July 2009- Recent business conditions require companies to re-evaluate their strategies. The June Purchasing Manager's Index posted the 17th consecutive month of contraction in the manufacturing sector, with a rating of 44.8. (A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.)
However, Norbert J. Ore, CPSM, C.P.M, and chair of the Institute for Supply Management Manufacturing Business Survey Commitee, said in the release, "Manufacturing continues to contract at a slower rate, but the trends in the indexes are encouraging as seven of 18 industries reported growth in June. Most encouraging is the gain in the Production Index, which is up 12.1 percentage points in the last two months to 52.5 percent. Aggressive inventory reduction continues and indications are that the de-stocking cycle is at or near the end in most industries, as the Customers' Inventories Index remained below 50 percent for the third consecutive month. The Prices Index was unchanged from May, indicating that the supply/demand balance is improving. Overall, a slow recovery for manufacturing is forming based on the current trends in the ISM data."
During what is sure to be a bumpy recovery, it's important to stay on track with improvement strategies.
"Companies still do not have clear visibility into demand over the next three to six months, but signs indicate that it's beginning to firm up," said Tim Hanley, vice chairman and leader of Deloitte's U.S. Process & Industrial Products sector, in a media statement. "Most of our manufacturing clients believe that 2010 will see moderate pickup in demand, though getting there may still be a bumpy ride. Many manufacturers are encouraged but are still in cost-cutting and right-sizing mode, proceeding with caution in terms of adding capacity and bringing production lines back on stream.
"The combination of continuously tight credit markets, the inability to forecast demand levels, and an intense focus on internal operations has created an environment where companies are taking significant steps to protect liquidity. While an important action, the fundamental business model must change in order to make it in the new economy. there will be a 'new normal,' which will be the result of credit markets never going back to the way they were, likely culminating in industry consolidations. Though some manufacturers are giving thought to the upturn and are ready to act, many continue to focus on short-term business challenges."
Hanley recommends that companies:
Conduct a risk assessment.Identify areas of supplier and customer risk and prioritize them based on value and importance to your long-term business success.
Have a Plan B.What happens if a major supplier goes under in the next few months? Make sure you have lifelines in place in case a critical link in the chain snaps.
Improve transparency.Take steps to improve the visibility and transparency of customer and vendor performance. Strengthen communications and information sharing to better manage demand, supply and cash flow.
Target structural costs.As companies continue to grapple with margin pressure, they'll have to expand their cost-cutting efforts to focus on more complex areas such as portfolio rationalization, complexity reduction and footprint optimization.
Target smart growth.Drive the new growth culture without losing sight of adding real economic value to the business. What opportunities will present themselves? How can you best allocate limited resources? Do you have the financial strength to take advantage of the favorable M&A market?
Take charge of talent. The downturn has forced a major shakedown in staff; multiple across-the-board reductions have stripped talent from organizations. Evaluating talent and aligning with expected businesses needs may mean the difference between success or failure. Help underperforming employees find new roles. Redesign incentive structures to attract, reward and retain your critical talent resources. MM