June 16, 2020

State of the National Manufacturing Industry

By Jon Shoop, Office Managing Partner, Downtown Cleveland

State of the National Manufacturing Industry Paycheck Protection Program

The manufacturing industry, which employs some 13 million workers in the U.S., is meeting multiple challenges as a result of the COVID-19 pandemic. Issues include supply chain disruptions, lack of capital resources, a drop in consumer spending and, for some, decreased workforce productivity. According to a recent survey of the National Association of Manufacturers (NAM), roughly 80% of manufacturers expect the pandemic to have a financial impact on their businesses compared with roughly one-half of companies in other industries.

Even manufacturing businesses faring better must brace for long-term global supply chain changes and a prolonged recovery. In this article, the first in a series of updates on the manufacturing industry and how it is responding to the pandemic, Marcum assesses the following three areas.

1) Impact on Materials Sourcing

COVID-19 has resurfaced a sourcing concept that was very much in the news five years ago: reshoring. Simply put, reshoring means bringing as much production as possible back to the nation where customers and primary manufacturing facilities are housed. Reshoring offers a great benefit when viewed through the lens of the total cost of ownership (TCO), versus savings through lower foreign wages and total cost of business.

What is interesting about the reemergence of reshoring as a business strategy is the timing. Over the past two to three years, geopolitical negotiations resulted in tariffs from certain countries for particular products, some as high as 25%. While tariffs were viewed by manufacturers as a real threat, the higher cost to manufacturers and downstream customers ultimately wasn’t enough to compel manufacturers to take action. Time will tell if COVID-19 disruption is enough to reenergize the concept of reshoring into action, with the positive impact of increasing employment and domestic GDP.

2) Workforce Reductions

By the nature of their operations, manufacturers require a largely on-site, in-person workforce. Correspondently, that labor force could also serve to spread the virus from person to person. Businesses that didn’t close facilities during the pandemic have had to operate with a scaled-back workforce as a precautionary measure to reduce density in their facilities. The challenge has been to do so while maintaining production.

Some of the tactics employed by manufacturers include:

  • Reducing headcount on the shop floor.
  • Shortening shifts to a maximum of six hours.
  • Running four six-hour shifts to maintain production levels.
  • Asking (mandating?) employees to wear company-provided personal protective equipment (PPE).

To retain a workforce already stressed by a skilled labor shortage, some employers are paying employees a full eight-hour shift for six hours of work.

3) Cost of Goods

At least in the short-term, there has been limited impact on the cost of goods. In fact, raw material pricing has remained stable for most non-commodity-based manufacturers. The imminent risk for the manufacturers are higher costs associated with vendor inefficiencies and correspondingly lower margins. If fixed costs remain stable, production levels will also need to remain stable. If not, each item produced will carry a higher cost to that manufacturer. The good news for consumers is they are generally shielded from price increases associated with inefficiencies.

Manufacturing Sector Outlook

Marcum expects the manufacturing industry to maintain or slightly contract for the second half of the year. The first two quarters of 2020 were generally strong for manufacturers, unless they were in vertical sectors supplying tradeshows, retail or aviation, the latter of which declined drastically. As we talk to manufacturers about the balance of the year, some are predicting smaller backlog and fewer orders. These manufacturers are considering labor reductions (shorter shifts or furlough) after Paycheck Protection Program (PPP) funding is depleted, although they are hopeful there may be additional government stimulus. Others haven’t experienced any significant curtailment in backlog and orders.

Looking ahead, manufacturers should review their supply chain vulnerabilities, examine cash flow projections and have contingency plans in place to prepare for any disruptive event. An uptick in domestic manufacturing achieved through automation and robotics may be one of the most significant changes to come from the pandemic. Marcum’s Manufacturing, Retail & Distribution advisors will continue to update you on the state of the nation’s manufacturing industry. Contact your Marcum professional for assistance.

Coronavirus Resource Center

Have more questions about the impact of the coronavirus on your business? Visit Marcum’s Coronavirus Resource Center for up-to-date information.