Wow, we’re over halfway through 2020, and it couldn’t have been a stranger six months. Presidential impeachment. Australian wildfires. Protests for racial justice. Murder hornets and locust swarms. And the biggest of all, a global pandemic, rightfully continues to make headlines.
And while COVID-19 will no-doubt be mentioned here again, you’re really here to read about the manufacturing landscape. Yes, some strange issues have caused problems in the manufacturing industry and some others have been solved.
In this article, we’re sharing 10 challenges that manufacturers still face for the rest of 2020. However, we’ll do more than just list them; we’ve asked our Vice President and Manufacturing Practice Leader, John Madsen, to give his thoughts on how to handle these challenges.
John worked in the manufacturing industry for over 40 years before joining the Black Line Group team. His first-hand knowledge of manufacturing makes him uniquely qualified to help manufacturers, whether he’s solving industry challenges or finding qualified R&D Tax Credits in their business.
1. Responding to COVID-19
According to a March Survey of the National Association of Manufacturers (NAM):
- 78% of manufacturers expect that the pandemic will have a financial impact on their business
- 53% of manufacturers anticipate a change in operations
35.5% of manufacturers are facing supply chain disruptions
No surprise, the effects of COVID-19 have impacted manufacturing, top to bottom. It’s hard, even with a business plan, to adequately address the unpredictable and rapid variables of the outbreak: quarantining, restricting travel options, closing schools, disrupting supply chains, etc.
John reminds us about two blog posts from earlier this year. First, we covered how the three major concerns for manufacturers — financial impact, operational options, economic recession — are even more important in the midst of this pandemic. Next, we shared a logical approach to increasing manufacturing profit margins by focusing on individual customer margins.
2. Increasing Reshoring
More and more throughout 2020, businesses are rethinking their global manufacturing strategies. The Reshoring Institute predicts that “companies will increasingly be motivated to participate in reshoring efforts in the coming years due to rising foreign wages, rising tariffs on steel, aluminum, and electric components, and reconsiderations of the total cost of ownership.”
How strong are reshoring efforts? As early as last fall (well before the coronavirus), 97% of executives said they’d consider a domestic source for parts if the price and quality were competitive to foreign suppliers, again according to the Reshoring Institute.
More than ever, automation is making U.S. manufacturers competitive enough to bring manufacturing back and scale operations. For more on automation (and to get John’s opinion), see #7 below!
3. Finding and Keeping Labor
Up until unemployment spikes due to COVID-19, numbers in the U.S. were low among skilled workers. Today, even given the current situation, manufacturers still need to find motivated, knowledgeable employees for the job.
If you’re trying to hire the best manufacturing employees, follow these tips:
- Determine Minimum Qualifications. Creating a job description that states the minimum qualifications — and posting it early in the selection process — helps candidates understand clear job expectations and allows you to use the criteria to quickly screen candidates.
- Broaden Your Search. Today’s hybrid manufacturing jobs require a variety of skills, so widen your focus to include more than manufacturing graduates or professionals. Look for trainable candidates who can learn complex subject matter.
- Develop a Strategy. Business always runs smoother when you have a strategy, and that includes your hiring process. Here are some considerations when creating a hiring strategy.
- Focus on Retention. Hiring may be necessary, but it’s even more important to hold on to the employees you already have. Consider profit sharing, employee referral programs, and great benefits as retention tools.
Speaking of retention, retaining seasoned staff in an environment where employees consistently make lateral moves to improve their salary and benefits can be challenging. You have to make your business the best place to work to encourage good employees to stay. Creating a culture where employees feel valued contributes to employees’ desire to stay.
John puts it this way: “Do not ask for anything you (the boss) are not willing to do yourself. If you ask your team to work late or work on Saturday, be there yourself.” He goes on to list 6 tips to retain manufacturing employees in this article.
4. Navigating Changing Laws
Every year, you have to make sure you’re on top of changing legislation because every year laws change, are updated, or removed. John suggests that in order to maintain your sanity in an industry rife with fluctuating legislation, focus on seven areas in 2020 for manufacturing industry laws:
- ISO Procedures
- State and Local Laws
- CARES Act (see #6, Addressing Tax-Related Issues, below)
Find tips from John on what specifically to look for within the first six of these areas in our article Navigating Changing Manufacturing Industry Laws.
One benefit that’s not going away is the R&D Tax Credit. Not only can you deduct qualified expenses incurred during the sales process, but also throughout the entire manufacturing process. Read our guide on 9 Hidden Qualifying R&D Expenses in a Manufacturing Company.Back to top
5. Growing With Increasing Demand
Again, even in the face of a global pandemic, some manufacturers are facing two demand-related problems in 2020:
1. You have so much demand you need to increase capacity
2. Demand-driven manufacturing is impacting your most important company goals
Having so much demand that you need to increase capacity can force choices, like moving to a new facility or expanding your existing facility.
As a previous general manager of a mid-sized manufacturing business, John understands the trials of trying to decide whether to move or expand. In his article, 7 Things to Consider When Your Manufacturing Facility is at Capacity, he addresses how to manage that decision-making process. Fortunately, those costs can be offset using the R&D Tax Credit.
