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What do we really know?

The future of the manufacturing sector looked pretty gloomy at the end of 2015 according to the EEF & DLA Piper 2015 Q4 Manufacturing outlook report.  

As always, there are many factors which create volatile and sometimes unpredictable conditions in which to run a manufacturing business. Last year some of the reasons cited for a weaker manufacturing performance, particularly in the latter part of the year were weak domestic and international demand, the collapse of the oil sector and the strengthening of sterling. This all led to a drop in the amount of investment and hiring predicted across the manufacturing sector for 2016. 

We entered 2016 with weaker confidence and ongoing concerns about the impact of the increasing minimum wage, as well as the looming debate around a possible Brexit. 

Despite all of this, this week we hear good news. 

Markit’s PMI – Purchasing Managers Index  states that according to a poll of manufacturing businesses in January the score sits at 52.9. Better than December’s figures, in fact the best figure for the last three months across manufacturing, and notably better than the outlook in the EEF & DLA Piper 2015 Q4 Manufacturing outlook report.

The manufacturing sector is one that requires long term strategy and investment but is affected by many factors that are out of people’s control. What is a disaster for one business is great news for others. 

Take the price of oil - terrible news for any business supplying services or products in to the E&P sectors but great for the manufacturer whose energy prices drop.  

Or the recent weakening of sterling - not so good for holiday makers, but great news for manufacturers who export products that are sensitive to the value of sterling. 

My question is how predictable or unpredictable is a manufacturing business to run? And how much of this can be factored for by stronger management and leaders? 

As always your thoughts and comments are welcome!

 

Claire Lauder is the Director for Manufacturing & Engineering at Interim Partners. 

Comments

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Colin Lewis

16 Feb 2016 15:25 PM

Vulnerability to external changes and the required management/leadership strength to predict and react to them is highly dependent on market sector and competitive landscape.
Aerospace & Defence markets tend to be long term, with distant horizons where potential contracts are more predictable than in other sectors. Customer needs, driven by the top tier players (e.g. Airbus, Boeing or governments), are mostly known and it takes a single event upset such as 9/11, or a change of national budget strategy to cause significant variations in the heartbeat section of a book of business. Second tier contractors in this market also tend to have limited competition due to consolidation over the last couple of decades. In this environment the leadership teams have to excel in the art of customer intimacy to stay close to the forecasts and to drive operational excellence in all that they do.
Conversely, industrial markets which have much shorter horizons, broad competition and a revenue stream which depends on book-to-bill, has to be highly flexible in this dynamic environment. Leadership of such manufacturing companies must excel in short lead-times and embed processes that can accommodate rapidly changing requirements, not least in design modifications and fluctuating volumes.
This is just two examples on an infinitely variable spectrum, but the ever present risk of exchange rate variations and fluctuations in material costs is a challenge for all.


Claire

16 Feb 2016 11:54 AM

Another comment from my network...

John Clark

My views come from experience working in an extremely high-tech energy sector, which had an aspiration to set up mass-manufacturing routes for potential high volume products.

A few of your contributors have pointed out various economic factors putting the brakes on the manufacturing sector at the moment- Chinese recession, oil price collapse etc, which is all valid but could be just a distraction from the wider picture- that manufacturing as we know it today in the UK is going through an irreversible change, from volume to niche- towards novel products, ideally higher value, higher technology, and first of a kind.

Increasingly, UK manufacturers will need to be known for their manufacturing technology, their responsiveness and their skills in design for manufacture. Our success will be in the know-how that enables the products, not the products themselves. All of this will need to be founded on cutting edge design and manufacturing technology coupled with an intimate understanding of the customer’s needs and a willingness to accept frequent change and very short product life cycles.

I’m actually quite optimistic about the potential for manufacturing in the UK, but only if the sector realises that design and manufacturing technology is at the heart of what it’s doing and only if the engineering and business development teams can learn come together to anticipate their customers’ needs.


