Industrial Manufacturing: Building a Competitive Recovery - Part I: Using Digital Strategies to Optimize Your Supply Chain

MATT BRADY: Welcome to Cherry Bekaert's Industrial Manufacturing podcast. We are excited to kick off our latest series titled Building a Competitive Recovery, where we will discuss the challenges of this COVID-19 recovery landscape and provide strategies to position your manufacturing business for future success.

MATT BRADY: I'm Matt Brady, leader of the firm's Industrial Manufacturing Industry Group. Today I'm joined by Joe Hanner, an assurance director who focuses his practice on developing and executing multinational operational strategies, and McKenna Bettingfield, a senior manager in our Digital Advisory practice who leads our analytical solutions group and drives digital transformation for our clients.

MATT BRADY: Welcome, Joe and McKenna.

JOE HANNER: Thanks for having me, Matt. Excited to be here.

MATT BRADY: Let's dive in. The focus of today's podcast is how manufacturers can use digital strategies to optimize supply chains. Before we jump into the digital aspect, Joe, I'd like you to bring us up to speed on the current state of supply chains. What are your observations surrounding industrial businesses' supply chain strategy?

JOE HANNER: Lots is going on in that space. U.S.-based industrial manufacturing companies are seeing increased demand for their products, mainly driven by consumers focusing spending and accumulated savings on activities closer to home or Stateside.

JOE HANNER: Demand surged for certain recreational products, like boats, during the pandemic. The Federal Reserve Bank of Kansas City stated that from March to April 2020 alone the savings rate nearly quadrupled. That means that for every $100 of disposable income, consumers saved $7 in December, and that trend continued through 2020 into 2021.

JOE HANNER: Manufacturers are faced with the challenge of not being able to satisfy increased demand because they are not able to source sufficient materials to produce sought-after products. UBS's chief economist Paul Donovan notes the world economy is producing goods at a near all‑time record rate, but no supply chain can accommodate a sudden 25% rise in demand. It would be unprofitable to hold that much capacity, and his assessment is accurate.

JOE HANNER: The sudden increase in demand and the already challenged supply chain due to COVID-19 restrictions and international sourcing strategies tests manufacturers in the U.S.

MATT BRADY: Are these supply chain challenges a new development?

JOE HANNER: The COVID-19 pandemic exposed weaknesses in current supply chains that had not been addressed previously due to related cost needs and strategic realignments. Doing nothing is no longer an option. International sourcing strategies have been under pressure for many years, most notably with the trade war and related tariffs with China.

JOE HANNER: Many manufacturers struggle to source critical parts and components from suppliers. Changing suppliers is not easy either, because high quality standards and contractual obligations must be considered. This is an industrywide challenge with widespread demand for certain parts. Chip shortages are one of the most pressing topics right now.

MATT BRADY: We've certainly heard about chip shortages, especially for those looking to buy cars and many other consumer goods. What's a solution from your perspective?

JOE HANNER: There is no quick fix. Local sourcing and nearshoring of production capabilities can be strategies to mitigate supply chain challenges, but taking a hard look at your existing supply chain and related implications is a good start. That assessment should be used to develop a future supply chain strategy for the organization.

JOE HANNER: Local sourcing refers to utilizing suppliers in closer proximity to manufacturing facilities to mitigate risks of delays and to enable using different transportation modes as needed, such as switching between ship, rail, and truck. Geographic proximity also provides more flexibility to cope with swings in demand.

JOE HANNER: Nearshoring often refers to moving production facilities from overseas, for example China, to the U.S. or countries like Mexico and Canada if the customer is located in the U.S. This reduces risks of shipment delays, though labor costs may increase compared to countries like China or South Korea. Overall, this is a strategic assessment and decision.

JOE HANNER: Useful assessment questions include: Where are my future customers and markets? What is my sales strategy—B2B or B2C? How fast can I make a change? How much will it cost, and what will be the return on my investment?

MATT BRADY: Certainly not a quick fix and no single answer—lots of factors to consider. We've discussed many of these strategies in past webinars and regularly present on these interrelated considerations. For our listeners, please visit cb.com to find previously recorded webinars on these topics.

MATT BRADY: Let's pivot and discuss potential digital strategies to manage supply chain challenges. McKenna, given Cherry Bekaert's expertise in digital transformation, what are some key trends driving change in the industry?

MCKENNA BETTINGFIELD: Since 2019 we've seen massive disruption in nearly all manufacturing sectors, which has forced us to accelerate analytics and digital transformation capabilities. Significant manufacturing pain points include labor shortages, global competition, and increased cost pressure.

MCKENNA BETTINGFIELD: Advanced analytics and the promise of AI applied to analytics are playing a pivotal role in manufacturing. AI is powerful given the enormous amount of data, repetition of tasks, and multi-dimensional systems.

MATT BRADY: For listeners less informed on the digital world, can you explain how AI works and its application to these outcomes?

MCKENNA BETTINGFIELD: One way to think of AI is as a computer program you can train with data to perform complex, multi-dimensional tasks. AI uses historical and real‑time data to predict critical future outcomes, reduce risk, improve operations, cut costs, and increase revenue.

