings. Things that would have taken years to create took weeks or days.”

Solutions For Growth

One industry that weathered the storm and offers a lesson for growth is aerospace and defense, explained Eric Chewning, former chief of staff to the Secretary of Defense and a partner in McKinsey’s Advanced Industries Practice.

The defense industry leveraged efficient coordination across supply chains, he noted, and accelerated about $5 billion in government progress payments through to smaller suppliers. Those waivers were granted to keep production sites open, “and the industry itself invested about $10 billion to reconfigure production lines (and) infrastructure for remote working.”

Thirty-one percent of manufacturing executives polled by Deloitte indicated they plan to nearshore some part of their production back to the Americas.

Furthermore, “they had good visibility into what their end-demand requirements were going to be for the most part, because all these programs had their existing schedules. The challenge became how do you stay on schedule? That challenge is something we saw across the board—this lack of multi-tier visibility into the supply chain so you understood the critical areas where you had to provide extra emphasis to make sure that they stayed available. [This happened] particularly in industries that were overly reliant on sole or single-source relationships.”

Going forward, Chewning said, “we’re seeing companies investing in capabilities to realize what’s in their supply chains.” That entails understanding what is in a given supply chain, how visible it is to key stakeholders and knowing what environment your suppliers are working in.

Meanwhile, capital investment to upgrade aging plants and equipment with Industry 4.0 technologies in scale-based manufacturing might require significant spending. In an April 15 article, “Building a more competitive U.S. manufacturing sector,” McKinsey estimated that could require spending $15 billion to $25 billion annually over the next decade—“and capital needs to flow to some 120,000 small and medium-size enterprises.”

With research from McKinsey Global Institute showing a potential $4.6 trillion in trade shifting over the next five years, Chewning stressed four areas where U.S. manufacturers can grasp the competitive edge and capture that value:

Making the right investments in Industry 4.0 productivity tools to fully leverage the benefits of those technologies and processes to enhance productivity.

Ensuring access to capital: “Not just the large guys, but at the small and medium enterprises. The CHIPS act (Creating Helpful Incentives to Produce Semiconductors for America) is a good example, where the government is specifically setting aside $50 million for the semiconductor ecosystem in the U.S.”

Fostering resilient supplier ecosystems: “Leaders realized two things: One, that re-establishment of R&D in manufacturing to drive technical innovation is important. The second is that there are real benefits to co-location with your suppliers and incorporation of those benefits into business cases. Reshoring certain supply-chain activities is increasingly important.”

Developing the manufacturing workforce: “There’s a huge talent dimension to all this. What is the right focus on people development for those Industry 4.0 opportunities, and how do we make sure we’re getting our local ecosystem of trade schools as well as universities providing that type of pipeline as we get people coming back to work?”

Added Swan, “It’s obviously a bit more complicated for some of the smaller manufacturers. One recurring issue we saw in the early days of the pandemic, and then more recently as demand has rebounded in some industries, is that leaders misunderstood their inbound supply chain and where their risks existed.” A case in point: One McKinsey client initially indicated “it had delivered a thorough risk review of its supply chain, and leadership believed they had mitigated their risk. I received a call back a week later from the CPO who explained they were in a bind because they didn’t review any deeper than their Tier 1 suppliers, and now one had confirmed that it sourced a major upstream component from a Tier 2 supplier that was at risk.”

Ultimately, “we’re optimistic” regarding the U.S. manufacturing picture, Chewning asserted. “The current administration and prior administration both made revitalization of the U.S. manufacturing sector a priority, and it’s easy to see why. It’s 8 percent of the workforce, 11 percent of GDP, and it’s responsible for 20 percent of our capital stock, 35 percent of our productivity growth, 55 percent of our patents, 60 percent of exports, and 70 percent of R&D spending. A healthy manufacturing sector creates external benefits to the rest of the economy. Our research has suggested we could boost GDP on the order of $275 billion to $460 billion and add up to 1.5 million more manufacturing jobs by 2030 if we make the right choices.”

Just as vital, Swan added, is “for companies and leaders to think about planning their supply chains for a range of outcomes vs. around the best possible outcome.” Noting that resiliency and flexibility are usually the first casualties of cost-cutting measures, Swan asserted that “there will be a mindset shift required of our leaders to ask what the range of outcomes could be within our supply chain and how we can set ourselves up to be successful.

“This all is top of mind for people across the public and private sectors,” Swan continued. “We need our companies and manufacturing leaders to examine head-on what is it going to take to be successful five years from now, 10 years from now. We need more people to be thinking big and bold about what they need and how they can pull it off. I’m really encouraged by the fact that there are more people thinking that way these days.”

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