While manufacturers continue to battle inflation, increased interest rates, workforce shortages and supply chain challenges, it is becoming increasingly evident that leaders must also review their strategic and financial plans to ensure they are prepared for this recession risk. Join Joe Haehner, Industrial Manufacturing Partner, in this podcast series as he explores a variety of strategies manufactures can implement now to proactively rein in costs while simultaneously reinvesting in growth.
In Part III of this series, Jim Holman, Director of Digital Advisory Services, provides insight into key process optimizations manufacturers can utilize to reduce operating costs, lower margins and subsequently increase revenue. In addition, he reviews best practices for partnering with vendors and suppliers, and he analyzes inventory sampling strategies to maximize labor utilization.
We invite you to tune in to all podcasts in this series:
- Part I: Industry Economic Outlook – Chad Moutray, Chief Economist | National Association of Manufacturers
- Part II: Identify and Implement Technology and Business Process Improvements – Steve Holliday, Director, Digital Advisory Services | Cherry Bekaert
View All Industrial Manufacturing Podcasts
JOE HAER: Welcome to Cherry Bekaert’s industrial manufacturing podcast. We are excited to have our next podcast in our latest series, "Recession Readiness: Strategies to Take the Lead," where we are exploring a variety of strategies manufacturers can implement to proactively rein in cost while simultaneously reinvesting in growth.
I’m Joe Haer, and I’m a partner at the firm. I focus my practice on developing and executing multinational operational strategies.
Last week, we had the pleasure to talk to Steve Holiday about adjusting operational strategies. Today, we will be exploring more tactical activities. I’m thrilled to have Jim Homan with me today.
Jim is a director within our firm’s Digital Advisory Group and has more than 25 years of experience advising clients specifically with digital transformation, IT strategy, business process optimization, and analytical reporting. Our Strategy and Operations group consults with clients to improve and re-engineer business processes, eliminate non-essential procedures, and reduce costs.
Jim serves as the firm’s supply chain lead with the Consortium for Advanced Management International (CAM-I). Before joining Cherry Bekaert, Jim worked for a boutique consulting firm, served as an IT director for a Fortune 500 specialty chemical company, and worked as a senior information technologist. Welcome, Jim.
JIM HOMAN: Thanks, Joe. It’s great to be here.
JOE HAER: Good to have you. Let’s dive right in.
From your perspective, Jim, what decisions can industrial companies make to improve their financial position in anticipation of a recession that will not need to be undone when the economy begins to improve?
JIM HOMAN: That’s a great question. We work with a lot of organizations in the mid-market, upper and lower mid-market.
Coming out of the pandemic, these companies faced significant disruptions in their supply chain from both material and labor shortage perspectives. Some of those material and logistical constraints are a bit better, and labor has settled into the new normal, which involves less experience due to high turnover and levels that are still below pre-pandemic levels.
These types of shortages are still hanging around. However, many sectors are now starting to see slowing demand, such as housing, luxury goods manufacturing, and low-end computers.
To best answer your question, process optimization is a good place to start. These efficiencies you bring to your organization will not need to be undone, which is the point of the exercise.
Industrial companies should ask themselves: which processes can we change that will reduce waste, cost, delay, errors, rework, and low-value activities? These optimizations can lower our operating costs, improve margins, and in many cases increase revenues.
For example, better processes mean higher quality data, which leads to better pricing decisions, improved delivery performance, and the ability to operate with reduced staffing. I like industrial organizations to automate processes such as accounts payable, bank reconciliation, and accounts receivable.
The big one industrial organizations have been struggling with for 30 years is reducing reliance on paper. This includes the administrative area, such as paper checks, work orders, and purchase orders. If you print it, consider changing it.
JOE HAER: Great thoughts, Jim. From your perspective, if an organization has limited resources, time, capacity, and budget, what would be your focus? What would you say is the biggest bang for the buck or a quick win?
JIM HOMAN: We like to look at where money is left on the table. The big ones are going to be bad debt and slow-moving and obsolete (SLOB) inventory.
This is inventory carrying on the books for which they have made obsolescence reserves while it takes up space. The other big one is accounts payable.
We’ll talk about this a little bit later, but there are opportunities where, if we could pay our suppliers quicker, we could get an early payment discount. Those are quick wins that are easy to identify, and deployment of the solution is fast.
JOE HAER: Very helpful. What opportunities exist during a recession for industrial companies in partnering with their upstream supply chain partners?
JIM HOMAN: We work with global supply chain participants, such as ATI Metals, one of the largest suppliers of titanium for aircraft manufacturing and the U.S. Navy.
New ideas have been brought to the table regarding looking at vendors as strategic partners. When you engage with your suppliers, you will find they are very interested in improving the digitization of their customer relationships.
Most vendors that survived and thrived during the pandemic are considering their own optimization and costing strategies. One example is a large increase in mid-sized companies re-embracing digital trading standards, such as EDI, to improve transactional communications and drive out costs.
Your vendor would likely be a willing recipient of your digitization because they are doing it as well. Other opportunities include sharing forecasts with key suppliers.
This has been possible for years and, to be honest, can be a bit controversial if your vendor is not truly a trusted partner. However, with any impending change in an economic situation like a recession, data sharing is more important than ever.
Sharing the trends you detect in your customer base—such as what, when, and how they purchase—can be vital to your suppliers as they line up inventory and pricing contracts. Lastly, consider multi-year contracts to lock in prices and confirm inventory availability, but only for trusted suppliers on sound financial footing.
Even if the supplier is not the cheapest, we recommend running a D&B report on them. If you would not put your supplier on Net 30 terms, don't buy from them.
