Viewpoint -- Plan To Fail If You Fail To Plan: Words To Live By For Process Manufacturers

Manufacturers must refocus their strategic objectives and place an increased emphasis on profits versus revenues and emphasize organic growth over growth through acquisition.

It's no secret that process manufacturing companies are facing some tough challenges. Consolidation, globalization, increased competition and severe economic and geo-political pressures are impeding process manufacturing companies. What has been a secret until now, however, is that there are ways for manufacturers to not only survive, but to thrive, in the face of these challenges.

According to a recent market intelligence study commissioned by Deloitte Consulting, sustaining financial health, generating cash flow, rationalizing operations and optimizing cost infrastructure are keys to achieving success. The study included input from representatives from 26 chemical companies within the process industries in the U.S. with annual revenues no less than $1.5 billion and was based on survey questions that focused specifically on the manufacturing sector of the process industry.

According to the study, these challenges are leading to increased pressure to find and retain top human capital and are driving the ongoing imperative to become more market focused. In light of these challenges, manufacturers must refocus their strategic objectives and place an increased emphasis on profits versus revenues and emphasize organic growth over growth through acquisition. Tactics that were once viewed as the sole means to sustain or improve our business infrastructures are now outdated and will not only lead to stagnant profits but will ultimately cause us to fail unless we change the way we do business.

For example, managing growth and profitability was once a standard "fix" for companies. Now accomplishing those goals has become increasingly challenging in recent years due to increased volatility in energy costs, slowing organic top line growth and finding and retaining qualified employees to address the increasing skills gap. All of these issues are making success more difficult to achieve.

According to the survey findings, one-third of the manufacturing companies in the process industry cite energy costs as their top challenge, followed by growth, profitability and globalization.

Energy Costs

According to a report from the National Association of Manufacturers, The Escalating Cost Crisis, since 2003, natural gas prices have soared, most significantly, because federal policy sharply limits exploration and domestic production of both natural gas and oil. Importantly, unlike petroleum, natural gas does not have a global price, so by limiting domestic supply, government policies have led directly to higher prices, undercutting U.S. manufacturers' competitiveness and hurting job growth in manufacturing.

Price volatility in raw materials is triggered by a number of factors. In the energy sector, political uncertainty and natural disasters, notably Hurricane Katrina in August 2005, have caused significant supply outages and interruptions. The increasingly global economy is another source of volatility.

However, in our view, the greater the volatility, the greater the potential for companies to differentiate themselves from competitors. Deloitte believes that companies can turn price volatility in raw materials and finished products into a key differentiator, giving them more opportunity to reduce costs, achieve higher average profitability and expand market share. Based on our experience, an effective commodity management strategy has two fundamental characteristics:

  • It is holistic, with a focus on managing the net exposure between the buying side and the selling side.
  • It is based on informed insight and strong analytics.

A holistic approach to managing commodities takes a very different view: that volatility can be transformed into a source of competitive advantage by integrating all the major functions of a business including procurement, manufacturing, finance, sales and marketing and technology. The centerpiece of a holistic approach is the integration of procurement and sales activities to help manage net exposure. This is an important departure from traditional approaches because it takes into account all of a company's influencers.

The benefits of wise commodity management can be substantial. For example, in the chemical industry, many commodity chemicals have exhibited volatility in the 20% to 40% range, over the past 15 years. The value of a holistic approach to a typical chemical company is calculated by factoring in the level of volatility with a goal to exceed the market by 10% to 15%. The result: Up to 100 basis points are added to Return on Capital Employed (ROCE). Businesses with greater-than-average commodity exposure stand to benefit even more.

Growth And Profitability

Growth and profitability are at the forefront of every company. Today however, the process industry must meet strict expectations for long-term viability, while entering a global marketplace. This means meeting cultural challenges and bridging cultural divides. Ensuring that there is a cultural fit can be one of the biggest challenges.

Achieving long-term results will likely require large investments of time and resources in the short term. Because of this, and market complexity, companies should conduct a thorough analysis of risks and rewards before deciding how new geographies fit into their overall global strategies. Recruiting and retaining qualified employees, protecting intellectual property and implementing go-to market strategies appropriate for local markets are examples of issues that must be addressed when considering moves into emerging markets.

In the past, most companies have focused on cost containment, productivity and price management as key levers in driving profitability. To be effective today, that focus must shift -- change is imminent.

We look at growth as a strategic approach to increasing revenue in the near term and sustaining it in the long term. It is the capability to grow the top and bottom line on a systematic and repeatable basis.

