COVID-19- Impact on Industrial Manufacturing
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The COVID-19 pandemic is having a major financial and operational impact on the industrial manufacturing sector. Many manufacturing jobs cannot be done remotely, and slowed economic activity has reduced demand for industrial products globally. Plant closures and layoffs have already occurred as manufacturers struggle with declining revenues and demand. The crisis has also disrupted global supply chains. Manufacturers face continued pressure and uncertainty as the duration of the pandemic is unknown. They must take steps to ensure workforce safety, financial stability, and supply chain resilience to prepare for a prolonged recovery period.
COVID-19- Impact on Industrial Manufacturing
- 1. COVID-19-IMPACT ON INDUSTRIAL MANUFACTURING 1 December 19, 2020 FOREWORD- THE CONTEXT The COVID-19 pandemic is already ushering in a host of challenges to the industrial manufacturers, especially those that depend on workers whose jobs cannot be carried out remotely. About 80% of manufacturers expect that the pandemic will have a financial impact on their business, according to a recent survey of the National Association of Manufacturers (NAM). That is significantly higher than the 48% of cross-industry companies that are concerned about the same impact, which is based on a recent survey. The majority of those in the manufacturing sector (53%) expect COVID-19 to impact their operations, the NAM survey reported. Indeed, we’re already seeing these grim expectations become a reality in the sector, amid plummeting oil prices and demand, supply chain bottlenecks, spending slowdowns and jitters over the credit markets. Some major industrial companies have closed facilities and are mulling the extent of layoffs to help curb the spread of the virus, as well as for economic reasons. Clearly, the manufacturing sector, which employs some 13 million workers in the US, is poised to be hit hard during this outbreak, primarily for two reasons: First, many manufacturing jobs are on-site and cannot be carried out remotely. Second, slowed economic activity has reduced demand for industrial products in the US and globally. Safeguarding consumer and workforce health is priority number-one among businesses and governments. Plant closures (full or partial) could continue to be necessary for manufacturers in hard- hit regions for a prolonged period. For companies vulnerable to a viral outbreak within their ranks, this would be a critical time to explore a proactive deployment of automation technologies (e.g., collaborative robotics, autonomous materials movement, industrial internet of things) to decrease worker density throughout their operations. Uncertainty surrounding the duration (or even a deepening) of these conditions clouds any insights into how a recovery could unfold for the industry. Indeed, many beleaguered companies in manufacturing could be eligible for government stimulus support. But there is a real possibility that the crisis will result in bankruptcy for some manufacturers, as declining demand, production and revenues, along with debt obligations, take their cumulative toll. Most companies already have business continuity plans, but those may not fully address the fast-moving and unpredictable variables of an outbreak such as COVID-19. Typical contingency plans ensure operational effectiveness following events like natural disasters, cyber incidents and power outages, among others. They don’t generally take into account the widespread quarantines, extended school closures and added travel restrictions that may occur in the case of a health emergency. The coronavirus outbreak is causing widespread concern and economic hardship for consumers, businesses and communities across the globe. The situation is fast-moving, with widespread impacts.
- 2. COVID-19-IMPACT ON INDUSTRIAL MANUFACTURING 2 December 19, 2020 CRISIS MANAGEMENT & RESPONSE Manufacturers are facing continued downward pressure on demand, production and revenues as the COVID-19 pandemic intensifies. Additionally, many are facing cash-flow liquidity challenges and difficulties in managing debt obligations. Therefore, the industry may see some manufacturers struggle to recover — and even declare bankruptcy — depending on how robust and effective any government intervention and support may be, and how long the COVID-19 crisis lasts. The industry is especially vulnerable given that the bulk of its workforce is employed in on-site jobs that cannot be done remotely. Additionally, given the nature of the industry, manufacturers should be creating social distancing in workplaces that are typically worker-dense (e.g., manufacturing plants, warehouses, material movements and logistics, etc.) Additionally, manufacturers should be prepared for major global supply chain disruptions. This will affect not only the OEMs, but will also likely ripple throughout the supply chain, affecting suppliers by driving reduced demand for materials and components. Supply chain partners may experience their own challenges and may not be able to fulfil orders on time — or at all — during the crisis. Prepare for a prolonged recovery. Given the unknown variables of how the COVID-19 pandemic will play out and when containment will be achieved, industrial manufacturers should brace for a trying period and plan for a recovery that may not arrive for at least one year, based on prior crises the industry has experienced. Manufacturers can expect to enter a new era of closer public-private coordination in order to strike the right balance between producing critical products and protecting public health. Steps to consider: 1. Assess how profitability, loans, revolving credit and cash flow reserves can support ongoing operations in a low-revenue environment — in light of current (and forecasted) cash operating expenses, taxes and other cash expense items. 2. Review capital and corporate cost budgets to identify not only marginal investments, but also discretionary items that can be cut. 3. Consider divesting non-core or underperforming assets — or assessing M&A prospects — as a potential source of cash. 4. Consider refinancing debt. 5. Work closely with municipal, state and federal governments to coordinate plans on worker and consumer safety, while keeping mission-critical productions running.