JOE HAER: From this explanation, would you say that manufacturers can use predictive analytics to better forecast and be more prepared? Can they look at parameters outside of their control that impact production, sales, and revenues, and share this information in an arrangement with suppliers?
JIM HOMAN: Absolutely. We are even seeing value in sharing pre-sale trends using data and analytics.
Some suppliers in commodities markets require customers to share forecasts, but there has rarely been skin in the game or incentives for the customer to ensure an accurate forecast. What we're seeing now is value in sharing data from your CRM and business development activities.
What are you quoting? What quotes are you not winning and why?
It could be that you offer three variations of a product and the customer chooses one. Understanding why the other ones weren't selected—whether because of price, quality, or delivery ability—helps suppliers because they have a direct influence on those factors.
These insights help vendors understand a lost sale downstream. It is almost like a win-win situation.
As Ronald Reagan said, "Trust, but verify." We are going to trust our vendor to be a good steward of our data, but you want to build that trust and put in guardrails. It is also possible to redact some of that content to be fair.
JOE HAER: Touching on inventory, what can manufacturers do within their supply strategy to maximize labor utilization without building up excess finished good inventory?
We see many manufacturers building up buffers due to supply chain challenges, which negatively impacts working capital. How do you think this could be optimized?
JIM HOMAN: The automotive sector is near and dear to your heart, Joe. I like the "make-to-stock" and "make-to-forecast" models used in automotive manufacturing.
At the beginning of the pandemic, colors and variations were based on forecast. However, disruptors like Tesla used a configured sales cycle. They might have a showroom, but they didn't have a lot full of every available model.
Industrial organizations should take a page from Club Car, Tesla, and now Ford. This involves holding off on final assembly and determining at which point in your multi-level manufacturing process you can pause just short of the final product to allow for customer configuration.
Think of it as a near-finished good that you can flex into different options. Invest in the capability to complete these goods at the last possible moment.
While this puts pressure on processes and systems, it enables customers to have more options. A new challenge could be excess manufacturing or warehouse space, which we will talk about later, but consider locating final assembly closer to the end consumer to offset reduced showroom inventory.
JOE HAER: Regarding labor costs and the challenges our clients face, we receive many questions around process automation and robotics.
Instead of filling open roles with new bodies, companies are seeing if they can be more efficient using technology. We also see a big push for bringing manufacturing back to the United States. To be cost-competitive, you need to look at these measures, and we will likely cover nearshoring in a future podcast.
From your perspective, which areas offer the shortest return on investment for process automation during a recession? What can companies employ to reduce the time it takes to see positive impacts?
JIM HOMAN: That is probably our number one question. We have clients who are skeptical because they have had consultants promise fast ROI that never materialized.
Every consulting and automation initiative has to fund itself. We treat it like an investment. If our rate of return on process optimization doesn't exceed what we could get in the stock market, why would we do it?
I would love to say the answer is robotics, but it isn't. Long-term investment in robotics is currently shaky because we don't know where those automation elements should be located.
Back-office systems and processes are a great place to start because they have the easiest business case and the fastest ROI. Organizations are looking at accounting because you aren't touching the product, and it isn't customer-facing or supplier-facing.
Industrial organizations tend to have large, short-staffed accounting departments due to the complexity of the model. We found that our industrial clients are, on average, 20% to 25% understaffed in administrative resources.
What if you could automate processes so you didn't need to hire a replacement? We start by looking for vendors that offer early payment discounts.
Assuming you have the cash, you can save 1.5% if you pay within 10 days instead of Net 30. If your processes are poor, you can't move that invoice from receipt to payment in 10 days.
For organizations purchasing $300 million worth of components, taking advantage of early payment discounts can fund the automation project right away. The ROI can be as short as three months.
Look for open staff positions you can't fill and look at time spent on AP and AR. Look at past financial audits where risks like segregation of duties or fraud risks were raised.
Think about the pressure on segregation of duties when an accounting department of eight is down to six. You might have staff members processing both purchase order receipts and payments, which creates risk.
Also, look at inadequate bad debt reserves. Using data and analytics, we can monitor customer financial performance electronically to detect when borderline accounts start to experience recession-based pressures.
Watch your Day Sales Outstanding (DSO) and your monthly financial close. If it takes longer than 10 days, that’s a litmus test. If it’s getting longer because you are short-staffed, senior decision-makers are waiting too long for key data.
We found you can improve relationships with vendors and customers by automating these backend processes with 25% fewer administrative resources. ROI is often less than six months.
We are working with a pharmaceutical distributor right now where automating AR and AP had a negative ROI calculation because the savings were so immediate—basically month one after deploying the solution.
Finally, look at inventory management. Identify slow-moving and obsolete inventory that can be liquidated via secondary markets to free up space and generate cash.
We suggest secondary markets so you don't cannibalize primary product sales via fire sales. Some organizations are finding they can consolidate warehouses, saving on rent or taking advantage of a resilient real estate market by selling or renting excess space.
JOE HAER: Jim, thanks so much for these insights. It is clear that manufacturers can execute different activities to prepare for a potential recession and even take the lead by implementing these strategies.
We invite you to follow Jim on LinkedIn to stay up to date with his latest activities. Thank you for joining us for this webcast, Jim.
JIM HOMAN: Thanks for taking the time to be with us this morning.
JOE HAER: I'm Joe Haer, and this is Cherry Bekaert’s industrial manufacturing podcast series. Thank you all for joining us today, and we hope you listen to the rest of the series. Thank you.