In spite of the high impact that growth has on shareholder value, companies are finding that achieving profitable growth is becoming increasingly difficult, and most of them fail in their efforts. Following are key questions that serve as warning signs for the CEO:

  • Has your company missed revenue growth targets repeatedly in the past 5 years?
  • Do you often miss your expectations on pricing and profitability as well as volume?
  • Are your competitors getting products to market faster than you?
  • Has your share price multiple fallen vs. your industry peers?
  • Are you unsatisfied with the multiple the market has given your company?
  • Is your company caught in a cost-price squeeze?

Globalization

A new generation of multinational manufacturers is mulling whether to establish operational beachheads in emerging markets such as China and India. In contemplating emerging markets, however, manufacturers may face a dilemma. On the one hand, these markets have huge potential. On the other, potential pitfalls abound for those companies who are as yet unfamiliar with the intricacies and nuances of these markets. What are some of the risks?

  • Volatility of a still emerging market
  • Rudimentary infrastructure
  • A scarcity of local talent
  • Weak intellectual property protections that leave companies exposed to potential theft of proprietary technology

Given this landscape, companies should proceed prudently. Achieving long-term results will likely require huge initial investments of time and resources in the short-term. Because of this, and because of the sheer complexity of the market, companies should conduct a thorough analysis of both the risks and rewards the market poses before deciding how it fits into their overall global strategy.

For manufacturers, doing business in an emerging market represents tremendous opportunity for growth. To adequately exploit that opportunity, however, CEOs must take a clear look at the risks inherent in doing business in the emerging market. They should also take a hard look at their companies' own internal capabilities to determine if they have the in-house expertise, experience and knowledge about the new market to settle on and execute the most appropriate strategy for navigating the complex landscape of the unknowns.

Talent Management

One of the fastest growing and most competitive global issues is finding and keeping top talent. It is also one commanding a great deal of attention from chemical company CEOs and other high level executives. In fact, newly emerging industry groups are forming committees whose sole purpose is to address how to recruit, coach and maintain talented people. Therefore, retention is becoming even more imperative, both to recoup the substantial investment in training, and to maintain power for sustained growth. Middle managers are now an increasingly cared for group, companies are moving them along with greater speed, some as soon as three years.

As we all know, the talent game has changed, and traditional recruitment and retention strategies no longer work. Rather than fight a futile "war for talent," leaders should look within for the critical skills and knowledge required to execute the company's most important jobs. By developing, deploying, and connecting these people the right way, leaders can raise their performance -- and the performance of the entire organization -- to a whole new level.

Six key questions CEOs need to ask their HR leaders include:

  1. Which segments of the workforce create the value for which we are most rewarded in the marketplace?
  2. Which areas of our business will be most impacted by impending waves of retirement? What are we doing to prepare successors? What impact will anticipated retirement have on the skills and productivity necessary to meet future demand?
  3. In what areas is the talent market heating up (i.e., demand will outpace supply)? Which segments of our workforce will be most impacted? What are the potential top-line and bottom-line implications?
  4. What skills will we need over the next five years that we don't currently possess? How will we create that capacity? What happens to our business if we don't?
  5. What is our turnover within critical areas? How much is it costing us? In customers? In productivity? In innovation? In quality? What are we doing to resolve the root cause?
  6. Are we actively developing talent portfolios or workforce plans that will help us to understand and communicate the financial consequences of talent decisions on our business?

Our consultants with Deloitte Consulting LLP help companies reassess their talent requirements and align them with corporate business objectives. In addition, they redesign human capital programs to reflect those new talent objectives, resulting in greater capability, productivity, creativity and customer-centricity.

Making It All Work for You

Moving forward, success will entail balancing efforts across revenue enhancements through identifying growth opportunities and cost performance in these non-traditional areas. Continuing to update a company's business model and executing an efficient strategy will be imperative to surviving a potential downturn should companies remain dormant.

A word of warning however: most companies cannot successfully go at this alone. Deep industry knowledge and expertise in specific areas are fundamental in addressing these complex issues. Therefore, it is important that companies reach out and find help in an expert who truly knows the industry through a great depth of experience, research and understanding. After all, in a sink or swim world, you want to make sure that you're not swimming alone.

Tom Marriott is a partner at Deloitte Consulting LLP as a U.S. Process Manufacturing Industry Practice Leader . www.deloitte.com/us/manufacturing/process

Deloitte & Touche USA LLP and its predecessor firms have provided audit and consulting services to the process industry for more than 100 years. Globally, more than 200 partners and 1,000 skilled professionals with industry knowledge provide a full range of audit, tax, financial-advisory, and consulting services to companies in the process
industry.

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