Faced with continued disruption, manufacturers and distributors have proved to be very resilient, and the American workforce continues to pivot and adapt amidst adversity in most manufacturing and distribution (M&D) environments. The M&D industries will continue to face significant challenges including supply chain disruptions, worker shortages, and soaring costs through 2022 and likely into 2023.

The Rapidly Changing Business Environment

Top Business Challenges

Over the past two years, M&D companies have been faced with multiple challenges related to COVID-19, and they are still recovering from them. According to the National Association of Manufacturers (NAM) Manufacturers’ Outlook Survey, the top reported obstacles include increased raw material costs, supply chain challenges, and attracting and retaining talent.

“Though there has been a lot of disruption, manufacturers have proved to be very resilient, and the American workforce continues to strive and thrive amidst adversity in almost every manufacturing environment. Some areas of manufacturing have seen increased demand only to have supply chain disruption cause difficulty in meeting the increased demand.”
JOHN MARK MCDOUGAL, CPA, SHAREHOLDER, PRACTICE LEADER AUDIT AND ADVISORY SERVICES

Primary Current Business Challenges, Q4:2021
Primary Current Business Challenges, Q4:2021

Note: Respondents were able to check more than one response; therefore, responses exceed 100%.
Source: NAM Manufacturers’ Outlook Survey

Raw Materials

Rising raw material costs topped the list of primary business challenges, cited by 87.1% of respondents. These manufacturers expect raw material costs to rise 6.5%, which is down from 7.5% this past summer but nonetheless elevated. The expected average price growth over the next 12 months is shown in the graph.

The expectation of 6.5%, though elevated, seems modest compared to the actual price increases incurred by certain sub-industries and many of our clients. For example, those manufacturers reliant on steel mill products have seen the PPI commodity index value rise to 446 (projected) as of November 2021 from 197 in December 2020, or a 126% increase (Bureau of Labor Statistics). Some sub-industries and companies that previously thrived or suffered when materials costs dipped or spiked, respectively, have begun to negotiate variable customer pricing and materials surcharges to protect their margins.

Expected Average Price Growth Over the Next 12 months, Q1:1998-Q4:2021
Expected Average Price Growth Over the Next 12 months, Q1:1998-Q4:2021
Note: Expected growth rates are annual averages. Expected raw material price growth data begin in Q2:2018.
Source: NAM Manufacturers’ Outlook Survey

Supply Chain

We have all been affected by the supply chain disruption either personally or professionally over the past year. The majority (84.5%) of manufacturers are currently challenged by their supply chain in some way. Many distribution companies are experiencing similar supply chain issues. The causes of disruption within the supply chain are many, and the challenges are chiefly the new difficulties predicting and controlling volumes and prices. Suppliers and their buyers face longer lead times for materials and goods, transportation challenges, inventory stock depletion or outages, variable workforce needs, potential breaches of performance clauses in contracts, and rising prices. The goal of just-in-time supply and production has often morphed into the whenever-we-can reality. Sustained periods of supply chain disruption have led M&D companies to seek more supply chain flexibility and visibility.

Supply Chain Collaboration in Wholesale Distribution is a way to help mitigate risk and respond to unforeseen challenges. Giving suppliers greater transparency can help transform the supply chain from disconnected to collaborative. Collaboration is just one part of the overall transformation of a distributor’s logistics processes. To compete in the global market, companies need to innovate to meet demands, but also do a better job of planning, procuring, storing, and delivering goods.

Nearly 75% of manufacturers have found alternative suppliers for some inputs; however, 88% of manufacturers are still experiencing longer than usual lead times with 83% having to delay orders to prioritize highest value customers. This chart represents respondents’ answers to what they have shifted due to supply chain disruption.

What Manufacturers Have Done Due to Supply Chain Disruptions, Q4:2021
What Manufacturers Have Done Due to Supply Chain Disruptions, Q4:2021
Note: Respondents were able to check more than one response; therefore, responses exceed 100%. Source: NAM Manufacturers’ Outlook Survey

Attracting and Retaining Skilled Talent

The variability and availability of talent is evolving, perhaps at a more rapid pace than before. Younger people are entering the workforce as greater numbers of older workers are leaving the workforce, and more people are working remotely (or expect to and/or are changing companies to do so). In a recent Industry Week webinar, it was noted that 4 in 10 manufacturers are reporting skills shortages, and 30% are experiencing staffing issues. The challenge to recruit, hire, and retain talent will continue through 2022.

Because of the shortage in skilled talent, manufacturers and distributors have indicated that they were unable to onboard new business and lost revenue opportunities.

