6 minute read 8 Dec 2021
Worker working together help each other to work in factory

How manufacturers are adapting to the waves of disruptions

By Jerry Gootee

EY Global Advanced Manufacturing Sector Leader

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

Contributors
6 minute read 8 Dec 2021

Companies are rethinking their sourcing strategies and operating models to remain sustainable, agile and resilient in the future.

In brief
  • Raw material and labor shortages, commodity inflation and transportation congestion are creating significant headwinds.
  • Enhancing productivity, supply chain visibility and profitability are immediate priorities as companies strive to minimize disruptions and maintain margins.
  • Sustainability continues to be a key driver for launching new products and increasing the wallet share of high-margin service offerings.

The 3Q21 Advanced Manufacturing Quarterly (pdf) analyzes the top five market forces and company responses discussed by leaders of 31 advanced manufacturing (AM) sector companies including those from the aerospace and defense (A&D), industrial products (IP) and chemical subsectors during public earnings calls with analysts in October and November 2021. This update tracks the movement of the top five market forces and company responses from quarter to quarter to provide a perspective on shifts in the AM landscape.

Themes that stood out include the following

Operating costs are emerging as a significant market force

Skyrocketing variable costs fueled by raw material shortages, a long-lasting surge in transportation costs and a talent shortage are impacting margins and cash flows at a time when manufacturers are already struggling to cut costs. Even when prices are increased, many manufacturers continue to endure revenue losses in the range of $300 million to $500 million for 3Q21 and are predicting similar headwinds for 4Q21. Apart from revising prices, many peers are implementing operational improvements via productivity playbooks, and Lean and Kaizen frameworks to increase efficiency and minimize head winds.

Supply chain reinvention is emerging as a significant company response

Demand upsurge, coupled with raw material shortages and congested ports, is leading to significant disruption in production schedules. AM companies are undertaking numerous initiatives to rethink their sourcing strategies and operating models. They are collaborating with customers and distributors for better visibility, contracting alternative suppliers, implementing new pricing strategies and signing long-term contracts.

The top five themes emerging from the 3Q21 earning calls are listed in the charts below. Themes are segregated as market forces and company responses, each delving deeper to identify the subthemes for each category. We have also added the prevailing sentiments and evolution of themes every quarter over the last year.

Explore the sections below for a view on AM subsectors and how different market forces are driving various company responses. Hover over the individual bubbles for more details; the size of the bubble denotes the number of times a theme is discussed in the earnings call.

  • A&D

    The 10-year commercial airplane market outlook for commercial original equipment manufacturers (OEMs) is largely unchanged. Commercial OEMs expect passenger traffic to return to 2019 levels in 2023 to 2024 and see recovery in three stages: first domestic, then regional markets, and finally, long-haul international routes. OEMs anticipate demand for widebody aircraft to take longer in line with the international traffic recovery. Business jet OEMs have seen some upward pricing pressure and are optimistic about the pent-up demand. Several defense contractors predict space to be their fastest-growing segment again in 2022. Even the defense contractors are not immune to the global supply chain pressures seeing some isolated impacts from the supply chain. However, the freighter market remains robust with more dedicated freighters being utilized as the cargo capacity of passenger airlines is limited.

  • Chemicals

    As demand from end users continues to recover, chemicals and advanced materials companies have lifted revenue and profitability outlooks, and are expanding into new geographies as well as adding new products to their portfolios. Sustainability remains a key driver for new product development, with several brands being launched. To overcome the supply chain issues and raw material shortages, companies are dispersing their manufacturing bases out of China – into local and global locations. They are also developing M&A strategies to strengthen portfolios while also improving working capital and cash flow.

  • IP

    A series of disruptions, including rising inflation after major supply chain challenges, is making industrial products companies rethink their pricing and sourcing strategies. Many peers are implementing dynamic pricing models and are resorting to productivity playbooks, and Lean and Kaizen frameworks to improve operational performance and maintain margins. Supply chain reinvention is emerging as a key focus area with multiple peers are setting up dedicated teams for negotiating with suppliers and using digital tools, such as predictive analytics, to minimize material and pricing disruptions.

Scope, limitations and methodology

The identification of the top market forces and company responses are based solely on an examination of earnings calls held in October and November 2021.

Summary

Despite continuing demand rebound in major end markets, the AM sector’s growth has been subdued by a series of unforeseen challenges. AM companies are realizing that operational excellence and resilient business models need to be an enduring priority and not just in times of crisis. Many leaders have already embarked on that path and are creating end-to-end visibility in supply chains, collaborating with customers and suppliers to manage risk, and embedding data and digital in operations to better predict issues and capitalize on new opportunities.

About this article

By Jerry Gootee

EY Global Advanced Manufacturing Sector Leader

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

Contributors