Are British factories an endangered species?
The cost base for manufactures is at an all-time high
There is no doubt that the manufacturing landscape is tricky to navigate:
- The cost base for manufactures is at an all-time high
- International competition has never been more acute
- Production operations have never been easier to transfer overseas
With the rate of change accelerating fast, the outlook for manufacturing is far from rosy. The basic business model for large numbers of factories up and down the country can’t be sustainable in the long term.
Yes, there will always be some products that will be made locally, such as items that are produced in low numbers, items with a short shelf life, (such as pre-packed sandwiches) heavy items such as bricks and those that need to be changed quickly to adapt to market needs. However, in general, if businesses want to continue to manufacturer products in our country, then they need to think long and hard about how they can do this whilst building revenue, staying competitive and continuing to prosper as a business.
Many manufacturers rely on their technical expertise to keep them at the bleeding edge of innovation. Others do everything they can to provide a higher quality product. These companies can often stay one step ahead of their competition, but this is not always possible for everyone. Is there another way?
Yes there is. It is called servitisation and it could possibly revolutionise manufacturing, not just in the UK, but worldwide.
The idea of manufacturers providing services is not new. At a basic level, manufacturers have been supporting their product offering with spare parts for generations. The next step in the servitisation model is to offer intermediate services such as a helpdesk, periodic maintenance, repair and overhaul. Again, many of these are standard fare and have been for a long time, even so these intermediate services present a fantastic opportunity for businesses to strengthen relationships with their customers, and provide ways to generate additional revenue streams for the business.
But it is with advanced services where the opportunity for business growth is even greater.
With an advanced service offering the customer receives an outcome, or capability, rather than purchasing a product. For example, an office manager might sign up for the provision of ‘document management solutions’ rather than buying a photocopier. Similarly, an airline might enter into an agreement for a number of flying hours rather than ordering a jet engine. In northern Europe, consumers have already been offered a 'pay per wash' option as part of a trial run by their domestic washing machine manufacturer, and this trend will surely continue.
The advantages with these advanced services are numerous for both customer and producer; the customer benefits from a ‘pay-per-use’ model rather than spending a large amount of cash up front. The customer also benefits from a guaranteed product performance as well as commitments regarding product development and enhancements over time. In return the customer agrees to a longer-term contract over several years and a stronger partnership between manufacturer and customer is formed, all of which improves long-term cash flow and customer lifetime value.
The manufacturer, instead of selling products is now in the business of selling outcomes, bundling together a range of products and services tailored to individual customer’s requirements. If carried out correctly, the business transformation through servitisation should allow for a new lease of life for manufacturers up and down the country.
Who said our factories were an endangered species?
IHS Markit/CIPS: UK Manufacturing PMI near-record high
UK manufacturing trends
For the UK manufacturing sector, growth of output and new orders were both reported by IHS Markit and CIPS as among the best seen over the past seven years, which in turn has led to a strong increase in employment. Despite this, the sector continues to face supply chain delays and input shortages, which resulted in increased purchasing costs and record selling price inflation.
UK Manufacturing IHS Markit/CIPS Purchasing Managers’ Index® (PMI®)
Seasonally adjusted, IHS Markit/CIPS Purchasing Managers’ Index® (PMI®) rose to 60.9 in April, which was an increase compared to March (58.9) and above the estimated 60.7 for April.
Increasing for the eleventh consecutive month, the latest readings are the highest since July 1994 (61.0). The output growth for April has been attributed to the loosening of lockdown restrictions, improving demands and a rise in backlogged work.
“The manufacturing sector was flooded with optimism in April as the PMI rose to its highest level since July 1994, bolstered by strong levels of new orders and the end of lockdown restrictions opened the gates to business. It was primarily the home market that fuelled this upsurge in activity though more work from the US, Europe and China demonstrated there were also improvements in the global economy. This boom largely benefited corporates as output growth at small-scale producers continued to lag behind,” said Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply.
In addition to expanding production, total new orders rose for its third consecutive month, which was attributed to a revival of domestic market conditions, stronger client confidence, parts of the economy reopening and improving global market conditions.
While new exports rose in April, the rate was reported as weaker in comparison to new orders. “Companies reported improved new work intakes from several trading partners, including mainland Europe, the US, China and South-East Asia. Large-sized manufacturers saw a substantial expansion in new export order intakes, compared to only a marginal rise at small-sized firms,” said IHS Markit/CIPS.
UK Manufacturing’s outlook
Remaining positive at the start of the second quarter, 66% of companies forecast that output will be higher in a year's time, which is attributed to expectations for less disruption related to COVID-19 and Brexit, economic recovery, improved client confidence and new product launches.
“Further loosening of COVID-19 restrictions at home and abroad led to another marked growth spurt at UK factories. The headline PMI rose to a near 27-year high, as output and new orders expanded at increased rates. The outlook for the sector is also increasingly positive, with two-thirds of manufacturers expecting output to be higher in one year’s time. Export growth remains relatively subdued, however, as small manufacturers struggle to export,” said Rob Dobson, Director at IHS Markit.
Adding to comments from IHS Markit and CIPS, , Managing Director of Freight and Logistics at Accenture Global said: “While today’s figures are positive overall, the worsening supply situation is still a concern, with rates of both input costs and selling price inflation running far above anything previously seen. Shipping delays and material shortages are driving huge backlogs of uncompleted work and the surge in manufacturing orders is leading to many firms struggling to boost operating capacity to keep up with demand. With business expectations becoming even more optimistic as the economy rebounds, the big question will be whether firms will be able to cope with the surging inflows of new orders.
“As ongoing supply chain issues are still at large, companies with wide international footprints should look to reassess their logistics strategies by running supply chain stress tests and simulations in order to respond quickly to upswings and variability in demand. A flexible and resilient supply chain will be a key way for businesses to remain both competitive and stable as we emerge from the pandemic”