Manufacturing outlook for 2021 focuses on resilience
As midmarket manufacturers focus on recovery from the pandemic, many will take advantage of the opportunity to accelerate Industry 4.0 projects, according to BDO USA.
The manufacturing outlook for 2021 is mixed, as many struggle to recover from a difficult 2020 while others capitalize on the openings or accelerated opportunities for growth and innovation brought on by the economic challenges.
That's according to the "2021 BDO Manufacturing CFO Outlook Survey," which analyzed responses from 100 CFOs at midmarket manufacturers. The report was conducted by tax and advisory services firm BDO USA.
The survey results show an industry at a crossroads. Almost three-quarters of midmarket manufacturers reported that their businesses are struggling or just surviving, while at the same time just over half projected an increase in demand in the next six months. The demand increase presents challenges, and the vast majority (83%) of survey respondents estimated that it will take more than a year to recover from the continuing effects of the pandemic.
Eskander Yavar
Not only do manufacturers have to wade through the disruptions from 2020, but the constraints of having more remote workers and social distancing due to the pandemic have made it difficult to meet increased demand, said Eskander Yavar, national leader at BDO USA's manufacturing practice.
"It's a matter of supply and demand balance. They haven't been able to keep up with the spike in demand and the increase in their capacity to produce that happened in the spring and summer of last year," Yavar said. "The businesses that were interrupted are predicting it will take significantly more than a year to catch up with their demand versus those that weren't interrupted; it's just simple math."
Finances will be a challenge for midmarket manufacturers in 2021, according to the report. Just under half of respondents, 45%, expect revenue to increase, while 37% expect to see a decrease in revenue and another 18% expect there will be no change in revenue. A significant number of respondents (78%) reported receiving government assistance to help deal with the effects of the pandemic, but a return to growth will not be easy.
"While government assistance helped carry manufacturers through 2020 -- and additional relief measures could be on the horizon -- cashflow will continue to be a major hurdle in 2021," the report stated. "Whether because of continued operational disruptions, delayed payments from cash-strapped customers or suppressed revenues."
The interrupted and the uninterrupted
The pandemic did not affect all midmarket manufacturers in the same way, and the report distinguishes businesses that were interrupted (82%) by the pandemic versus those that weren't (18%). Interrupted manufacturers were forced to close some or all their facilities at some point, while uninterrupted manufacturers went through the year without needing to close any facilities.
According to the BDO report, a company's manufacturing outlook for 2021 depends on whether it was interrupted or uninterrupted. Half of the uninterrupted companies expect that their companies will recover in less than one year, while only 10% of interrupted companies expect to recover in under one year. Further, 78% of uninterrupted companies reported that they will be thriving by next year compared to 41% of interrupted companies.
The businesses that were interrupted [by the pandemic] are predicting it will take significantly more than a year to catch up with their demand versus those that weren't interrupted; it's just simple math.
Eskander YavarNational leader, BDO USA's manufacturing practice
Innovation opportunities increase
The good news for uninterrupted and interrupted companies alike is that the opportunities to innovate are increasing, according to the report. A movement by manufacturers to implement Industry 4.0 technologies such as IIoT, AI, robotics and automation was already underway, and this will accelerate due to the COVID-19 pandemic disruption.
The prime driver for the acceleration is the drive to implement e-commerce platforms either for B2B or direct-to-consumer commerce, Yavar said.
"Manufacturers are all chasing the KPI thresholds around quality and on-time delivery that Amazon set, so everybody's trying to get as close as possible to that two-day or one-day service," he said. "That's not easily done, so they're scrambling to understand how deploying technology like robotics can speed up the process and strategically align distribution functions, whether it's in-house or external, to cut costs."
The increasing importance of the supply chain as a vital business process will spur innovation and bring new players into the market, Yavar explained.
"It's akin to the ERP market of the 1990s and early 2000s where there was the traditional 'Big 5,' but then we saw the explosion of players with the advent of cloud. The same thing's happening in the supply chain technology space today," he said. "The barrier to entry to produce the technology and get in the marketplace is much lower than it used to be, so this market will become more and more dynamic over time, there will be consolidation, and new technology and the supply chain will be seen not as a cost center but a differentiator for manufacturers over the next several years."
Pandemic silver linings
The pandemic has also enabled manufacturers to make decisions faster, innovate on new products and services, and accelerate digital transformation projects, according to the report. For example, because the pandemic has required social distancing among employees, manufacturers have accelerated efforts to implement automation and remote access technologies. Companies have also had to become more flexible and pivot to producing new products, such as personal protective equipment (PPE), or introduce new aftermarket services, such as post-sale maintenance.
For example, almost half of the manufacturers have adopted or are planning to adopt strategies to produce PPE or other critical COVID-19-related supplies, and more than two-thirds have introduced or plan to introduce new aftermarket products or services such as product maintenance programs or subscription-based analytics, according to the report.
These aftermarket products and services provide ways for manufacturers to diversify and increase revenues that may be lost in other areas.
"Aftermarket services, an Industry 4.0 trend underway pre-pandemic, can provide recurring revenue streams at a time when demand for new purchases may be unseasonably low," according to the report.
Eskander Yavar
