As the worldwide economy continues to struggle, new orders in the manufacturing sector are falling at record rates. Markit, a financial information company, reported that manufacturing output in Britain hit an astounding 17-year low. The U.S. Census Bureau also announced the troubling news that orders for durable goods decreased by 4.5% in the month of August 2008. The heightened financial sector turmoil and tighter credit conditions are significantly raising the danger of prolonging the downturn. This kind of news can rock the nerves of even the toughest CEOs and CFOs who are responsible for managing some of the largest manufacturing enterprises in the world.
Besides developing deep circles under the eyes from sleepless nights, is there anything that manufacturers can do to survive and thrive in such a tough and volatile economy? Following are six winning strategies that manufacturers can deploy now to help drive higher profit margins and protect shareholder value despite the current economic climate.
1. Immediately Analyze Demand to Identify Shifts in Consumer Buying Behavior
The buying habits and preferences of consumers and businesses inevitably have, and will continue, to change in response to the slowing economy. Manufacturers should quickly dedicate the time and effort to apply an additional level of scrutiny to analyze demand and to identify the products or product categories showing significant upward or downward trends. The forecast of these items should then be aggressively adjusted to reflect the shifts in product preference as consumers make trade-offs in price, package size quantities and value versus premium offerings.
By quickly aligning forecasts to reflect the current economic conditions, manufacturers will establish the foundation for making strategic, profitable changes to inventory policies, product mix, production plans and procurement plans. Every manufacturer is forecasting demand to some degree of accuracy today. The urgent question now has become: Is your demand signal visibility sufficiently accurate, dynamic and comprehensive enough to manage every echelon in your extended supply chain?
2. Quickly Make Adjustments to Inventory Policies to Align Them with Shifting Demand Patterns
Manufacturers should adjust their safety-stock level policies to place a greater emphasis on those products that are trending upward, and less emphasis on those that have a significant downward trend. This is a relatively easy way to quickly align working capital investments with the changes in product mix driven by trade-offs made by consumers in response to the economic downturn.
Another quick-win strategy is to slightly raise the safety stock levels of those products that have remained fairly stable and that reflect significant volume and reasonable margins. This strategy will squeeze out additional margin dollars through recovery of some lost sales with a minimum incremental working capital investment.
3. Change the Product-Mix Strategy to Place Additional Emphasis on Value-Based Products
As both consumers and businesses rein in spending, they will undoubtedly re-evaluate their budgets and suspend buying premium products that are non-essential and shift purchasing over to more value-based products. Therefore, manufacturers should also evaluate and adjust previous production plans to allocate more capacity to value-based product lines. This will position them favorably to grab market share from competitors by appealing to the more cost-conscious buyers.
At the same time, manufacturers should re-examine the raw materials used to produce products for potential upstream savings to garner additional margins. As consumers trade down, there is also the opportunity to garner additional margins from value lines by executing well-timed pricing actions, such as sales, volume discounts or promotions.
4. Collaborate with Channel Partners to Promote Products with Bloated Inventories Caused by the Downturn
For those products that have fallen victim to the abrupt economic downturn, manufacturers should work collaboratively with their channel partners to aggressively promote those products, alleviating excess levels of inventory. This action can free up much needed working capital. And, although there may be an immediate impact on margins, the additional capital could be used to invest in areas where growth is still achievable.
5. Collaborate with Transportation Providers to Lock In Preferred Rates
The high cost of fuel coupled with constrained transportation capacities have resulted in steady increases in freight rates and fuel surcharges. As the drop in factory orders brings transportation demand back in line with capacity, manufacturers should leverage the opportunity to collaborate with transportation carriers to receive and possibly even lock in lower rates.
In exchange, manufacturers should offer to provide transportation providers with better visibility into their capacity needs, and work with them to identify additional opportunities and to potentially agree to shorten payment terms if that is financially feasible.
6. Prepare for the Future: Conduct a Realistic Assessment of Your Supply Chain Agility and Flexibility
Supply chain agility and flexibility are trademarks of industry-leading enterprises - as is the ability to deploy new strategies quickly and dynamically in response to changing economic realities. Manufacturers need to view the current crisis as an opportunity to assess the visibility, flexibility and competitive advantage that their supply chains provide, and to realistically evaluate and score their overall readiness to effect rapid changes in product and inventory strategies. The score should be penalized if any of the following shortcomings are discovered in this readiness assessment:
- If many or most of the adjustments required to deploy a desired new strategy must be performed manually or using silos of information and spreadsheets
- If the only way to coordinate the planning and execution of desired strategy changes across the supply chain processes is through meetings and e-mail exchanges
- If it takes days or even weeks for forecast changes and demand shaping activities to be reflected in the distribution, production, procurement and transportation plans
- If there is no way to quickly evaluate how the change in strategies would impact revenues, margins and the resulting operational plans
- If there is no existing sales and operations (S&OP) process in place or if the S&OP process that is in place is not adequate to accurately evaluate the change in strategy prior to deployment
These shortcomings are clear indicators of the hurdles many manufacturers still need to overcome to achieve the desired goal of building a dynamic, demand-driven supply chain that can respond quickly to changing economic conditions.
The solution is to create, over time, an integrated, enterprise-wide information platform that enables a single view of demand and supply. How? By leveraging advanced information technology and best practices that enable business process automation and integration, real-time information flow, and collaboration among internal and external partners. That's the ultimate strategy for manufacturers looking to turn tough economic times into real opportunity for the future.
David Johnston is the Senior Vice President, Manufacturing and Wholesale Distribution, JDA Software Group. JDA delivers integrated supply chain as well as merchandising and revenue management planning, execution and optimization solutions for the consumer-driven supply chain and services industries. www.jda.com.