How will the manufacturing sector will recover?

Manufacturing is one of the sectors most impacted by COVID-19. Not only has this sector been impacted by supply chain issues and staff shortages, this industry debatably faces one of the toughest challenges of arranging social distancing as we endeavour to find a “new normal”. Most manufacturing facilities do not lend themselves to the social distancing measures and it is something our manufacturing clients are working through to find a workable and safe solution. From our conversations with clients and contacts, we have outlined the sectors’ key issues and challenges as well as some of the developments during this period below.

Supplier issues

• Raw material shortages – this has been a bigger issue for materials that are in high demand such as alcohol-based products and materials sourced in China as the supply chain has also been greatly affected by staff shortages and illness on production lines.
• Payment terms from customers – requests for payment terms to be extended, even from the larger companies, as they seek to manage cash flow. This factor has had an adverse effect on all companies in the chain as they have sought to manage working capital.
• Logistical issues resulting in longer delivery times for both goods in and out which impacts on the ‘just in time’ nature of many operations, precipitating pressure to hold increased inventories further pressurising cash flow.

However, we have seen that many manufacturers have benefited from stockpiling which had taken place previously in respect of Brexit planning, which broadly cushioned them for the shortfall in supply caused by the pandemic. Many will now be looking ahead to the end of the transition period on 31 December 2020 to see if further stockpiling will be required to counter further supply chain issues and the possible adverse effects of WTO tariffs further reducing margin and adding to cash flow pressures.

There are ongoing concerns regarding the ongoing availability of cash working capital to enable many businesses to trade out of the lockdown and the inevitable recession, the effects of which will only really become apparent post-October 2020 when government support under the furlough scheme ends. Many are hoping that the Government emergency support schemes such as the Coronavirus Business Interruption Loan Scheme (CBILS), remains in place and becomes easier to access as the process to apply remains over complicated. Many manufacturing companies would like to see banks being more proactive and innovative in their support.

Change in attitudes

There also seems to be a consensus that there have been significant changes in attitudes taking place in the sector (which is traditionally slow to change). Issues such as working from home (for those able to) is viewed more positively than before the lockdown. Business owners should engage with their workforce to invite and welcome their input and feedback so that attitudes and cultures continue to evolve. The workforce and their skills remain a key asset for manufacturing businesses. Good communication in a business fosters alignment of goals and objectives, raises staff satisfaction and ultimately leads to business longevity and success.

Other notable changes in the workplace include an increased focus on workers’ mental health – many firms have been prioritising this by offering additional wellbeing and resilience support to deal with isolation issues.

Looking ahead to a full return for all of the workplace- notwithstanding the reduction in the social distancing requirements announced for early July – there remain concerns over contagion as health professionals and experts still recommend social distancing at 2m and most manufacturing operations do not lend themselves to being distanced. There is also the cost and efficiency concerns in changing working practices because of social distancing, especially as some of those measures may be temporary, but expensive, to implement.

Embracing and managing change

Many manufacturers are embracing change and using technology to assist them which is long overdue. This includes online digital education and training of employees, meetings taking place online rather than in-person and re-inducting employees based on the new ways of working due to COVID-19.

However, there are also some concerns about how to manage these changes, which include:

• Dealing with possible friction between employees that have stayed on in the workplace and those who return to work from furlough.
• Concerns regarding bringing more vulnerable workers back to the workplace and how to keep them safe, especially as many want to get back as quickly as possible.
• Concerns around skills gaps as some firms say their older and more vulnerable staff are the most skilled in the business.
• Many firms are concerned about the end of the furlough scheme support and the need for possible redundancies in the future. However, there are examples where manufacturing businesses have continued as before with no need for furlough support. This is generally confined to manufacturers whose sales platform is e-commerce and those sectors which focus on food and pharmaceutical manufacturing.

Looking ahead to the future there are also some concerns about the practical management of issues such as holiday time and how businesses can cover absences later in the year if staff have not taken holiday to date. This may result in increasing the number of temporary staff which will have an impact on overhead costs. This is, however, confined to businesses that did not incorporate holiday contingency plans. These plans may include that a minimum portion of this year’s holiday entitlement to be taken before a set date meaning holiday bottlenecks later are avoided.

Rodney Sutton, Partner and Head of Manufacturing, Kreston Reeves comments: “Clearly there are many live issues for the sector and of course every business is different but managing the safety and needs of the workforce, balanced with the costs of running the business is the top of everyone’s agenda.”

“It is certainly going to be a challenging period ahead and many businesses in the manufacturing sector would benefit from taking a step back to consider plans for the next stage, make sure they have identified all possible future challenges and have available a contingency plan that is as flexible as possible”.

“From many of our clients we have seen many pro-active and positive steps already being taken which leaves me to believe that although there will be tough times to be faced, the sector remains resilient and will adapt and grow in the “new normal”.”

If you would like to discuss the topics explored in this article, contact Rodney Sutton.