Key Data Trends Manufacturers Should Leverage to Better Manage Their Business

At a glance

• Main takeaway: The US is heading into an economic slowdown, however conditions within the manufacturing industry are already weakening due to declining new orders and increased inventories.
• Impact on your business: As the economy slows, manufacturers need to focus on leveraging key data trends, such as new orders and input costs, to better manage their business during this time of uncertainty.
• Next steps: Aprio’s Manufacturing and Distribution Services team can help you understand the data trends impacting the industry to build resiliency into your business.

Schedule a consultation with Aprio today.

The full story:

If we travel back to 2019, data pointed toward a manufacturing recession. Then, the pandemic hit, and the economy came to a screeching halt. While the industry has spent the last three years slowly climbing out of the backside of an enormous COVID bubble coupled with rising interest rates, manufacturers are now facing weakening demand resulting in uncertainty for what lies ahead.

What’s the root cause for this slowdown?

Well, if you remember, at one point during the pandemic big retailers, such as Target, Walmart and The Home Depot, could not keep their shelves stocked, and supply chains were unable to keep up with the demand to fill orders due to excessive wait times on raw materials. So, businesses switched their game plans by doubling and tripling their orders in hopes of avoiding elongated wait times and keeping inventory in stock longer. To match this new and exciting demand, manufacturers started overproducing, which ultimately led to the industry’s current predicament of excess inventory and plummeting new orders as consumers shift their spending toward travel and experiences.

So, what can manufacturers do to overcome this challenge? Monitor and leverage two major data trends — new orders and input costs.

Gain a glimpse into the future with new orders

New orders, a subcomponent of the ISM Manufacturing Index, essentially focuses on predicting what future revenue and demand may potentially look like. This data is important for manufacturers (and suppliers) to monitor as multi-month trends can provide valuable insights to better manage business from a production and inventory management standpoint.

The ISM Index values are based on a scale from zero to 100, where anything above 50 is considered positive (an expansion) and anything under 50 is considered negative (a contraction). Now, at the time of writing this article (March of 2023), the new order index is trending negative, thus signaling to manufacturers to expect a lower demand and that it’s probably a good time to make adjustments, such as scaling back on production as the economy slows. While a notable decline in new orders does indicate a slowdown, not all is lost.

What can manufacturers do to alleviate the pressures of weakening demand for new orders?

Pay close attention to input costs, because it can be used to leverage better pricing from suppliers and relieve pressure of a slow economy overtime. To do this, divide your costs up into three buckets — the costs you can cut, the costs you can defer and the costs you can accelerate.

1. The costs you can cut without impacting the quality of the product or the customer experience could include reviewing your supplier contracts to see where you can possibly consolidate suppliers in exchange for better pricing. Additionally, consider renegotiating service contracts, especially those with automatic escalators built-in, or get quotes from new suppliers and see how they compete with your current contracts.
2. The costs you can defer are important items but can be pushed out until cash is more readily available. This could include pausing on buying new equipment for a future growth initiative, a potential build-out, or warehouse expansion until demand improves.
3. The costs you can accelerate on are investments that will drive growth when the economy starts rebounding. For example, focus on hiring top industry talent through more compelling compensation, accelerating training, increasing your spending on marketing and brand awareness, and deploying new technology that enables scaling. This will hopefully set you up with highly-trained staff to manage increased demand.

While manufacturers are sitting on what feels like a mountain of inventory, getting a pulse on customers could help reduce inventory and minimize profit loss.

You have probably heard the phrase, “walk a mile in someone else’s shoes.” For manufacturers to gain better insights into their customers, they should metaphorically walk in their shoes. To effectively reduce inventory and maximize profit and cash flow, much will be dependent on who your customer is, which can be determined by tracking the health of your customers’ customer.

For example, if your customer is a home builder, then you should pay close attention to data surveys in the residential real estate sector. Then, you can use that data and take it a step further to figure out what are the key decision-making factors on why your customer’s customer decided to buy or sell. Tracking customer data will give manufacturers new insights that naturally flow into improving how they think about matching new order demand to avoid overproduction and a loss in future profits.

The bottom line

While every industry has been impacted by the state of the economy, manufacturers are also weighed down with excess inventory and a significant decline in new orders. However, as the economy slows, manufacturers should focus on monitoring and leveraging key data trends to better manage their business during this time of uncertainty. Aprio’s Manufacturing and Distribution Services team can help you gain a better understanding of important data trends impacting the industry and build resiliency into your business.

Related Resources/Assets/Aprio.com articles/pages

6 Manufacturing Insights from Q1 2023 and What They Mean for You

Profitability and Cash Flow: How Forecasting can Impact a Manufacturer’s Bottom Line

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