Future proofing for SMEs

As companies start to build on their plans for the new financial year, it’s a good time to take stock of the state of play in UK manufacturing.

After the dark days of the financial crisis and its fallout, the last year has seen British manufacturing returning to long-awaited growth. The sector is expected to play an important role in the UK’s economic recovery.

UK manufacturing output is up 1.4% in the first quarter of 2014, according to the latest PMI (Purchasing Managers’ Index) from Markit/CIPS, its second-best calendar quarter of growth for the last 15 years. Job growth in the sector also reached three-year highs in February.

That is not to say that UK manufacturing is over the hump completely, and many challenges remain to be addressed to make the sector ‘future-proof.’ This primarily means enabling it to compete in a high-pressure environment where emerging markets as well as many developed economies are biting at its heels all the time.

With SMEs accounting for nearly two-thirds of UK manufacturing, it is critical for the sector that this ‘growth engine’ readies itself for what lies ahead. It will be harder for them, in many ways, given that some of the priorities to be addressed will require serious investment.

Juggling priorities

Manufacturing has become less about Henry Ford-style mass production and make-to-stock approaches.

There has been a shift to make-to-order and assemble-to-order so as to be more responsive to customer demands in both product choices and lead times. Equally, companies tend to produce smaller series of products, addressing fast-changing trends and lifestyle patterns, rather than stockpiling products.

During the crisis years also, we saw factory closures and relocation of production of lower cost markets.

To save costs, the priorities were and continue to be cutting capital and operational expenditure and adjusting the workforce flexibly, relative to demand. It is all about doing more but with fewer people, leveraging technology, deploying leaner methods and outsourcing costly but non-core activities. At the same time, the need for talent retention and development has grown exponentially.

Technology is not a nice to have

Much has been said in recent months about the strategic nature of technology for businesses. And yet this is a tough act for SMEs in manufacturing to follow through, given the financial implications of updating back office and shop floor IT systems.

It is therefore not surprising that many companies in the sector are still failing to make proper use of technology.

For example, our own research found that around one quarter of SMEs in the sector still use Excel sheets or paper systems for managing their accounting and finances. Twenty per cent of small businesses admitted that they forget to invoice.

This amounts to hundreds of millions of pounds of lost revenue.

Automation therefore has to be a key consideration for SMEs as they consider where to focus future investments.

ERP goes SME

While Electronic Resource Planning (ERP) systems have long been vaunted as the future for manufacturing companies, they represent a major capital investment effort that may take a long time to recoup for an SME, especially given the above trends.

Software as a Service and hosted Cloud-based approaches are starting to change these dynamics, moving from licensing to subscription-based pricing models.

Another stumbling block for ERP systems has been the static nature of terminals on the shop floor, which has made it hard to accommodate back-office input into the system. Thanks to ERP systems moving to mobile devices and making use of Cloud technology, there is now much greater flexibility and integration of back office and shop floor systems.

The Cloud is also facilitating much tighter integration of the supply chain, all the way from the raw materials to the end-user of the finished product. This means business can be done in real-time, and previously manual, paper-based tasks – such as invoicing and payments – can be replaced by automated, online transactions such as purchase-to-pay processes.

Clearly, technology is no longer just a nice to have for SMEs. Getting stuck in the rut will mean getting stuck in the past as more innovative trailblazers, large and small, sail past.