By: Bryan Porter
Manufacturing experienced meaningful growth in 2017. And, although the prognosis for 2018 provides both reoccurring and new challenges for business executives to contemplate, the opportunity and economic outlook for the industry sector remain strong. The demand to design, create and produce products and solutions to meet the needs of an ever-changing world will continue to require manufacturing companies to re-invent themselves. A disciplined and regular look at market demands, political policy, employment challenges and the ever-present impact of technology is not only good business practice but the price of admission to compete in today’s global market. While executives recognize the days of traditional factories filled with human capital, long production cycles and questionable working environments are long gone, they should also consider last years’ playbook obsolete, or at a minimum, out of date. This is not to say the mission statement, core values and core competencies of the company need regular revisions. It is necessary, however, to consider the rapidly changing landscape and how the company will remain relevant. As early 2018 results begin to materialize, executives should consider how the following trends will impact long-term sustainability of their manufacturing company.
1. Start with strategy
Critical to long-term business success is developing and adhering to a well-developed business strategy. Unfortunately, due to the heavy demands on executives, the act of developing the strategy often gets overlooked — particularly at small and medium-sized manufacturing firms.
Best in class manufacturers have robust strategic plans that encompass far more than just an annual budget and serve as a living document that is regularly reviewed, analyzed and updated in order to maintain relevancy. As your firm is developing its strategy, consider how the local and global markets have evolved and where they are headed. Then, make any necessary tweaks in order to add additional value to the customer experience. An effective strategy will include:
- Input from relevant company stakeholders
- A realistic assessment of the company’s key short-term and long-term objectives
- Identification of achievable steps toward specific objectives and a system to measure progress
- A plan to regularly review how the company is meeting the goals outlined in the strategy and to make revisions to the strategy as needed
- A process for communicating the strategy to the employees of the company regularly and as the plan evolves
Gathering input from relevant outside resources throughout the strategic planning process can add value to the strategy development as well. Reach out to professional business advisors, an informal board of advisors familiar with the sectors in which the company operates, professional service providers or colleagues charged with the performance of another geographic location or industry sector. Many manufacturing sectors also offer industry-specific conferences to educate and yes, sell, executives on new technology, software and process improvements designed to solve a perceived problem. Although executives need to balance costs with the return on investment and cannot be on the front line of every new technology solution, industry-specific conferences offer a wealth of information to be considered during regular strategic planning. A well-developed business strategy will include many external inputs to uncover unforeseen current and future risks and avoid operational and financial strain.
2. Invest in your team
It should be no secret that successful technology is designed to do more with less. In addition, there is no shortage of technology solutions offered to executives of manufacturing companies. Industry 4.0, the internet of things (IOT), automation, additive manufacturing and even augmented reality will change day-to-day production on the manufacturing floor in a relatively short period of time. While business executives may welcome the efficiency of technology, employees often have a very different point of view. Machines and computers will replace them in the workplace. Even employees who support innovation and technology naturally consider the long-term impact on their own ability to put food on the table. Manufacturing employees often have significant tenure and best suited to understand day-to-day challenges of their particular industry sector. Executives rely heavily on the current workforce to execute the strategic plan and achieve strategic goals when employees understand how they contribute to the operational and financial success of the company.
Employee buy-in and ownership of the strategic plan during their daily duties are critical to its success. Arguably, an executive’s most significant responsibility to employees of the company is to create an environment where each employee has the resources to contribute at their highest level. These resources include technical, safety and appropriate financial training to help employees understand how daily activities contribute to the corporate mission. As new technologies emerge and are introduced to the manufacturing floor, tenured, engaged and properly trained employees give the strategy the best chance of success.
Executives also need to be mindful of how existing compensation packages motivate employee behavior as the business strategy evolves. Many companies have a standard compensation package that has been in place for years despite significant changes that may have taken place in their industry’s competitive landscape. Often times, dated compensation packages limit growth or are even detrimental to the overall goals of the company. A review of how the company motivates individuals through compensation, in appropriate detail, may result in a better use of corporate assets in achieving the strategic mission. The result of a properly aligned compensation program will improve company culture and create a sense of ownership, which increases participation from those who have first-hand knowledge of how to improve the day-to-day processes.
Additionally, developing a team environment is as critical to long-term success as individual training and proper motivation. Employee satisfaction will directly affect the bottom line over the long term. Employees who leave for the wrong reason or stay and consistently underperform create an additional hurdle in an already competitive and rapidly changing economy.
3. Stay on top of your cash flow
Forecasting and monitoring the cash flow of the business unit is also critical to competing in today’s marketplace. Most manufacturing firms periodically communicate financial results to executives and outside stakeholders, and while those reports are valuable in determining the financial health of the company, they are based on historical results. To get a complete picture of current and future cash reserves, executives should develop and analyze a real-time cash flow model. Cash flow financial modeling can help firms avoid expensive cash shortages and operational delays. Successful models incorporate seasonal or cyclical sales trends, anticipated market conditions, changes in key customer and vendor relationships, known plant expansions, continued investment in technology, costs to comply with new regulations, the impact of political policy, merger and acquisition opportunities, and tax consequences to the company or business owners. The cash flow model should be compared to the company’s rolling budgeted results and help executives identify necessary changes to the existing budget for future periods.
Cash flow models can also be used to evaluate financing options that are available to your firm. It’s to your benefit to put these models in place while your company is financially prosperous. It will allow you to more easily negotiate financing options from a position of strength.
Want to put your firm in the best position to prosper in 2018? Develop a strategic plan, invest in your employees and monitor your cash flow. With all of these components firmly in place, manufacturing firms will be better equipped to make smart, nimble decisions and thrive in this challenging and ever-changing marketplace.
BRYAN C. PORTER, CPA, MS, is a director in the Audit, Accounting and Consulting Department of Ellin & Tucker in Baltimore, MD, where he advises privately-held businesses in various industries, including manufacturing, wholesale distribution, construction, technology and not-for-profit. Bryan is also a member of the firm’s Audit and Accounting Technical Standards Committee, which oversees programs designed to educate the firm and its clients on current accounting and business topics. He can be reached at email@example.com.