MCKENNA BETTINGFIELD: It's easy to focus solely on descriptive and diagnostic analytics, which are hindsight. Hindsight is limited, which is why training AI with real‑time and predictive capabilities is critical. Predictive AI uses what our data is telling us to improve decision-making for the future.

MCKENNA BETTINGFIELD: AI can help reduce human error by identifying subtle connections and relationships from historical results. By implementing a data model, we reduce manual processes needed to perform analytics and remove noise, helping analysts and executives focus on the areas that matter to manage supply chains.

MCKENNA BETTINGFIELD: We have a client in industrial sales whose sales and inventory were disrupted by the COVID-19 pandemic. The old way of forecasting inventory no longer worked. My team implemented a model that removed the guess‑and‑check method and allowed the client to accurately position inventory needed for the next 18 months. That enabled analysts to focus on growth and new product deployment.

MCKENNA BETTINGFIELD: In that case, we leveraged AI to identify trends, account for outliers, and represent product needs to maintain a strong hold on supply and demand.

MATT BRADY: That sounds like a valuable exercise for the client. Can you tell us about forms of advanced analytics applicable to manufacturing and their outcomes?

MCKENNA BETTINGFIELD: Predictive Analytics is a form of advanced analytics that examines data to answer what is likely to happen. Connecting and utilizing available data can enhance success in manufacturing today.

MCKENNA BETTINGFIELD: For example, delivery times can be improved by incorporating a weather API into analytics to predict whether shipments will be on time. We worked with a company that was inconsistent in product delivery. They had a gut feeling about the cause, but could not prove it.

MCKENNA BETTINGFIELD: We implemented a weather API into their analytical models. The API incorporated historical rainfall counts and weather probabilities for all their shipping locations. Tied into their order data, we can now identify days when shipping will be delayed so those responsible can make preemptive decisions.

MCKENNA BETTINGFIELD: For companies heavily dependent on overseas inventory, we can monitor external factors such as trade agreements, government regulations, social and political unrest, world health, and current events. All this data is available. A recent example is the Suez Canal being blocked; using AI to monitor news results and incorporate those events with manufacturer-specific data can help determine risks between diverting shipping routes or waiting for clearance.

MCKENNA BETTINGFIELD: By applying Predictive Analytics, manufacturers gain agility, deeper insights, and can make faster, more accurate decisions.

MATT BRADY: Can we take a deeper dive on how Predictive Analytics can transform manufacturing?

MCKENNA BETTINGFIELD: Predictive Analytics elevates production line efficiency through data generated by sensors and monitors. Time and motion can be analyzed on the production floor to identify where processes can be improved. Predictive analytic algorithms can carry data models to explore how process changes can increase production using digital twins without disrupting existing lines.

MCKENNA BETTINGFIELD: It also enhances quality. Sensors and production machinery can analyze and flag when faulty products are produced, and it supports predictive maintenance by flagging when a machine needs repair or replacement. This leads to cost savings and waste reduction.

MCKENNA BETTINGFIELD: Supply chain prediction plays a role in identifying substandard feeder parts prior to final product failure. Insights gained from predictive models help manage inventory and supply, creating healthier and more productive supply chains.

MCKENNA BETTINGFIELD: The pandemic highlighted the challenge of lean manufacturing models' difficulty adapting to sudden demand changes. If Predictive Analytics had highlighted office closures' impact on toilet paper demand, manufacturers could have quickly adapted by repackaging and redirecting products.

MCKENNA BETTINGFIELD: AI can also improve manufacturing safety. With careful training and good analytical models, we can detect connections and patterns that are too subtle or random to identify from incident reports.

MCKENNA BETTINGFIELD: Finally, Predictive Analytics drives savings. Manufacturers can combine demand forecasting with an overall view of the manufacturing process to identify trends, anomalies, and risks to accurately forecast—critical for inventory management of commodity items.

MATT BRADY: It's clear from Joe's and McKenna's comments that strategic supply chain planning and the need for predictive versus reactive analysis are key drivers for industrial businesses. The impacts of supply chain disruption became a dinner table topic since spring 2020 when the COVID-19 pandemic began.

MATT BRADY: As we navigate recent challenges and prepare for future ones, it's important for industrial businesses to perform a strategic assessment of their supply chains, re-evaluate longer-term strategy, and incorporate technology that strengthens the business against market swings while helping to capitalize on market opportunities. These factors are critical as you strive to grow.

MATT BRADY: Our guests are well informed and have more to say about navigating potential supply chain disruption through planning and data analytics to bolster agility and business continuity.

MATT BRADY: Thank you both for your insights today.

JOE HANNER: Thank you.

MCKENNA BETTINGFIELD: Thank you.

MATT BRADY: For our listeners, additional guidance regarding the subjects mentioned today can be found in the related guidance section of this podcast web page. Please visit cb.com for more. We hope you will tune in for the subsequent parts of our series on Building a Competitive Recovery.

MATT BRADY: Next, we will discuss the impact of international tax changes on your supply chain efficiency. In part three we will highlight the pros and cons of utilizing vertical integration to ease supply chain challenges. Part four will focus on the benefits New Markets Tax Credits can bring to your growth strategy, and in the final part we will review tax strategies available to offset potential expansion costs.

MATT BRADY: Thank you for joining us today, and we hope you listen to the rest of the series.