Paul Smith

12 Feb 2016 11:51 AM

Manuacturing businesses are subject to a wide range of both internal and external influences. Day to day there are innumerable business variables that can serve both as positive and negative influences. Certain variables such as exchange rates, are of course beyond the control of the business manager, however, it remains the responsibility of the business manager to promote growth and stability and vision in that business.
The key fact is that good management is able to constantly find ways to minimize the risk of the variable nature of the business and to foresee and address the potential future business variability.
Both ability to deal with a wide range of current and perceived future variables is central to the managers ability of provide growth and stability to difficult and complex manufacturing situations.
It is ultimately, the complexity that provides the challenge for the manager and the manager that caries the responsibility and ability to provide the solutions. The answer to the question is therefore that unpredictability is inherent in the business but it is the manager that needs to shift unpredictability towards predictability. The extent to which this is possible is an inherent part of that manager’s expertise.


Peter Alderslade

12 Feb 2016 09:47 AM

All the evidence is there is much to do to transform UK industrial performance to rebalance the economy.

More recent comment:

http://www.newstatesman.com/politics/economy/2016/01/whatever-happened-march-makers

http://www.bbc.co.uk/news/business-35414075


Peter Alderslade

10 Feb 2016 15:07 PM

Week 6, 2016: UK Production



Summary: This morning the UK's production index for the end of 2015 was released, and it showed that the poor end to the year left the UK's production sector, and in particular manufacturing, smaller than at the end of 2014.

What does the chart show? The chart shows a seasonally adjusted index measuring output of the production industries in the UK over the past ten years, with 2012 being equal to 100. The red line shows the manufacturing output, which is a subset of the overall production industries output shown by the blue line. The other elements that also make up the production index are mining and quarrying, and the utility industries such as electricity and water.

Why is the chart interesting? The production sector was hit particularly hard by the recession in 2008, falling almost 15% in terms of output. There was a brief period of recovery, followed by another (deeper) trough in 2012. Since then, while the economy as a whole has recovered, the production industries have remained fairly flat. In the first half of last year, it looked as though growth might have returned somewhat, but a very poor end to the year left the production sector's output down on the same point in 2014, and roughly the same level as it was in the post-crisis trough of 2009. The largest contribution to this end of year slump has come from manufacturing, which seemed to be stable in 2014 before enduring an awful 2015.

The biggest implication of today's production figures is for future GDP estimates; the preliminary fourth quarter GDP growth figure of 0.5% had assumed that production output would only fall by 0.2% in the last quarter of the year. In fact, it fell by 0.5%, and this may lead to the second estimate (due at the end of this month) revising down the headline figure.

- See more at: http://www.ercouncil.org/chart-of-the-week/week-6-2016-uk-production.html?utm_medium=email&utm_campaign=ERC+Weekly+Digest&utm_source=YMLP&utm_term=ercchart0616.gif#sthash.ZPVbfGLp.dpuf


10 Feb 2016 14:36 PM

Hot from the press.

"George Osborne's "march of the makers" has long been reminiscent of one of General Melchett's advances in Blackadder Goes Forth. But after the nasty shock provided by this morning's official industrial production figures the march is turning into a full-blown retreat.

The City had expected a slowdown because the mild weather led to a big reduction in output from the energy sector. But even factoring that in, the 1.1 per cent decline was a full percentage point worse than the number economists had pencilled in. Underneath the headline industrial production figures, manufacturing output dipped in December, marking three months of declines in a row.

The figures make it likely that GDP growth for the final quarter will be trimmed when the data are revised, from an already lacklustre 0.5 per cent growth. It also makes it less likely that we will see interest rates rise this year.

There are reasons for optimism: the latest survey data suggests things have picked up a little and the dip in sterling in recent months will help manufacturers sell their wares abroad.

Mr Osborne will be able to point out that weak export markets are doing much of the damage, but separate data from the Bank of England's Regional Agents this morning shows that domestic output is stagnating too, its worst performance in three years.

Nearly five years on from Mr Osborne's "march of the makers" budget speech, it looks like he has some explaining to do.

Marcus Leroux
Industrial Correpsondent
The Times"


Peter Alderslade

10 Feb 2016 10:11 AM

Claire you are correct “Greater customer and market diversity seems key”.
Following my contribution about the UK motor industry, if we consider the Austin mini from the 70’s the brand was Austin. BL offered it in a small number of variations with a small number of extras. Now the brand is MINI. BMW produce 40 variations and heaven knows how many extras. Not mini anymore some of the variations are physically large. Like MB, BMW laser focus to cover every conceivable market segment and ‘customer must have extras’.