- 3. COVID-19-IMPACT ON INDUSTRIAL MANUFACTURING 3 December 19, 2020 OPERATIONS & SUPPLY CHAIN Manufacturers should expect continued weakening links in their supply chain, as some vendors and suppliers will likely face operational or financial struggles of their own. Brace for continued supply chain bottlenecks both nationally and internationally, especially in those jurisdictions hardest hit by COVID-19. The deeper into the supply chain, the greater the impact of the outbreak is likely to be. Manufacturers with global supply chains are likely to find that Tier 2 and especially Tier 3 suppliers are most affected by disruptions related to the pandemic. While many large manufacturers have instant online visibility into top-tier suppliers, the challenge grows at lower levels. As with previous downturns, the industry will likely move quickly to cut discretionary and capital spending to support operations. A key question for all companies will be: Do you have the financial reserves to weather the storm — or potentially to capitalize on the tumult in the industry? Steps to consider: 1. Immediately implement sanitation measures and reconfigure workspaces for safety. For example, stagger shifts, increase distance between workers and ban visitors on factory floors. 2. Evaluate automation solutions to reduce the number of workers on the factory floor. Manufacturers that have piloted solutions should ramp them up carefully, while others should start exploring them. Focus on these three areas: autonomous materials movement (e.g., autonomous forklifts and cranes and high-payload drones); automation of repetitive tasks, including assembly (e.g., industrial robotics and mobile/collaborative robots); and predictive maintenance (e.g., using IoT and AI for predictive maintenance). 3. Transfer new knowledge throughout the supply chain. Update best practices as the situation evolves and assist suppliers in implementing them. This requires increasing transparency in the supply chain through daily self-reporting with all critical suppliers. 4. Gain a keener, real-time situational awareness of your supply chains, especially those affecting critical materials and components. Identify potentially weak links in the supply chain — especially in regions already affected and those likely to be impacted by COVID-19. 5. Prepare for supply chain pivots that could require identifying alternative suppliers. 6. Prioritize cybersecurity and system resiliency. The significantly higher levels of remote access to core systems that will be required could make employees and management more susceptible to social engineering efforts in the midst of a crisis.
- 4. COVID-19-IMPACT ON INDUSTRIAL MANUFACTURING 4 December 19, 2020 THE WAY FORWARD As the COVID-19 crisis continues to expand, manufacturers are facing challenges on numerous fronts. At the outset of any major commercial disruption, companies will be looking for immediate measures to keep their workforces safe and their businesses solvent. But companies should also be looking to the future. Which assets, people, capabilities will they need or want then? Manufacturers will also need to look beyond their own economic viability. They will need to coordinate closely with the public sector to forge plans that are essential to both public safety and the solvency of their workforce, while keeping the lights on in their operations. This will be relevant to manufacturers of critically important components, parts and finished goods in areas of importance to the nation — especially those supplying to critical infrastructures (e.g., energy and power, transport, communications, food and agriculture, etc.). Indeed, this will be an enormous load to carry, and, for many companies in the sector, it will mean taking every measure possible to survive now and thrive in the future. Most companies in the sector will need to take concrete steps to succeed in this challenging climate. Some will be austere, but austerity measures should be tempered to preserve long-term objectives. The best approach is likely to include making surgical cuts, while balancing short- and long-term needs. Potential long-term impact on industrial products companies- Longer term, industrial products companies will need to examine their overall supply chain strategies to mitigate risks, improve agility, and ensure supply security. In addition, companies will need to re- evaluate market conditions and adjust their operations in light of the new normal. This suggests that industrial products organization may: • Postpone significant investments. • Take a more holistic view of potential risk. • Be more selective about the products they manufacture. • Pursue greater vertical integration and inorganic growth if they have the excess cash to do so. Key questions executives and boards should be asking • How do we safeguard our own people first? • How can we assess and mitigate risk throughout the entire supply chain? • How do we use communication strategies and public relations to comfort our stakeholders, communicate our response, and position ourselves in the market? • What is the new normal in terms of market conditions and what does it mean to us financially?