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Disruption is the New Normal in the Manufacturing and Distribution Industry

COVID and other factors have forever changed manufacturing and supply chains. Disruption is here to stay.

Many CEOS in manufacturing have cleverly adapted to disruption and saw financial performance improve in 2022. While COVID has had devastating effects, it has had positive unforeseen consequences across the manufacturing and distribution (M&D) industry.

Fundamental changes to business models that had to be rushed through to keep the lights on (i.e. onshoring, multiple sourcing partners, and stockpiling) have become embedded and are now considered best practices. Almost by accident many M&D companies that were ambling along now find themselves more agile, more focused, and more profitable.

Each year, Citrin Cooperman’s Manufacturing and Distribution Practice conducts a survey that takes the pulse of the industry. The 2022 results show that those thriving in this sector have learned how to live with disruption. Many even embraced change as a means of turbocharging growth or entering new markets.

The findings in this survey come from the United States but have wider relevance. The M&D industry is facing economic slowdown while “temporary” supply chain disruption and labor shortages are proving difficult to overcome. There are levels of geopolitical instability in Europe and the Pacific Rim which have not been seen for decades.

However, successful companies have maintained a sharp focus on four key areas: reshaping their product offering, building their online presence, supply chain resilience, and data analysis.

What our research has demonstrated is that businesses that are doing the best have access to time-sensitive, comprehensive, and accurate data which allows them to take calculated risks with a greater expectation that they will pay off.

However, most middle-market companies are not getting the most out of their enterprise resource planning (ERP) systems and automated forecasting systems. Much of their best features go unused because these companies do not have the manpower and talent maintain best-in-class reporting processes. ERP and forecasting systems help us identify buying patterns from previous sales periods or pinch points on production lines, but they do not help us get inside the heads of consumers and understand their future behavior.

The main metrics most companies look at are quality control and order fulfilment performance, i.e., historic data points that are focused internally on the process of manufacturing and distribution rather than the needs and desires of customers.

Although there is general support for the notion that customer service is an important key performance indicator (KPI), less than 50% are tracking the data that would give them advance warning of failings or highlight gaps in demand which potentially could be filled with new products.

Even if these tools were available across the board, it is questionable if there are the required number of qualified experts available with the skills to interpret the outputs. The laws of supply and demand are such that there are not enough experienced data analysts to go round – and the best can virtually write their own terms and conditions.

While affordable technology that delivers true customer insight may be some years away, much of what we currently consider to be artificial intelligence (AI), or machine learning, is focused on supply chain bottle necks and predicting geographic location of product demand.

COVID restrictions remain tight in regions where most of world’s mass manufacturing takes place. That has impacted production and shipping schedules, meaning it still costs three times as much to ship goods from Asia to the U.S. as it did before the pandemic. Anything AI can do to smooth out peaks and troughs in inventory management can make a difference of millions of dollars to the bottom line.

More than half of the companies in our U.S. survey have doubled down on efforts to find alternative or additional manufacturing locations to offset production disruption and increased shipping costs. U.S. M&D companies, like most of their counterparts around the world, have accepted that the era of just-in-time manufacturing and distribution is over.

However, if higher inventory costs and longer lead times are the result, additional strains on working capital will follow and the extra cash required over longer periods will cost more because of rising interest rates.

These are the new realities facing CEOs and leadership teams in these disruptive times. Nobody knows how long this period of instability will last, but the response to COVID has shown that the most agile companies can come out on top despite a challenging economic environment.

For more information on how Citrin Cooperman can help your manufacturing and distribution business, contact Mark Fagan at mfagan@citrincooperman.com.

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