Like the Japanese – Nissan Sunderland was the first in Europe – the Germans equally focus on low cost but high quality, high efficiency, and high flexibility manufacturing across the world.

I was at the Land Rover production facility recently. Every vehicle they make is a customer order. They do not make then sell. They sell then make. Some of you will remember the airfields and docks full of unsold cars that ate up cash and deteriorated needing expensive remedial warranty work – eating up more margin and cash. Bye, bye went the British motor industry.


Peter Alderslade

09 Feb 2016 20:29 PM

In 1961 the original Mini was in production.
According to BBC, UK was then worlds 4th biggest car producer. Now we are 11th.


Russ Haworth

09 Feb 2016 19:02 PM

Hi Claire, your blog is good and provides a high level perspective of the sector and issues which are affecting overall performance. In troubled times like these where confidence and demand is at a lower level than we would like this creates opportunities for Interim Managers who are focuses on performance improvement and change management. It's now more important than ever that businesses look to improve there overal performance.


Philip May

09 Feb 2016 16:41 PM

A fascinating question - one which the blog comments show is a complicated one!
Predictability is very unlikely to increase so unpredictability is one to get comfortable with.
As an aside I just checked the exchange rate; remember $/£ 1.95 in August 2008 and in December of that year the €/£ near parity.
What can leadership do in this uncertain environment? Be clear and resolute on the business strategy and be sure to look for business growth, be it in the current sector, or adjacent sectors or geographically. That's not to say good cost control and lean don't have an important role to play.
To your question, Claire, a volatile market needs leadership to plot a route through the peaks and troughs and to do this with a positive mindset.
In manufacturing our biggest long term investments are (likely to be) in plant and equipment and people. Does the same rigour go into the people, their quality, development and leadership as we do with physical assets? It's only with stronger management and leadership we can do with this volatile world.


Matthew Williams

09 Feb 2016 14:01 PM

The ideal business will serve several different market sectors to help it to counter the effects of macro-economic, seasonal and political events. A well run company must have clear strategies and business plans in place to predict and mitigate such risks. This will not always be possible, for example when a manufacturing company is focused on specialist markets such as automotive and construction, but notwithstanding such specialism it is the responsibility of the leadership to develop plans to ensure that the business remains robust and can weather the impact of external events. In conclusion, running manufacturing businesses will never be entirely predictable, but good planning and strong leadership are essential to maintain market positions and avoid falling victim to external circumstances.


Mike Gansser-Potts

09 Feb 2016 13:44 PM

I fear that the improved sentiment is related to the fall in sterling (about 10% versus the Euro in the past few months)rather than any fundamental improvement in global outlooks or British competitiveness. The only way to achieve manufacturing success is through genuine, long term value enhancement. We need to keep that goal foremost, and avoid being lulled into a false sense of security in the short term as the Brexit debate plays tunes with exchange rates in the next few months.


Peter Alderslade

09 Feb 2016 11:18 AM

John Nicholson says, "Perhaps it is a feature of being an interim Leader that you get to see only businesses which struggle in their sector."
John, this is certainly not the situation. Interims work for clients to further improve highly successful businesses.


Claire

09 Feb 2016 09:57 AM

A comment that has come straight in to my inbox.....

Chris - A very valid question and one which I think has been driving the UK attitude to the manufacturing sector for a number of years - balancing short term (tactical) actions with the longer term business strategy. The ongoing appetite for short term versus mid / long term investment paybacks continues to impact the investment decisions of a number of businesses especially for those in public ownership.

Within the economy we are currently seeing some factors that are impacting sentiment and creating uncertainty such as the Asian drag, oil pricing and the ongoing Brexit debate. These factors are current issues that do/may have an impact and will affect tactical decision making such as short term market strategy or the timing of investments etc. As we know markets thrive on certainty which is seldom present and indicators can be helpful but, if used in isolation, can often confuse the situation. So, as ever, the situation is not an easy one.

