The rocky road ahead for manufacturers

As the world emerges from its coronavirus-enforced stupor, the UK’s manufacturing sector is presented with a range of challenges it hasn’t faced since the 1970s.

Supply chain issues, coupled with changes in consumer behaviour, have had a profound impact on underlying activity and this has undermined the fundamentals of many otherwise sound businesses. Recent examples include the impact on global automotive production, caused in part by the microchip shortage, and the focus on short haul travel instead of long haul changing demand in the aerospace sector. These sectors typically benefit from long-term investment and the sudden change in activity has undermined the economics of many tier one and tier two suppliers in these industries. But even across less heavily affected parts of the manufacturing sector, supply chain issues are causing significant material and component cost increases that many businesses are struggling to absorb. 

These structural issues are then compounded by the increase in other key input costs, notably energy and staffing, the latter being accentuated by the difficulty in retaining and attracting skilled staff. The changes to border processes and duties after Brexit are also adding increased uncertainty and, in some cases, costs to working capital cycles.  

The short and medium term outlook for UK manufacturers will be challenging, so it’s important that management teams actively manage their businesses to address the evolving risks and opportunities.

Liquidity is a major concern

Our recent survey with Make UK illustrated a number of points, notably that a third of manufacturers were increasingly seeing liquidity strains on their cashflows and that cash previously set aside for investment had instead been used to address the trading challenges of the past two years. 

Revealingly, 38 per cent of manufacturers confirmed that they have either used or intend to use restructuring, turnaround or insolvency ;professionals within the next 12 months. Six in ten confirmed that they were planning to take on more debt. 

In this context, it is important that businesses facing liquidity and trading issues regularly appraise their trading and financial strategy. Regrettably, however, many management teams are instead focused on fire-fighting and it can feel a little like Groundhog Day.

The practical steps business leaders should be considering

With all this in mind, we would encourage management teams and shareholders to review the business and identify whether there are:

• loss-making or problem contracts that need to be renegotiated or exited;
• obvious efficiencies and cost savings that can be made;
• supplier terms that need to be renegotiated;
• additional liquidity or flexibility requirements on current funding;
• non-core assets and divisions that can be sold or exited; and
• management incentivisation processes that are realistic and competitive.

Unfortunately, many businesses that identify issues then prevaricate when it comes to addressing them. In the uncertainty of the current environment, it is important that businesses rapidly implement plans to address under-performance. Typically, the best approach is a step plan focused on a clear outcome. In many cases difficult conversations with stakeholders will have to be had, so management may need professional support to ensure negotiations result in an optimum outcome.