Survival, supply chain and sustainability

Posted on 6 Jan 2010 by The Manufacturer

Gautam Dalal, KPMG's UK head of diversified industrials, offers 2010 predictions for manufacturing

While 2010 will see the economy curve upwards, manufacturers should expect the forthcoming year to be difficult given the recovery will be slow and shallow. Indeed our autumn business confidence survey found seven in ten manufacturers expect it to take three to five years before pre credit crunch conditions are reached.

Therefore management teams will need to maintain their concentration on cash management and working capital requirements during the year, and after a period of cost cutting designed for short term gains, the emphasis must shift to achieving sustainable advantage. The winners in 2010 will be those that recycle funding from cost initiatives to generate cash for growth, continually rebalancing resources from underperforming areas into those with promise.

At some point in the year I expect the focus may change from cash conservation to avoiding the temptation to over-trade when activity levels rise. Many won’t have the cash available to finance dramatic new growth plans and bank lending remains both limited and expensive, at up to 200 basis points more than when refinancing two years ago – with higher up front fees too. So, manufacturers that adopt a cash-focused culture will help themselves to achieve sufficient liquidity to get through the next 12-18 months, after which there may be more bank liquidity for financing future growth plans.

As a result 2010 will require companies to keep up the good habits that they have relied upon to see them through the downturn. For instance, forecasting will not only assist in managing cash flow during the final throes of the downturn and demonstrate good practice to funders, but it will also provide a sound base on which to monitor demands on working capital.

There are causes for optimism, with the continued weakness of the pound against the dollar and the euro presenting an opportunity for British firms to look beyond these shores and tap into overseas markets.
Our survey found expansion into new markets was cited by 10 percent of manufacturers as a way to address business concerns and I expect this number will grow as management teams become increasingly aware of the cost advantage they can exploit by exporting, which will be of particular interest given other markets are recovering faster than the UK.

2010 will be a crucial time for decision making about supply chains and I think a number of the UK’s manufacturers will consider to whether to bring elements of them back from overseas locations for two key reasons: Firstly, to take advantage of the relatively weak euro and pound that are expected to be maintained in the medium term and secondly due to increasing concern about risk within complex supply chains as the merits and disadvantages of globalisation in uncertain times are scrutinised.

As a result the next year may well see a number of businesses re-basing their suppliers closer to home or switching to more local suppliers, who offer a greater degree of certainty. The question is whether they will bring production back all the way to the UK, or only as far as the euro-zone. The extent to which regional development aid is made available to facilitate this move may go a long way to determining what that final location is.

The government has indicated it intends to support and encourage investment by manufacturers that seek to increase operations in the UK so perhaps 2010 will reveal how these aims are intended to be achieved.

Finally, sustainability must be on the 2010 agenda with the Carbon Reduction Commitment taking effect from April and significantly impacting on the manufacturing sector’s larger organisations. This legislation has the potential to threaten or indeed boost the bottom line of any companies that qualify and understanding the impact is crucial. And of course in the long term the increasingly ‘carbon constrained’ global economy may have profound effects on the way manufacturers operate.

So, I predict a good deal of challenge for the UK’s manufacturing sector but the year will not be without silver linings.”

By Gautam Dalal, UK head of diversified industrials, KPMG