I feel that the fundamental questions for senior managers is how do they view the longer term robustness of their own business model? Over the economic cycle is it capable of generating the returns required to support and grow that business going forward? Shorter term external factors will affect their tactics but, unless they represent a 'paradigm shift' in the market they are operating in, they need to be able to answer positively to these two questions. Robust business models with agile tactical responses to the present challenges are typically the ones that outperform the competition.


Claire

09 Feb 2016 09:56 AM

Thank you all for your comments, I always find the input of my network hugely insightful.

I guess the next question would be how to de-risk your business in both the short term and long term. Greater customer and market diversity seems key. As Jonathan Walter quite rightly pointed out, you can have the most efficient processes and teams in the world but if there is no one driving sales and pushing innovation then whats the point! I have seen a wide array of scenarios in the businesses I have placed interim's in to,whether that be great at sales and innovation but lacking the foundation and operational capability to support the strong sales pipeline, through to poorly run businesses where bad practice has become normal practice. I am always amazed when speaking with my network that the problems in most businesses are often all caused by a similar set of circumstances - issues around people, processes, products & sales, sometimes only in one of these areas, but quite often it can be all of them!


Peter Alderslade

08 Feb 2016 23:40 PM

Manufacturing covers many sectors, the performance of which has varied greatly over the years. The best measure I suggest is value added as a % of GDP. Claire as you say, manufacturing generally requires a long-term strategy, but in the short-term many factors can affect it. I caution reading too much into individual surveys.

It is hard to get up to date figures but I believe UK manufacturing as a % of GDP has been in long-term decline – as has been employment - and is now around 11% as is France. In 1970 UK was near 30%. Germany is now around twice UK. UK is currently the 11th largest manufacturing nation in the world.

So Claire, to answer your question it depends a great deal on your sector. I never like the word strong but high-quality leaders and managers will always beat the rest?


Barry Allen

08 Feb 2016 18:16 PM

This question is of little relevance to the manufacturing sectors that do have a good degree of stability in their market sectors and therefore have better vision and regularity of order volumes. This enables a flatter platform for planning across the manufacturing activities including the unfixed and fixed costs such as purchasing and labour respectively, which represent the two biggest chunks of costs in most manufacturing businesses.
Having said that, any market sectors can take a turn away from stability, given the far more volatile world that we now find ourselves in.

It is on the other hand extremely relevant to companies that have far less stable markets and there are far more of these since the recession and the emergence of the highly unstable world we now have for what appears to be quite a long time to come.
So predictability for many manufacturing businesses has tumbled greatly since 2007. It has become very difficult to know what markets might do from one month to the next, let alone from one year to the next, with world problems emerging sometimes almost overnight. This makes building and investing in the manufacturing infrastructure way more risky than has been for a very long time.

Leaders of manufacturing businesses, however brilliant they may be, must recognise these risk factors and consider their options should a large market turn quickly prevail. Companies with a business based on a smaller number of large volume orders or customers/ markets sectors, are now even more at risk in these times, as any one downturn could cause immense damage. In these times with many global markets in decline or at risk, any loss of business will be so much harder to replace quickly. It has always been safer to have a wide customer base and with today’s volatility, leaders of manufacturing companies with a narrow customer base should work even harder to broaden it as quickly as possible however difficult that may be.

Lean clearly helps provide flexibility, so leaders should never stop looking for ways to increase their use of lean across all processes and functions. Outsourcing also reduces risk and provides more flexibility and should always be considered as an alternative to direct internal investment particularly whilst world volatility remains.

So in answer to your question is it more or less predictable to run a manufacturing business right now, leaders must assess the likely volatility of their markets sectors and decide whether predictability may be less either now or in the short term future, whereby ongoing risk reduction planning should form an important part of their company strategy.