“In today’s tight labor market, employers need to offer more than just a paycheck to entice workers. Good benefits, above-average wages, and time off are a few ways to do this, but offering professional development opportunities can also draw in top talent. Good employees are always striving to seek more knowledge, polish their professional skills, and aim for excellence each day on the job. They want jobs that help them build a career. By offering opportunities for employees to grow, employers can attract driven talent and benefit from more skilled employees.”
SHARON POWLUS, PRESIDENT/CEO, EMPLOYMENT PARTNERS

How Manufacturers are Addressing the Skills Shortage, 4th Quarter 2021
How Manufacturers are Addressing the Skills Shortage, 4th Quarter 2021
Note: Respondents were able to check more than one response; therefore, responses exceed 100 percent.
Source: NAM Manufacturers’ Outlook Survey

Business Optimism

Despite the continued challenges, many business leaders exhibit optimism out of their resilience. In a recent Industry Week webinar, 40% of survey respondents felt the current business outlook within the manufacturing industry was prospering followed by 25% who said they felt it had recovered.

Overall, 78% of manufacturers had a more positive outlook for 2022 than they did in
2021. Respondents’ confidence is backed up by performance and adapting to challenges, with 57% of the respondents increasing their sales and revenue in 2021. In 2022, 78% believe that sales and revenue will increase even more. This is needed positive trajectory for the year ahead in the manufacturing and distribution industries.

Manufacturing Outlook Index, 2019-2021
Manufacturing Outlook Index, 2019-2021
Source: NAM Manufacturers’ Outlook Survey

Business Performance/ Strategies

Sales & Profitability Strategies

Top goals of manufacturing and distribution companies were growing sales, improving financial performance, and increasing business value. It’s no surprise that these still hold true moving into 2022.
There are many stories of challenges and resolve in the manufacturing community. For plants running at or near capacity, shutting down completely for 1-2 months left a big hole to fill in terms of annual revenue and top-line results. Also, some areas of manufacturing have seen sustained increased demand, only to have supply chain disruption cause difficulty in meeting the increased demand. On a more positive note, many of the manufacturers we work with were on a run rate that looked more like pre-pandemic levels at the end of 2021.

Sales growth often has not come from volume though, and instead M&D companies have raised prices across their segments at least once if not twice or more in 2021. As we described above, with material cost increases, less than optimized supply chain, and new investments in the labor force, achieving profitability targets has generally required price increases. Accordingly, the expected growth rate for prices of company products was a record high result at 5.9%.

M&D businesses may still have opportunities to restore or improve cash flow. For companies selling multiple products, the cost structure of those products may have increased differently, and a thorough analysis of gross and net margins can lead to decisions that produce higher profitability and increased cash flow.

Top Business Goals
Top Business Goals

Capital Spending

When asked in what areas they plan to increase their capital spend, almost half plan to invest in acquiring new locations or facilities. Research and Development and training employees tied for second at 30.4% each. Growing M&D companies are twice as likely to increase capital spend in acquiring new locations and three times as likely to increase spend on employee training than their no growth peers.

Areas in Which Increased Capital Spend is Anticipated
Areas in Which Increased Capital Spend is Anticipated

Mergers & Acquisitions

We reported in our 2021 report that growing M&D companies were twice as likely to increase capital spend to acquire new locations. In Industrial Distribution’s recent survey25, 67% said that growth via mergers and acquisitions would be part of their plan while 43% plan to expand their physical location, slightly down from 45.7% last year. Similarly, we find that while focus may have shifted slightly on expanding physical locations, this still holds true for 2022.

Areas in Which Increased Capital Spend is Anticipated—Growth vs. No Growth
Areas in Which Increased Capital Spend is Anticipated—Growth vs. No Growth

Key Business Topics

Research and Development

In our 2021 report, we noted that M&D businesses were allocating 30.4% of their capital spend to research and development. According to one of our partner firms in Leading Edge Alliance (LEA) Global respondents of their manufacturing survey indicated that they spend anywhere from half a percent to 20% of revenue researching and developing new products, with the majority reporting an average around 5%. The capital spend is allocated to activities including improvements to existing processes, development of new processes or systems, and new product or service development, which all qualify as research and development expenses eligible for tax credits.

Specifically with manufacturers, the survey reported that 36% of respondents launched a new product or service in 2021, some with pivots to make personal protective equipment (PPE) or other high-demand items.

Acquiring/Retaining Talent

With a majority of manufacturing and distribution companies experiencing growth, plant management staffing needs are close to pre-pandemic levels. For 72%, their top strategy for 2022 was focused on attracting and retaining talent.

