A focus on the manufacturing value chain will be key to the sector’s mission to step up its productivity and profitability in 2022.
By creating a unified operating model and focusing on cost engineering from an early stage of product development, manufacturers can realise valuable, new opportunities and unlock profits along the way.
Over the past two years, market disruption has made it challenging for UK manufacturers to maintain profitability. A perfect storm of influences, including Brexit, the Ukraine war, the Suez Canal blockage, and the knock-on effects of sector shutdowns, led to unprecedented levels of demand uncertainty. At the same time, supply shortages affecting raw materials and components made it difficult to stay operational and keep production lines open.
However, there are now signs that the sector is back on the road to recovery, with UK factory output growing at its fastest pace for six months (to 57.3 PMI) in January 2022. As manufacturers begin to ramp up production, a focus on optimising the manufacturing value chain could help to improve efficiency and unlock hidden profits.
Put simply, a value chain is a set of activities that a business performs in order to deliver a valuable product to the end customer. By following these steps, businesses can boost their productivity and increase profits at each link in the chain:
- Plan – This stage involves transforming the business’s financial forecasts, supply chain insights, sales and marketing activities and product development into a joined-up operational plan, to inform strategic decision making. By aligning people and resources to market opportunities, manufacturers will be in a better position to improve their resilience and predict their future financial position.
- Buy – Manufacturers should consider how to optimise their procurement strategy to ensure they have the right materials in stock at the right time. Clear supply chain visibility is required to inform decisions about performance and capacity, and to better understand the contribution that each supplier makes to the value chain.
- Make – How can businesses convert raw materials into a profitable finished product? This stage should aim to ensure that manufacturing, purchasing and replenishment decisions are driven by reliable data about customer demand and the consumption of supply.
- Sell – At this stage, manufacturers aim to reach out to the market in order to drive growth. This process should be informed by real-time insights into customers’ experiences and values. Consideration should be given to adapting processes and customer interactions to deliver improved financial returns.
- Ship – This revolves around the logistics and distribution processes involved in delivering products and services to the customer in full. As manufacturers expand overseas, this stage becomes even more important to mitigate against potential disruption. A three-to-five-year logistics network plan should be developed, including insights from annual scenario planning.
To be truly effective in optimising the manufacturing value chain and informing strategic decision making, it’s vital that all five areas are seamlessly integrated and aligned closely to real-time customer demand. Having real-time demand visibility across the value chain enables retailers, distributors, manufacturers and suppliers to quickly identify and address gaps between supply and demand. With accurate customer demand, businesses can manage procurement and replenishment more efficiently, ensure that production is ramped up before possible shortages occur, reduce the chance of stockouts, cut the cost of inventory and free up working capital.
Often, manufacturers with a global footprint rely on numerous, disparate data systems, which can undermine strategic decision making. To improve their understanding of customer demand, clear supply chain visibility and access to a single source of accurate and reliable data is key.
In order to optimise the manufacturing value chain, it is important for the sector to secure strategic procurement skills. This is likely to require investing time and money in training more people at the highest level, including a strong focus on value chains. Additionally, more must be done to promote procurement as an aspirational career choice.
A focus on cost engineering could also help manufacturers to improve their profitability by reducing the costs involved in making a particular product. For example, this might involve a change of engineering approach or the removal of non-critical parts to reduce the overall material cost of a product. This process may also open up opportunities to negotiate lower costs with suppliers.
The pandemic has transformed trading conditions in the manufacturing sector and businesses that are unable to respond by adapting their operations will struggle to remain competitive. By building a fully integrated value chain, manufacturers can uncover opportunities to improve their business models, boosting their profitability and productivity.
☛ Nick Harrison is a partner and Paul Cooper is a director at Vendigital.