2022 Outlook: 5 Areas of Focus for Manufacturing and Distribution Companies
It's impossible to talk about the 2022 outlook for manufacturing and distribution companies without addressing two competing forces: a continued strong demand for products versus labor shortages and inflation. For years, strong economic growth, coupled with booming markets and low interest rates, enabled businesses in this industry to prosper. In contrast, the COVID-19 crisis established a new playing ground, complete with its own unique challenges and opportunities. The pandemic gave rise to supply chain disruptions, labor shortages, and two years of tremendous government assistance, but it also created high consumer demand and consumption. Given the current environment, the future for 2022 looks bright, but businesses will have to navigate carefully between fulfilling consumer needs and dealing with manufacturing disruptions.
The following are the top 5 areas manufacturing and distribution companies should focus on in 2022:
- Ongoing labor shortages
Prior to the pandemic, the manufacturing and distribution industry was already struggling with a skilled and unskilled labor shortage. Now, with the Omicron strain in full force, the industry is going to experience ongoing waves of impact as the virus fluctuates and causes the environment to change in response. With the holidays behind us, we have already seen extensive fallout from this COVID-19 variant, as businesses shut down, workers call out sick, and products become increasingly unavailable. The impact has ranged from seeing local coffee shops reducing their hours because they cannot find enough staff, to a wave of “backordered,” “out of stock,” or “limited quantity” notifications for almost every product under the sun. Companies will have to remain flexible during this time and should start to think past the short-term frustration and disruption by focusing on protecting their future. In order to solidify the variability in labor markets, Companies have offered flexible work arrangement, significant wage increases, and/or outsourcing to staffing and consulting firms. is not sustainable in the long-term. These strategies, although effective in the short term, can be solved with long-term investments in technology.
Labor shortages accelerating investments in technology
To offset the ongoing labor shortages and fulfill customer needs, companies are turning to the following technological investments as alternative solutions:: 1) machine learning and artificial intelligence; 2) automation in warehouses and factories; 3) inventory systems and financial systems that will provide real-time KPIs (key performance indicators); and 4) financial planning, forecasting, and budgeting software. These investments will not only provide faster, real-time reporting, and higher quality results and production, but also minimize a company’s dependence on a constantly evolving labor market.
Supply chain disruptions continue
As with the last few years of the pandemic, manufacturers can expect higher freight, labor and product costs and erratic supply issues well into 2022. This is causing changes in purchasing behaviors, which is further exacerbating the supply problem. Instead of a just-in-time inventory system, companies are stockpiling raw materials to prevent themselves from impacting production schedules or losing a customer due to a lack of product on hand. Manufacturers will need to invest more time in sourcing and stocking the right materials to prevent any delays in production. Some companies have been forced to look at air freighting product to alleviate their supply issues and are willing to pay these increased air freight costs to avoid losing customers. However, many businesses are finding out that they cannot pass all of the additional costs onto the end consumer. It will be crucial for businesses to forecast the impact of these increased costs on overall product profitability, as this ramp-up in costs could create working capital constraints and a need to increase businesses’ access to capital (i.e. – line of credit).
Tax increases are on the way
Since the beginning of the pandemic, the U.S. government has created a massive amount of social and economic safety nets such as PPP loans, employee retention tax credits, and multiple industry-specific assistance packages. These overall incentives have helped to keep businesses afloat and protect employees’ incomes. All of these programs will ultimately impact future taxes and manufacturers should be anticipating tax increases in the coming year. Businesses should prepare accordingly by forecasting and budgeting to expect reduced operational cash flow.
As cybersecurity incidents continue to rise, manufacturers and distributors should look not only at their cybersecurity defenses, but also at the resiliency of their business in the event of a cyberattack. Customers and employees are shifting away from in-person interaction to online engagement, creating more opportunities for hackers to access company networks. An attack can shut down operations, impact intellectual property, harm your customer’s trust in your brand, and incur significant breach remediation costs. Companies should routinely challenge their providers to perform an assessment of their cybersecurity, create employee cybersecurity awareness trainings, and ensure they have adequate insurance coverage in place.
How Citrin Cooperman Can Help
Citrin Cooperman is proud to be home to one of the leading manufacturing and distribution practices in the country. Our dedicated team leverages deep expertise to provide a full range of attest, tax and specialty tax, business advisory, economic advisory, and transaction support services. Our consultative approach to all services, coupled with our depth of experience, allows us to help our clients achieve their goals in 2022 and beyond. If you need assistance with any of the topics discussed in this article, please contact your Citrin Cooperman advisor.
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