Customer Demand Seen as Main Financial Obstacle in 2009 for Industrial Manufacturers

March 20, 2009
93% of CFOs say an inability to measure customer demand is among their top three external concerns

It's not credit crunch that is having an adverse direct impact on midsized U.S. manufacturers, rather it's customer demand. In a study of CFOs, Prime Advantage, a buying consortium for midsized industrial manufacturers, announced that 69% of the respondents reported that their companies have not been directly affected by the cost or availability of credit. Only 24% have been affected "somewhat" and only seven percent said they have been affected "very much."

"Less than 10% of our member company CFOs indicated that they have been directly affected by the credit crunch, demonstrating that there are more pressing issues for midsized manufacturers," said Louise O'Sullivan, president, founder and CEO of Prime Advantage. "We believe this is reflective of the overall small and mid-tier manufacturing market, and in particular of the good financial health of Prime Advantage members. However, our CFOs indicated that their most pressing concern is slowing customer demand, which could be due in part to tighter credit. An effective federal stimulus that boosts customer demand could mitigate some of their top concerns."

Ninety-three percent of the respondents listed "an inability to measure customer demand" among their top three external concerns, with 76% of respondents citing this as the top concern. Credit markets and interest rates was the second most frequently listed concern, and volatility of the dollar and a new administration and congress tied for the third most frequently listed concern.

The top three internal, company-specific concerns for the CFOs reflect the aforementioned external concerns. The ability to forecast results came in as the top concern among 45% of respondents, and was cited among the top three concerns by 72% of the respondents. The cost of healthcare and supply chain risk was also cited most frequently among the top three concerns. The impact of these concerns is apparent from the 48% who also predicted a decrease in earnings in 2009.

"The uncertainty of current and near-term economic conditions has made it extremely difficult for manufacturers to plan for the future," O'Sullivan said. "Demand, revenue, and margins are shrinking. In light of this, we are seeing manufacturers leverage strategic sourcing and procurement planning to better improve pricing flexibility. The improved procurement planning benefits that our members enjoy have helped strengthen their balance sheets and better position them to ride out this downturn."

Changes Ahead Likely Include Downsizing and Capital Spending Cuts
Like CFOs in companies large and small, the survey found that there is growing pessimism about the economy among CFOs of midsized industrial manufacturers. Fifty-five percent are more pessimistic about the economy compared to last quarter, and 45% stated that they are more pessimistic about the financial prospects for their company compared to last quarter.

Many CFOs also expect far-reaching cutbacks, with 62% planning some type of workforce downsizing. Other areas executives are targeting for cutbacks include capital spending (according to 69% of respondents), marketing/advertising budgets (54% of respondents), and IT budgets (48% of respondents).

Many CFOs will try to hold the line on costs with wages and salaries. Forty-five percent reported that they have considered acquisitions as an alternative to boost revenues. Seven percent have considered mergers with competitors and another seven percent have considered divestitures to solve revenue issues.

In a strong indicator of the importance of product quality and innovation, CFOs are expecting to see an increase in productivity (45% of respondents) and new product development budgets (31% of respondents) over 2008 levels. Forty-five percent of respondents are expecting productivity and product development budgets to at least be maintained at 2008 levels.

Many companies will also likely broaden their product development and strategic sales efforts in 2009 as a result of the global economic turmoil. Twenty-one percent report that new market entry has become an objective this year. Another 17% are planning development of new products or services to meet new customer needs.

In contrast to these findings, a survey of smaller, private companies, conducted in December 2008 by McKinsey Global, indicated their most likely strategic action would be to cut back on capital spending, followed by focusing solely on cost cutting and conserving cash in operations and considering restructuring.

"Prime Advantage Members appear to be more opportunistic than other survey respondents, potentially due to their unique advantage in the marketplace as part of a buying consortium," said O'Sullivan. "Manufacturers are more dependent on their external partners than ever, and their supply chains will play a greater role in their ability to successfully cut costs, execute new products, and uncover new revenue channels."

Interested in information related to this topic? Subscribe to our Information Technology eNewsletter.

Popular Sponsored Recommendations

Empowering the Modern Workforce: The Power of Connected Worker Technologies

March 1, 2024
Explore real-world strategies to boost worker safety, collaboration, training, and productivity in manufacturing. Emphasizing Industry 4.0, we'll discuss digitalization and automation...

3 Best Practices to Create a Product-Centric Competitive Advantage with PRO.FILE PLM

Jan. 25, 2024
Gain insight on best practices and strategies you need to accelerate engineering change management and reduce time to market. Register now for your opportunity to accelerate your...

How Manufacturers Can Optimize Operations with Weather Intelligence

Nov. 2, 2023
The bad news? Severe weather has emerged as one of the biggest threats to continuity and safety in manufacturing. The good news? The intelligence solutions that build weather ...

Transformative Capabilities for XaaS Models in Manufacturing

Feb. 14, 2024
The manufacturing sector is undergoing a pivotal shift toward "servitization," or enhancing product offerings with services and embracing a subscription model. This transition...

Voice your opinion!

To join the conversation, and become an exclusive member of IndustryWeek, create an account today!