6 minute read 10 Jun 2020
Engineer works with a ar headset on a production line

How workforce, liquidity and supply chain drive manufacturing priorities

By

Jerry Gootee

EY Global and Americas Industrial Products Leader

Advisory leader with nearly 30 years of experience. Passionate about developing people, building relationships and serving clients. Guitarist and vocalist. Golfer and Cleveland sports enthusiast.

6 minute read 10 Jun 2020

As COVID-19 became a threat in 1Q20, manufacturers found themselves facing complex decisions in a business environment that changed daily.  

Employees needed to be supported while working in facilities and at home. Liquidity needed to be preserved. Supply chains needed to deliver. Aerospace and defense (A&D), industrial products (IP) and chemical companies are preparing to weather the storm.

While there are more questions than answers about the full impact of coronavirus-related disruptions, many advanced manufacturing (pdf) (AM) leaders expect to see slow growth in the second half of 2020 as the world adjusts to working in a “new” normal.

AM companies are adapting to a business environment shaped by COVID-19 globally. The identification of the top 10 themes are based solely on the examination of earnings calls held from April to May 2020 by manufacturing companies. 

Here are the top 10 themes:

1. Developments in end markets

Automotive, oil and gas, and airlines were named most often as end markets severely affected in early 2020 due to COVID-19 and record low oil prices. As much of the world’s population were under stay-at-home orders, pharmaceuticals, food and beverage, household products, and consumer electronics experienced sales growth. The demand for personal protective equipment (PPE), testing kits and medical supplies boosted sales of specialized materials.

2. Financial initiatives

New credit facilities and loans are helping companies manage liquidity risks, and debt maturing within the next 12 months is being replaced with longer-term maturity dates. Capital expenditures, including enterprise-wide transformations and facility construction projects, are being postponed. Meanwhile, share buyback programs and dividend payments have been reduced or eliminated by some peers.

It is going to be critical for companies to understand and control their liquidity positioning in order to sustain the company through the crisis and prepare for the recovery.
David M. Gale
EY Global Advanced Manufacturing Strategy and Transactions Leader

3. Culture and talent

Workplaces will see both short- and long-term changes. In considering workforce management and transformation, leaders made clear that employee health was a top priority. More than one leader noted that employees working from home had been more productive than expected and indicated a new willingness to support greater flexibility in work locations.

4. Change in financial outlook

Financial guidance for future quarters and full-year 2020 have been withdrawn by many peers and some have kept forecasts but widened projected ranges. Many peers are expecting global end market demand to fall to a low point in 2Q20, noting that auto and commercial aerospace build activity would be down significantly. In some observations, business unit growth sometimes appears close to flat, but it can reflect the simultaneous effects of high demand for one product category (such as PPE) and lowered demand for others.

5. Cost reduction

Leaders are focused on controlling costs in all parts of their organizations. Ongoing productivity and cost control programs are continuing at most companies, and some of these programs have raised savings targets. Executives are taking compensation pay cuts, as well as looking at making headcount reductions. Significant capex outlay is being deferred in the short term during current crisis mode.

6. Working capital and cash flow management

In changes observed from the previous quarter, increasing inventory levels have been a challenge in managing working capital, especially for aerospace companies. While receivables have been a focus of working capital improvement programs, manufacturers are trying to balance rising overdue receivable levels with a focus on preserving long-term customer relationships.

7. Supply chain

Supply chain transparency and resiliency will receive more attention. Plant shutdowns in multiple regions, and the supply chain bottlenecks that have followed, have increased manufacturers’ awareness of the need for better insights into their own supplier networks. Companies are in close communication with their suppliers to keep liquidity issues from closing down operations. 

Supply chain analytics are critical to support data-driven (rather than emotion-driven) decision-making during this time of volatility.
Sven Dharmani
EY Global Advanced Manufacturing & Mobility Supply Chain Leader

8. Critical projects

Companies have formed COVID-19 response teams to address the needs of employees and communities, coordinating support at global and local levels. Many manufacturers have repurposed assets to launch or increase production of key pandemic supplies. Capex reductions have put many facility and IT systems projects on hold, but defense contracts and deliveries of military equipment and services are continuing as planned in most countries.

9. Changes in production rates

In the areas of facilities and production line management, plant shutdowns, either under local governmental orders or in response to COVID-19 outbreaks at individual facilities, have disrupted supply chains and order deliveries worldwide. Automotive production lines, which have seen sharp declines in activity, are being idled to control operating costs and inventory. At the same time, production of pandemic supplies is operating at full capacity to meet overwhelming demand.

10. Geographic developments – growth markets

Leaders discussed market conditions in Asia-Pacific, Latin America, and the Middle East and Africa. Revenue declines in major Asia-Pacific economies, especially China, in 1Q20 are expected to reverse in 2Q as businesses reopen. The strategic importance of supply chain operations in China, India and other Asia-Pacific countries was recognized by many manufacturers. Growth in Latin America in segments such as crop protection chemicals was robust in 1Q.

  • Scope, limitations and methodology

    This analysis examines key themes among 22 global advanced manufacturing peers, including those from the A&D, IP and chemical subsectors, during public earnings calls in April and May 2020. This update tracks the movement of these themes from quarter to quarter to provide a perspective on shifts in the manufacturing landscape.

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Summary

In the face of a global pandemic, manufacturers realized that employees needed to be supported while working in facilities and at home, liquidity needed to be preserved, and supply chains needed to deliver. Aerospace and defense, industrial products and chemical companies are preparing to weather the storm.

About this article

By

Jerry Gootee

EY Global and Americas Industrial Products Leader

Advisory leader with nearly 30 years of experience. Passionate about developing people, building relationships and serving clients. Guitarist and vocalist. Golfer and Cleveland sports enthusiast.