Many manufacturers are just keeping up with work based on orders from existing customers, leaving little time or money to invest in other critical initiatives.
John identifies four challenges that stand in the way of growth for demand-driven manufacturers:
1. New equipment costs
2. Cost of acquiring new customers
3. Need for a new facility
4. Complications of adding a second shift
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He suggests strategic use of R&D activities, as well as the funds made available through the R&D Tax Credit, to help overcome these challenges.
READ: 9 Ways Manufacturers Invest Their R&D Tax Credits to Grow Their Business
6. Addressing Tax-Related Issues
First of all, it’s your CPA’s job to prepare you for tax-related issues. However, not every CPA is completely prepared for the manufacturing industry and its specific issues. That’s why you’ll want to be careful when choosing your manufacturing CPA. Specifically, you’ll want to confirm that they have industry experience, offer a broad breadth of services, and have great references.
Once you’ve teamed up with the right CPA firm, it’s important that you have a certain level of knowledge on tax-related issues so that you can work with your CPA to solve problems and preemptively avoid others.
As we continue through 2020, it’s important to take a look at some year-end tax tips for manufacturers. John recommends leveraging certain tax laws:
- The CARES Act’s tax provisions provide refunds from previously paid income taxes and can help reduce future tax liability to sustain ongoing operations
- Tax Cuts and Job Act includes several new or revised deductions for businesses
- Changes to fringe benefits have occurred: bicycle commuting reimbursements, moving expenses, achievement awards, etc.
- Changes to some of the laws regarding depreciation and expensing can affect your business’ tax situation
- There are a few new and revised tax credits for businesses available
- The R&D Tax Credit has increased in significance due to this year’s CARES Act
7. Maximizing Automation
This is something everyone was talking about before 2020, and it’s become even more important with many employees not being able to occupy each other’s space. COVID-19 has shown us all that this is a critical time to explore the implementation of automation technologies (and all things Industry 4.0, including collaborative robotics, autonomous material movement, internet of things, and artificial intelligence).
However, these types of investments aren’t always easy to stomach. Often, the investment comes down to a cost-benefit analysis. Estimate how much you’d benefit from increased automation compared to how much it would cost to implement.
John sums it up like this, “If your company prides itself on innovation and cutting-edge technology, it might make more sense to pursue automation. For smaller companies, it might be wise to wait for the latest technology to come down in price before implementing it.”
If you need extra funding to afford new automation, look no further than the R&D Tax Credit. You may be performing qualified activities on a regular basis that could provide the tax credits you’ll need to afford the new technology.Back to top
8. Integrating Software
It’s clear how investing in people and machinery directly impacts the efficiency of your business. However, don’t overlook the importance of software. Whether it’s payroll, project management, or quoting software, the right solution enables your business to run smoothly and makes your managers’ jobs easier.
John suggests the following action steps when looking into software investment for manufacturers:
- Evaluate your current software vs. your business requirements
- Research the capabilities and cost of new software
- Confirm the software can be integrated with your current systems
John asks some probing questions: “Are you making Excel spreadsheets to track data outside of the system? Are you handwriting notes from several screens to collect data? Are your customer service people walking the shop floor gathering data to answer customer questions?”
These signs scream that it's time for a software update.Back to top
9. Handling Global Competition
Whether your competitors are using cheaper offshore labor, or new technologies and techniques are being used overseas, there’s always something happening that makes the world feel smaller and smaller each year.
John pulls examples from his own experience to suggest three things to consider concerning international business for manufacturers:
- Hidden Costs of Low Prices. Instead of competing on price, take a look at some of the hidden costs of low prices, like language barrier issues, jeopardizing your own intellectual property, or taking multiple trips overseas.
- Shipping and Returns. “Often the U.S. buyer is required to pay for the shipment in advance of the product leaving the shipping port,” says Madsen. “If any product needs to be expedited, the cost to fly products to the U.S. is very expensive.”
- International Supply Base.“COVID-19 greatly disrupted international supply chains, and many manufacturers didn’t have contingency plans with U.S. suppliers. Reshoring (see #2) may be the best and most affordable way to grow your business,” says John.
10. Making Margin
Just because you’ve been doing business with someone for a long time doesn’t mean they’re a good customer. In fact, they may have been hurting your business longer than you think.
There are some areas to look for in your relationships with your customers to optimize your margin: shipping costs, contract length, variability in production. For instance, do they always have a steady requirement of product? Do they fluctuate from quarter to quarter?
Of course, customer margin isn’t the only place to look to optimize your profits. From channel margins to material cost to supply chain management, John goes into deeper detail on where to look to optimize your profit margin in this article.Back to top
As we finish the strangest year ever, 2020, there are likely a few key challenges you need to review. It’s important to closely analyze these aspects of your business, from customer relationships to hiring employees to reshoring options and likely much more.
Depending on your level of qualifying activities, you might be eligible for tens of thousands (or even millions) of dollars in tax relief through the R&D Tax Credit. Ready to learn about qualifying? Our Get Started form is quick and easy.