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What challenges are manufacturers facing in today’s marketplace?

What challenges are manufacturers facing in today’s marketplace?

Synopsis
4 Minute Read

New challenges are emerging in today’s marketplace — and may have a significant impact on your manufacturing business, affecting its ability to receive financing from the bank, its operating cash flow, and capital utilization.

Understanding the current market conditions and how they impact your business is the first step. It is critical to assess your business to identify weaknesses or threats and adjust course to improve its performance and achieve success.

Senior Manager, Consulting - Performance Improvement & Operational Excellence

Manufacturers are facing numerous challenges in today’s uncertain economic environment, including a slowdown in market demand, and continued high interest rates. Additionally, manufacturers are grappling with supply chain disruptions and the high cost of operations in labour and material prices. Each of these challenges may have a significant impact on the financial health of your business — and it is crucial to explore how to run your company with less to remain profitable in the months ahead.

The first step to achieve success in uncertain market conditions is to understand the current situation and its potential impact on your business. You can navigate through these uncertain times by assessing your company to identify potential threats and weaknesses. Once identified, you can adjust your course to improve your company's performance.

What challenges are manufacturers facing?

Market conditions are constantly evolving — and new challenges are emerging in the manufacturing landscape. The most pressing challenges include:

Rising interest rates

The cost of debt for most of twenty-first century was low — and interest rates in the previous decade were significantly lower than almost any other time in the last 50 years. Companies over-leveraged their balanced sheets with higher proportions of debt in this low-interest rate environment to fuel growth.

However, interest rates have now resettled to historical averages that are considerably higher than before. This exposes manufacturers to debt payments that are eating into a greater share of their profits.

Continued supply chain disruptions

Navigating supply chains in the wake of the COVID-19 pandemic has been a challenge for many manufacturers. Average global delivery times peaked at 100 days and dropped to closer to 87 days in late 2023 — causing significant delays in production.

These lengthy delivery times are a result of continued shortages in electrical, electronic, and semi-conductor components as well as ongoing global conflicts. Additionally, these long delivery times reflect the impact from the rising cost of fuel, higher cost of transportation, and/or delayed movement of materials from one location to another.

High cost of operations

Inflation has increased the cost of doing business in the manufacturing industry. The cost of labour and fuel has increased — making logistics more expensive. Additionally, manufacturers that rent commercial land space are paying more to lease the same facilities. Each of these factors increases the cost of operations and chips away at your profitability.

Slowdown in market demand

Demand for manufactured products is slowing down as customers cut back on spending to weather the current high-cost environment. Additionally, slowdowns in other industries such as the housing market may also impact manufacturers. Fewer people are purchasing new properties and projects are often being delayed — reducing the demand for products such as refrigerators or other house furnishings. This decreases product sales further, reducing revenue and profits for manufacturing businesses.

How do the current market conditions impact your business?

These market conditions may impact your company’s ability to receive financing from the bank, its operating cash flow, and its ability to utilize its capital effectively.

Reduced financing

High interest rates, the rising cost of operations, and slowdown in market demand means that your manufacturing business is no longer able to pass its costs back to its customers. This poses a significant risk to your earnings before interest, taxes, depreciation, and amortization (EBITDA).

Your EBITDA measures the profitability and financial health of your business — however, the bank also uses it as a component to calculate your debt service coverage ratio. Variability in your EBITDA may impact your ability to meet this ratio, causing the bank to reduce the amount of money that it is willing to loan to your business. This can have a significant impact on its growth and operational performance.

Strained operating cash flow

Your operating cash flow is another key indicator of your company’s financial health. A positive operating cash flow shows that your operations are generating more money than your business is spending. This enables you to add more money to your bank accounts each month, have enough money to meet your working capital environments, and pay down your debt service coverage ratio.

However, the current market conditions may significantly reduce your operating cash flow. Additionally, vendor terms are changing — and upfront or shorter payment terms can cause additional strain on your cash flow. This means that your business may not have enough cash on hand to pay its suppliers or meet its debt obligations, resulting in production delays or reduced financing from the bank.

Rising costs and/or delayed revenue from supply chain disruptions

Broad labour shortages are impacting the manufacturing market as more employees switch companies to gain higher compensation packages. The cost to refill these vacant positions comes with a much higher wage bill than in the past. However, manufacturers risk delays in production and revenue if these positions are not filled.

At the same time, manufacturers are grappling with rising operating costs, including rent and lease rates. Material rates are also higher due to delayed cycles, limited resources, and higher logistics costs — for example, dry bulk shipping rates are 199 percent higher than in the same period last year. Global shipping delays and in-land freight rates have both increased due to unavailability of containers, shipping route congestions, and high fuel costs.

Each of these factors means that your business is paying more for materials and labour while its revenue is taking longer to arrive. This strains its operating cash flow and may have a significant impact on its overall profitability.

Ineffective capital utilization

Your manufacturing company may have purchased machinery, equipment, and other assets in the previous low interest rate environment. However, these assets may no longer generate the same amount of value because you are no longer running them at full capacity as market demand slows down.

Additionally, your company may have taken out loans for this machinery and equipment. These loans may be up for renewal at a much higher rate than they were previously — further reducing your ability to realize value from these assets and impacting your profitability.

How can manufacturers overcome these challenges?

The current market conditions have significant real-world implications for the financial health of your manufacturing business. It is critical to assess your business for potential weaknesses and threats and take the right steps to improve its performance.

MNP’s Manufacturing Health Check Assessment can help you evaluate the current state of your business. Understanding what risks are emerging or may already be present within your company can help you address them early, continue to grow, and reach your goals.

However, identifying these risks is only the first step in the right direction. Overcoming these challenges will require comprehensive strategies to improve the performance of your business, such as improving your cash flow cycle and reporting. Our next articles in this series will examine these strategies in-depth — and provide case studies showing how businesses used these strategies to improve their performance and profitability.

Manufacturing Health Check Assessment

To grow your business and reach your goals, you need to understand your strengths and identify your weaknesses.

Take the next steps

If you need support to improve the performance of your manufacturing business, contact a member of MNP’s Consulting Services team. We can help provide the insights you need to help you grow your business through uncertainty towards success.

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