Barry Allen 09 February 2016


Jonathan Walter

08 Feb 2016 17:51 PM

I'm interested to see that most of the focus is on reducing cost and becoming more agile and responsive. These are all good things but I must say most of the UK manufacturing businesses I come into contact with are not particularly bad at these
things. Indeed I see more issues in Germany where I do most of my work. I agree that leadership is an issue but in the sense of defining a product development and growth strategy and focussing adequate resource in this area. I spoke to a UK client last week who complained that she was inundated with people offering lean transformation as the answer to her business problem when she knew that the issue was business growth. To put it bluntly the most efficient and agile production process is of little use if you have no customers. Of course it can be argued that these are components of business success, but my point is that they are not exclusively so.


Russell Levinson

08 Feb 2016 15:57 PM

Difficult to lump together all manufacturers because of their different markets, cost structures, capitalisation level, differentiation, and so on. As Glen Mills says agility is important but lean is only part of the answer; short term responsiveness helps in customer service and quality. But to stay on track and avoid the sort of mistakes that lead to large costs or opportunities missed, you need a robust S&OP process to coordinate operational, commercial and even financial planning in the 3-6 month term.


Timothy Thexton

08 Feb 2016 15:33 PM

Well this is typical UK doom and gloom. "Manufacturing is hard, no future" and so on.
Lets face it, when the times get tough a reasonable dose of innovative thinking doesn't hurt.
Start by asking the question, have I done all the lean I can? Have I really reduced my costs.
have I set my quality right? Have I got all my products and their extensions correctly placed in all my markets?
What can I do differently to attack in another way?
It is worthwhile to remember that if I am growing my business, I am moving forward. Don't listen to the competition, agree with their doom and gloom and keep carving the pieces off them.
If this sounds like motherhood and apple pie, it is not, its blood thirsty and cut throat.
Do I accept doom and gloom - never and the studies that tell this story tend to create self-fulfilling prophecies.


John Nicholson

08 Feb 2016 15:18 PM

Your comment on the ease of managing manufacturing businesses and the importance of strong and capable leaders is perhaps the most important issue companies face.
Perhaps it is a feature of being an interim Leader that you get to see only businesses which struggle in their sector. Every business I have worked with have been characterised by an absence of leadership. They often have metrics coming out of their ears so the management team always appear to be busy and are usually sincere in their belief that the wall will soon yield to their assault. I think it is a form of self hypnosis induced by despair at the poor results brought about by continual repetition of the same processes. The spark that an interim can often bring is Leadership, of understanding the market environment and creating the vision and the structures to address the market. Being an interim and able to value the evidence as found without the baggage of history is extremely useful in this environment.

Sadly companies usually invest in more management, more analysis and continue to push failing products. It would be interesting to see if my experience is unique and if Leadership is the key to rebuilding a great British Industrial Sector.


Martin Chisholm

08 Feb 2016 15:00 PM

An excellent question, but one with a complex answer! In short the demands on a manufacturing business are getting less predictable and I believe that trend will only continue (as they say, there are only 2 types of forecast: a lucky one or a wrong one). However, as Glenn said in his comment "creating agility will enable the business to adapt quickly". In order to do this strong management and leadership is required and that is the part that is predictable! For manufacturing to not only survive but to thrive, bold leadership is an absolute prerequisite and an organisation that learns quickly and can adapt.


Peter Broxton

08 Feb 2016 14:38 PM

Having just finished an assignment I am talking to several Directors of manufacturing companies to understand their potential senior resource needs. Without exception they are seeing stronger demand and are positive for 2016. Brexit is considered a non issue as trading will continue either way. People had already factored in a slowdown in China, domestic demand particularly in consumer goods is up and the £ is pretty stable. So all in all a broadly optimistic view.


Glenn Mills

05 Feb 2016 12:25 PM

Good question Claire on the back of a particularly gloomy outlook from the EEF. Manufacturing tends to less volatile than, say, TMT, but even so, the pace of change is increasing.

Improving prediction can only go so far. Creating agility will enable the business to adapt quickly to changes which can't be foreseen. Lean can help with this if done properly; it can hinder if implemented too rigidly.

Even better than resilience to uncertainty would be a business which thrived on it - what Nassim Nicholas Taleb calls "antifragility". This might mean, for example, allowing exposure to a certain level of risk, so that the business learns from failures and becomes stronger as a result.

Unfortunately in a climate of uncertainty, many businesses batten down the hatches and wait for sunnier times...