Supply Chain Briefing

ISM Reports Manufacturing Decline

According to the ISM, “The Manufacturing PMI”, a measure of manufacturing activity, registered at 48.5% in June, which is a decline from 48.7% in May. Anything less than 50% is contractionary. Similarly, the Production Index for June declined from 50.2% to 48.5%, and the Backlog of Orders index declined from 42.4% in May to 41.7% in June. Overall, manufacturing is in a slump.

From a client and contact point-of-view, the picture is a bit rosier, but still in decline. Clients backlogs have been pushed out across the board. The positive news is that backlogs are largely not being cancelled as they have in previous downturns, but they are being pushed out and delayed across the board. It doesn’t make things easy as customers want the ability to “turn on” priorities rapidly (pull in) while maintaining the ability to push out orders at the last minute. Although certain industries are slower for extraneous conditions (ie. aerospace is pushing out orders due to Boeing quality issues), this situation is across all product types, industries, and geographies with a few exceptions (ie. equipment supporting fire and police).

On a positive note, much of the declines appear to be related to VUCA (volatility, uncertainty, complexity, ambiguity). Most clients and contacts are concerned about the election and resulting policies. For example, regulations have been a hardship, and if they continue to increase, there is a limit to maintaining profitability especially in regulation-heavy states such as California. There are also concerns about increasing interest rates which relate to government spending, inflation, and potential tax changes. For example, if business taxes rise, profitability cannot be maintained without passing on additional price increases. Thus, many owner operated businesses (often led by Baby Boomer generation entrepreneurs) are selling and looking for other avenues to wind down their businesses before their profit and resulting business value dwindles. On the other hand, if businesses expect growth policies, they are more likely to invest.

Yet the Proactive See a Manufacturing Renaissance

Although the immediate timeframe is in a slump, a manufacturing renaissance is on the horizon. There are many reasons to see vast opportunities down-the-line. A few that pop to mind include:

  • Geopolitical risk: Although colleagues engaged in the global environment have been concerned for several years, the masses were focused on costs, costs, and costs. However, the pandemic exposed the risks, and the continuing heightened geopolitical risk has opened the eyes of executives across the globe. For example, if your business was dependent on a commodity from Russia or Ukraine, computer chips from Israel, product from China during Zero COVID, traveling through the Panama Canal or Suez Canal, or a host of other issues, the risks have been exposed.
  • The Amazon Effect: If your customers change their mind, expect rapid deliveries, assume easy returns, want 24/7 customized service and expect to pay a lower price, you are not alone. Given extended supply chains plagued with risk, proactive manufacturers are gaining control of their supply chains.
  • Supply chain risk: There has been a wide increase in a plethora of supply chain risks ranging from weather events to potential strikes to accidents. For example, the Baltimore bridge collapse occurred and greatly impacted the supply chain serving the region, automobile and small equipment (since the port specialized in roll-on-roll-off) related businesses, coal and other specialties from the area. Over the last year or two, there have been a raft of potential strikes and situations including the truckers’ protests for cross-border traffic with Canada, the potential rail strike, potential UPS strike, Yellow Freight bankruptcy, and the recent concerns about potential strikes and labor negotiations at the East Coast and Gulf Coast ports.
  • CHIPS act: The U.S. capacity to produce computer chips fell from 37% in 1990 to 12% today. With virtually everything dependent on computer chips, it is a high-risk situation especially as China and Taiwan produce the vast majority of computer chips. Thus, the CHIPS act was geared to advance U.S. manufacturing with investment into chip makers. A few examples include Texas (Samsung, TX Instruments, etc), Arizona (TSMC), Ohio (Intel), NY (Micron) and the companies that support new buildings, construction and other materials.

Only those companies preparing for the future will be ready to scale up rapidly as the need arises. We believe that the prepared and resilient companies will thrive during the next decade while the rest struggle and decline. Customers are not patient and will not wait quietly through shortages. They expect suppliers to have learned from the pandemic and be partners in profitable growth.

Path Forward: Think Three Steps Ahead

There is little doubt that only the best will thrive. The companies thinking three steps ahead as if playing chess will win market share as no other time in history (at a minimum similar to the behemoths created during the Great Depression).

Not only will the successful executives create reliable and resilient manufacturing operations and related supply chains, but they will also invest wisely while everyone else panics, hire top talent when everyone else cuts costs, automate and digitize their supply chains with modern ERP systems and advanced supply chain technologies, and roll out advanced processes such as SIOP (Sales Inventory and Operations Planning) and advanced forecasting and planning systems.

For example, an industrial manufacturer wanted to scale up rapidly to take advantage of time-sensitive customer opportunities. Thus, they rolled out an aggressive program to utilize their ERP systems and sync up their quote data with their order backlog information so that they could use predictive analytics to pinpoint where to focus. They also embarked on the SIOP journey which allowed them to ramp up certain areas of operations, purchase a new paint line to support order fulfillment objectives, and offload volume at the “right” time to take advantage of opportunities quickly. And they used digital twin like capabilities in combination with advanced planning processes to analyze what if scenarios and customer and product profitability to achieve profitable growth.

Another building products client hired top engineering talent at the bottom of the recession when everyone else panicked. The engineering talent developed a new product portfolio that enabled them to launch into commercial as well as residential markets. They also appreciated the value of upgrading technology and made the leap from a highly customized ERP system that supported the current business efficiently to a modern ERP system with advanced engineer-to-order capabilities combined with predictive analytics so that they could plan three steps ahead. They also were ahead of their time as clients realize the value of control as they proudly produced products and vertically integrated with a “Made in the U.S.A.” approach. This allowed them to shoot to the top of their industry with quick lead times and highly customized service levels.

If you are interested in reading more on this topic:
Succeeding with Regional Manufacturing & Optimizing Supply Chain