Sector trends & challenges
The main focus of manufacturers should be on liquidity as customers cancel their orders and look to extend payments. Organisations who are not able to access external sources of funding are at high risk of running out of cash.
Although many firms have taken steps to reduce their outflows and cut costs, even those who believe they have adequate liquidity need to act and reduce their cash burn to ensure they retain sufficient working capital.
Operations and supply chains
To support a successful restart, manufacturers should focus on improving the resilience in their supply chains. The readiness of the wider supply chain will be critical as manufacturers seek a return to profitability.
Sector rating profile
Visible restructuring activity across the sector has increased in recent years as concerns around Brexit, global trade issues and, latterly, the COVID-19 outbreak, have increased volatility and added operational complexity. Whilst the financial health of individual manufacturers will vary according to the condition of the end-use market(s) they are supplying, we have observed an overall tightening of margins across our client base in 2020 and into 2021, together with growing liquidity pressure stemming from supply-chain disruption and cancelled orders.
The outbreak of COVID-19 has disrupted virtually every area of the manufacturing sector. Though the sector is broad, and the impact has varied from business to business, some key issues we’ve noted include:
Importance of liquidity. Cash management will remain the key challenge for many manufacturing businesses, especially as government support schemes start to be withdrawn. Minimising cash outflow, drawing down on existing lending facilities and streamlining some operations will be key. Organisations who are not able to access external sources of funding are at high risk of running out of cash.
Cost streamlining. Although many firms have taken steps to reduce their outflows and cut costs, even those who believe they have adequate liquidity need to act and reduce their cash burn to ensure they retain sufficient working capital.
Supply chain fragility. Initial worries around supply chain disruption from China and Far East plants has been overtaken by broader concerns regarding supply chain failure. Many manufacturing businesses operate with relatively low stocks and/or single supplier contracts. As such, supply chain failure will likely have a major operational and financial impact. To ensure a successful restart, manufacturers should focus on improving the resilience in their supply chains. Getting the supply chain out of hibernation at the right time is also critical to returning to profitability.
Operational challenges. Whilst most businesses have adjusted to the requirements of social distancing, it continues to bring additional costs and complexity e.g. daily deep cleaning, increased staff absenteeism.
Capital expenditure. Many businesses have paused capital expenditure projects. For manufacturers supplying into such activities, obtaining new orders/contracts in the months ahead may prove challenging.
Some industrial manufacturing businesses have been able to adapt highly effectively, for example retooling production lines in order to support the global pandemic response or moving from B2B to B2C products and distribution channels. In the long-term, a desire for improved supply chain resilience may result in reshoring of some activities, which may support UK operators. For most, however, there remains a period of significant uncertainty as government economic support is reduced.
Many of the pre-COVID issues have not gone away either. Brexit remains a further area of uncertainty hanging over the UK economy, as are global trade concerns. With environmental and ethical standards receiving increased public scrutiny, both B2B and B2C manufacturers need to have clear oversight of their own activities and those of their supply chains.
Find Your Expert
Kenny McKay is Interpath Sector Leader for Industrials, which includes Industrial Manufacturing as one of three core segments. Nicky Ogden and Matthew Courtman-Stock co-lead our approach to supporting manufacturing businesses nationally. For a full list of our senior people with experience in this sector use the button below.Our senior team