What Supply Chain and Technology Trends in 2023 Mean for Factors and Their Manufacturing Clients
Even as the manufacturing industry sheds the worst of recent supply chain issues, the sector is evolving rapidly thanks to artificial intelligence automation, decentralization and product-as-a-service offerings, not to mention changes in the workforce. Olivia Hudson of Sallyport Commercial Finance breaks down these trends and what they mean for factors and their manufacturing clients.
BY: OLIVIA HUDSON, CAEF, SENIOR ACCOUNT EXECUTIVE, SALLYPORT COMMERCIAL FINANCE
The manufacturing industry has experienced a lot of volatility since the COVID-19 pandemic. According to the US Bureau of Labor Statistics, manufacturing rates dropped to the lowest levels since World War II in Q2/20, with industries such as motor vehicles, food and beverage, fabricated metals, and machinery taking the hardest hits. In Q3/20, the motor vehicle industry, after virtually ceasing production in Q2, became the driving force in increasing manufacturing production across all industries. Manufacturing then experienced some decline in each of the following three quarters due to supply chain issues; however, due to the recovery of production in other industries led by computer and electronic products as well as chemicals and machinery, there was an overall growth in terms of output for the manufacturing industry following that three-quarter decline. At the end of Q2/2022, output was greater than that of Q4/2019.
Although the manufacturing industry was exceeding expectations while coming out of the brunt of the pandemic stronger than ever in 2022, supply chain issues and economic uncertainty brought concern for manufacturing and production as we headed into 2023.
Entering 2023
Supply chain issues over the last few years caused many businesses to carry large backlogs of orders on their books as they entered 2023. Shipping delays resulted in an increase in orders, as businesses had to pre-order and keep inventory on hand to ensure that they had the supply ready for their own customers. Once supplier delivery times improved, businesses, for the most part, no longer needed to order months ahead of time or in bulk for anticipated orders, which resulted in a significant decline in orders being placed.
The volatility of this start-of-the-year period was difficult for manufacturers, whether they make consumers goods like guitars and pasta or massive production equipment like tanks for the energy sector. To be supportive of manufacturing clients in this atmosphere, factors needed to offer flexible and creative solutions to help them navigate what have been unusual times. For example, providing cash flow loans, short-term over-advances and extended recourse days provided some solutions to navigate the undulating landscape.
AI to the Rescue?
According to Hitachi Solutions, supply chain and workforce disruption will be ongoing trends for the manufacturing industry as we head “into a period of unprecedented economic uncertainty.” This means we should expect that profits will decline and businesses will begin to struggle. However, so far in 2023, there has been tremendous activity in the technological world, with artificial intelligence automation emerging and setting out on a path to become a new norm. Manufacturing businesses that can successfully embrace such automation to innovate and modernize will be in the best position to succeed in a world where demand has declined. For starters, AI automation has the potential to help businesses through continued periods of supply chain disruptions, as it will drive efficiencies throughout the manufacturing process, thus reducing waste and cost. For businesses that adapt well and quickly to the changing landscape that now must incorporate AI, they will be able to reap the benefits of being able to control the supply chain, reduce fraud and be more competitive.
Decentralization of manufacturing is another trend coming to the fore in 2023. According to Bernard Marr of Forbes Magazine, “the concept behind decentralized manufacturing is that products should be constructed as close as possible to the place where they will eventually be used.” More widespread adoption of this type of manufacturing will not only significantly improve delivery times, but it will also reduce waste and a company’s carbon footprint. Along with AI automation and 3D printing, decentralized manufacturing will improve the manufacturing industry in terms of efficiency and individualization, setting suppliers apart from those not embracing the new technologies.
Another one of the biggest trends of the year for the manufacturing industry is the concept of product-as-a-service (PaaS). In the past, manufacturers sold their product to their customers and had little to no contact thereafter until a repair was required. Customers now expect much more communication and only purchase as needed to budget their cash flow. While this can create a challenge for manufacturers, it also creates an opportunity for PaaS, with manufacturers leasing their equipment to their customers instead of selling it. This allows the customers to only pay for what they need, while the manufacturer also benefits tremendously with recurring revenue. AI technology will help this opportunity become a reality rather than a theoretical concept.
A Changing Workforce
Spurred by the pandemic, the phenomenon of massive numbers of employees leaving their jobs voluntarily and searching for better opportunities and higher salaries with a view to improving their work-life balance has had a huge impact on the manufacturing sector. The Washington Post reported that the industry experienced an almost 60% increase in resignations. The aging population of manufacturing workers is also a concern and that potential loss of technical knowledge will result in a labor shortage for manufacturing unless manufacturers address the changing requirements of the labor market and align younger employee’s desires with competitive salaries, benefits and working conditions. In addition, AI automation is also going to drive the workforce to a place where specific skill sets will be required compared to a four-year degree.
The Factoring Perspective
Supply chain issues are going to be a continued concern for factoring clients across manufacturing industries. Particularly entering a period of economic uncertainty and possible recession, businesses will need to become more innovative and potentially step out of their comfort zones to successfully navigate a new world. The ability to reduce prices by forward ordering and locking in contract pricing will ultimately lead to improved profitability for manufacturers specifically. In addition, embracing technology to improve efficiency across businesses will provide a strategic advantage and route to success.
The last five years have featured myriad changes and challenges to navigate for all businesses, including the COVID-19 Pandemic, supply chain issues, increased civic responsibility in relation to climate change, a dynamic political landscape (including essentially free money from the government through government assistance programs during the pandemic), and now the preponderance of AI. Businesses have had to be adaptable, agile and forward-thinking in order to remain relevant. This is just as true for manufacturers as it is for factors themselves. Responsiveness, flexibility and creativity have helped successful factors assist clients and bring value propositions to the table to win business. With a changing landscape come opportunities, and embracing changes and finding solutions is one of the fun parts of what we do.