Industries across the commercial landscape are confronting a bevy of issues presented by coronavirus (COVID-19), and the U.S. manufacturing industry is no exception. The industry, which employs some 13 million workers, faces issues that range from supply chain disruptions, lack of capital resources and consumer spending decreases to reductions in workforce productivity and more. Indeed, COVID-19’s impact on manufacturing cannot be overstated; according to a recent survey of the National Association of Manufacturers (NAM), about 80% of manufacturers surveyed expect the pandemic to financially impact their businesses compared with roughly one-half of companies in other industries.
Even those manufacturers which are weathering the storm should plan accordingly for long-term global supply chain changes and a prolonged recovery. This article focuses on three areas of particular interest: impact on materials sourcing, workforce levels and cost of goods.
The COVID-19 pandemic has brought a sourcing concept to the forefront that made headlines in 2015: reshoring. Essentially, reshoring entails bringing as much production as possible back to the nation where customers and primary manufacturing facilities are housed. Reshoring promises significant benefits when viewed through the lens of total cost of ownership (TCO) versus savings through lower foreign wages and total cost of business.
What makes the reemergence of reshoring as a business strategy interesting is the timing. During the past two to three years, geopolitical negotiations resulted in tariffs – some as high as 25% – from certain countries for specific products. While manufacturers viewed tariffs as a real and present threat, the higher cost to manufacturers and downstream customers ultimately wasn’t enough to compel manufacturers to take action. With COVID-19, time will tell if this particular disruption will prove disruptive enough to reenergize the concept of reshoring and compel action. The potential positive impact could increase employment and domestic GDP.
Manufacturers, owing to the nature of their operations, require a largely on-site, in-person workforce. Accordingly, that labor force could also serve to spread the COVID-19 virus from person to person. Businesses that haven’t yet closed facilities during the pandemic have had to operate with a scaled-back workforce as a precautionary measure to reduce density in their facilities. Doing so while maintaining production has been a primary challenge.
In this regard, manufacturers have employed tactics that 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 (or mandating) employees to wear company-provided personal protective equipment (PPE)
In select cases, employers are paying employees a full eight-hour shift for six hours of work to retain their workforce, given the already-stressed skilled labor shortage.
Cost of Goods
There has been limited impact on the cost of goods, at least in the short-term. In fact, raw material pricing has remained stable for most non-commodity-based manufacturers. That said, manufacturers face an imminent risk of higher costs associated with vendor inefficiencies and correspondingly lower margins. If fixed costs remain stable, production levels must also remain stable. If not, each item produced will carry a higher cost to that manufacturer. For consumers, the good news is that they generally are shielded from price increases associated with inefficiencies.
Manufacturing Sector Outlook Moving Forward
Industry insiders expect the manufacturing industry to maintain or slightly contract for the second half of 2020. For manufacturers, the first two quarters of 2020 were generally strong, except in cases where they resided in vertical sectors supplying tradeshows, retail or aviation, the latter of which declined drastically. Some manufacturers are predicting smaller backlog and fewer orders. These manufacturers are considering labor reductions (i.e., 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 yet experienced notable curtailment in backlog and orders.
Looking ahead, manufacturers would be wise to review their supply chain vulnerabilities, examine cash flow projections and ensure contingency plans are 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 COVID-19 pandemic.
Do you have questions about the national manufacturing industry in 2020, or other manufacturing and distribution issues? Please contact your ALL advisor or call us at 617-738-5200.
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