The candidate demand in the marketplace makes it even more crucial for companies to increase salaries in order to attract and retain employees who possess the experience, skill set, education, and industry knowledge required. As reported in our 2021 survey, 41.7% planned to increase compensation, and we expect a higher percentage of M&D companies to do so in 2022.

Strategies for Acquiring and/or Retaining Talent

“We are seeing a continuous evolution in talent acquisition. The demand for talent is at one of the highest levels in our firm’s 25-year history. Today, top talent candidates with proven experience and career progression typically have multiple job opportunities, so employers need to use every tool in their toolbox to secure that talent as quickly as possible. That includes offering the right salary, as those are increasing across the board, and enhancing their hiring process for expedience from interview to offers, as those dragging their feet will likely lose their first choice. Companies that choose to look at retention strategies and ways to ensure their company culture is positive will have the greatest chance of keeping their best employees. They will be the winners as the cost of turnover is not cheap! Maintaining a policy of no salary increases or bonuses can potentially put you at risk. When times were lean, team members may have been thankful to just keep their jobs; however, those who may feel overworked and underpaid now will look at new opportunities, especially if they fall into their laps.”
SHERRIE WHATTON, PRESIDENT/CEO, STAFFING SOLUTIONS

Technology Usage

From our survey collected earlier in 2021, nearly 46.7% plan to improve performance of existing systems while 33.3% plan to replace. We have seen a slight shift moving into 2022 with more M&D companies looking to invest in new systems now that they have improved performance of their existing systems.

A full system implementation is a massive undertaking, even for the most diligent and disciplined of organizations. Couple that with the general notion that most system capabilities are underutilized, and you see preferences to add best of breed tools to enhance the usefulness of existing systems.

Current Strategy for Managing Business Technology

“While it is important to receive ROI from technology investments, now more than ever it is critical to understand the competitive edge that staying current with technology provides a company. The fundamental reason many companies are moving to new platforms and cloud-based solutions is the increased functionality these solutions provide.”
STACY SCHUETTLER, PRESIDENT, TECHNOLOGY SOLUTIONS

Cyber & Data Security

The pandemic opened many new avenues for cybercrime as companies were forced to rely on networks to keep business moving as they pivoted to remote work. Cybercriminals found new weaknesses in cybersecurity systems to exploit, and this threat has affected businesses of all sizes. Human error is cited as the most common reason for cyber intrusion and data compromise.

Executives in the M&D industry are more confident in their network security than other industries; however, only 57% had conducted an IT penetration test within the last year, and 14% had never conducted one. The best security system in the world is still vulnerable if employees don’t understand their roles and responsibilities in safeguarding sensitive data and protecting company resources. Cybersecurity Ventures predicts that the security awareness training market will grow from $1 billion in 2014 to $10 billion by 2027. When it comes to cybersecurity, continually updating your employees with the latest security awareness education is one of the most important things you can do.

Digital Transformation

Disruptive change is all around us. M&D companies can use digital transformation to drive change by increasing revenue, improving profit margin, controlling costs, forecasting cash flow and managing debt.

The most critical piece of a digital transformation is your people. M&D companies should not implement technology just for the sake of implementing technology. It is imperative to spend time evaluating where operational efficiencies exist and if business processes can be changed to eliminate them.

The speed at which technology is changing is accelerating exponentially. Features such as machine learning, artificial intelligence, business analytics, and mobile enablement are no longer only available in enterprise level solutions targeted at Fortune 500 companies. There are many software applications that have this functionality at price points appropriate for small and midsized businesses. Having timely information, visual representation of trends and potential risks, and the increased operational efficiencies that AI and machine learning provide results in lower costs and/or increased profits.

WHAT IS DIGITAL TRANSFORMATION?

Testimonial Icon
“Digital transformation is how businesses use digital technologies to create new or modify existing business processes, practices, models, culture and customer experiences to meet changing business and market dynamics. Simply stated, it’s about identifying how you must adapt your business to drive customer loyalty and maintain a competitive edge in the digital age.”
KENNETH SIMS, VICE PRESIDENT OF BUSINESS SYSTEMS, TECHNOLOGY SOLUTIONS

Outlook

Most M&D companies have substantially recovered from the pandemic, and after an extended period of resilience, they are feeling optimistic about 2022. Challenges and disruptions continue primarily with materials costs, supply chain, and the labor supply and cost. Profitability strategies are emphasizing price increases and enhanced use of technologies. Operations strategies are emphasizing supply chain diversity and alternatives to regain predictability and control to inventory management. Cyber threats are ever present and require ongoing diligence and training.