Manufacturing 2.0: Energy, Volatility, Rules and Age

The role of manufacturing consultants has changed dramatically in recent years—“20 years ago, you had guys who smelled of the oily rag making the lines run faster,” notes one industry veteran—because of the number and magnitude of pressures and challenges confronting the industry. These forces, which include several forms of volatility as well as global competition and sustainability mandates, are driving manufacturers to transform ways doing things that have been in place and ‘agreed upon for decades.

North American manufacturers are fundamentally rethinking their strategies due to a long list of drivers including pressure from environmentalists; an ongoing need to do more with less; increasing government
regulations; increasing (once again, after a brief respite) oil prices; a scarcity of raw materials; the undervalued Yuan (and its labor arbitrage calculus); global workforce dynamics; and the need to contain or reduce costs in procurement, manufacturing, warehousing, inventory, and transportation. Yet, just as commodity prices (like oil) can swiftly change, so, too, can the external forces and trends creating challenges and opportunities for manufacturers. Thinking of setting up a plant in China? Think again.

China’s interest in continuing to play the role of low-cost sourcing partner is wanings. Manufacturing consultants identify numerous drivers of change, most of which occupy the following categories:

  1. Labor Quality, Cost and Supply: A mid-2010 study conducted by the U.S. Council on Competitiveness and Deloitte’s global manufacturing industry group identified talent—specifically, “talent-driven innovation”—as the most important determinant of a country’s manufacturing competitiveness. Human capital costs are increasing in the U.S. at a time when a significant portion of the current manufacturing labor force reaches retirement age. This aging workforce and dwindling supplies of domestic skilled labor are forcing companies to rethink where and how they source and develop talent. Healthcare is clearly on the minds of people running U.S. manufacturing companies. Healthcare costs have increased by an average of more than 10 percent in the past several years. The cost of labor continues to be a huge issue for manufacturers in North America. For older companies that have grandfathered benefits such as pensions and medical benefits for retirees, those costs will continue to create headwinds that will cut into profitability and create pressure to find other alternatives for sourcing production.
  2. Volatility: Although the U.S. manufacturing sector’s recovery from the recession (17 consecutive months of growth as of January, according to the Institute for Supply Management’s industry index) has been welcome, volatility continues to deliver swift impacts to manufacturers. These forms of uncertainty include macroeconomic (think quantitative easing), commodity prices, and regulations. For example, recent declines in the relative value of the U.S. dollar have made global exporting more attractive to many mid-sized domestic manufacturers. Domestic manufacturers are increasingly bringing capacity back to North America and/or sourcing from nearer in locations such as Mexico to ensure they have rapid response capability as well as strategic capacity should there be issues with China supply. Manufacturing experts also report that the demand volatility has increased significantly in recent years and should continue for some time. This condition pressures manufacturers to make their cost structures less fixed and more variable. Commodity and raw material prices are rising, so manufacturers will need to actively manage that risk, while balancing it with the need to increase prices to preserve margin.
  3. Energy Issues: The demand for more rigorous awareness and remediation of environmental impacts is coming from several stakeholders, including regulators, consumers and trading partners. The
    current “environment concerning the environment” also poses opportunities. Energy supplies, costs and regulations are helping to drive innovation, change and, of course, consulting services. Companies are looking much more carefully at how energy is used.
  4. Regulations and Risk: Looming CO2 legislation in the U.S. is far from the only regulatory issue manufacturers are confronting. All publicly listed companies are contending with the new requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Within manufacturing, the newly enacted Food Safety Modernization Act is sending ripples up the supply chain in the food sector. Last year, Ernst & Young’s annual cross-industry survey of CEOs on business risks identified “regulatory and compliance concerns” and the top business risk in the U.S.

MRP Consulting has become the largest Dynamics GP Manufacturing partner in North America. We have worked with over 600 companies Worldwide and are available, at ZERO cost to you, for a 1-day onsite visit in which we will map out your current processes and measure them again your current systems. Sometimes a “tune-up” is all that is needed to keep your business running as it should. We can all agree that having the right software will not only improve internal processes and productivity, but will also improve customer relationships.

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