Brexit concerns highlight payment risks for manufacturers
Shannon Murphy, assistant head of risk underwriting and manufacturing expert at trade credit insurer Euler Hermes, voices client concerns about payments risk in the sector.
Businesses across the manufacturing sector have been upbeat throughout 2018, with many reporting healthy order books up to the end of this year. Many are also citing the improvements in Britain’s digital infrastructure and the promise of further advances, specifically through 5G, artificial intelligence (AI) and automation, as reasons for optimism.
On top of this, firms have also benefited from greater demand from abroad, driven by the low exchange rate and healthy global economic growth, which is set to hit 3.3% this year compared with 3.1% in 2017. According to KPMG’s latest outlook report, 75% of the country’s manufacturing CEOs feel confident about the growth prospects for the UK in general.
But 2018 has still been a difficult year for the UK’s manufacturing firms, with growth slowing considerably since January and output levels falling sharply over the last three months, according to the CBI’s latest survey.
The shadow of Brexit will loom ever larger large next year, which raises a number of issues for manufacturers. The threat of a ‘no deal’ is anticipated to have a big impact on the value of sterling, which will see input costs rise further. Add to this the issue of foreign export partners seeking new markets to source their goods and services, and firms are understandably concerned that their order books and turnovers will begin to feel the pinch.
We already see some evidence of this in late payment claims from our clients in the sector, which are up by 20% on the same period last year. We anticipate the overdue payments trend will continue in 2019, which will lead to a greater strain on a firm’s cash flow and working capital and could lead to a tightening of its credit terms for goods supplied. Finance teams will need to pay close attention to these issues.
Looking at UK manufacturing as a whole, firms are adopting a wait-and-see approach and have kept the vast majority of investment decisions on hold for most of this year. It’s also becoming clear that most UK manufacturers, in particular small businesses with integrated supply chains such as those in aerospace, chemicals and food production, have done little contingency planning for life outside of the EU. With manufactured goods crossing the channel multiple times in the production process, any tariffs could significantly increase costs, and many have no UK-based supply chain to fall back on.
The automotive industry - the jewel in the crown of the UK’s manufacturing sector - is expected to be hit particularly hard. Our forecasts show insolvency levels will increase by up to five per cent this year, which is largely due to waning consumer demand and falling diesel sales. Given its integrated supply chain, the industry will feel the bite of rising input costs more than most and is certainly not keeping schtum about the effects a ‘no deal’ Brexit could potentially have. Toyota recently stated that a hard Brexit would temporarily halt output at its plant in the East Midlands. Nearly 150,000 cars were produced at the site last year, 90% of which were exported to the EU.
Uncertainty is having a big impact on the sector. Firms can only have confidence in their investment decisions if they have clarity on the UK’s future relationship with the bloc, particularly in terms of trade tariffs and maintaining the ‘just-in-time’ supply chain across borders.
Gartner: Leaders Lack Skilled Smart Manufacturing Workers
With organisations rapidly adopting industry 4.0 capabilities to increase productivity, efficiency, transparency, and quality as well as reduce cost, manufacturers “are under pressure to bring their workforce into the 21st century,” says Gartner.
While more connected factory workers are leveraging digital tools and data management techniques to improve decision accuracy, increase knowledge and lessen variability, 57% of manufacturing leaders feel that their organisations lack the skilled workers needed to support their smart manufacturing digitalisation plans.
“Our survey revealed that manufacturers are currently going through a difficult phase in their digitisation journey toward smart manufacturing,” said Simon Jacobson, Vice President analyst, Gartner Supply Chain practice.
“They accept that changing from a break-fix mentality and culture to a data-driven workforce is a must. However, intuition, efficiency and engagement cannot be sacrificed. New workers might be tech-savvy but lack access to best practices and know-how — and tenured workers might have the knowledge, but not the digital skills. A truly connected factory worker in a smart manufacturing environment needs both.”
Surveying 439 respondents from North America, Western Europe and APAC, Gartner found that “organisational complexity, integration and process reengineering are the most prevalent challenges for executing smart manufacturing initiatives.” Combined they represent “the largest change management obstacle [for manufacturers],” adds Gartner.
“It’s interesting to see that leadership commitment is frequently cited as not being a challenge. Across all respondents, 83% agree that their leadership understands and accepts the need to invest in smart manufacturing. However, it does not reflect whether or not the majority of leaders understand the magnitude of change in front of them – regarding technology, as well as talent,” added Jacobson.
Technology and People
While the value and opportunities smart manufacturing can provide an organisation is being recognised, introducing technology alone isn’t enough. Gartner emphasises the importance of evolving factory workers alongside the technology, ensuring that they are on board in order for the change to be successful.
“The most immediate action is for organisations to realize that this is more than digitisation. It requires synchronising activities for capability building, capability enablement and empowering people. Taking a ‘how to improve a day in the life’ approach will increase engagement, continuous learning and ultimately foster a pull-based approach that will attract tenured workers. They are the best points of contact to identify the best starting points for automation and the required data and digital tools for better decision-making,” said Jacobson.
Long term, “it is important to establish a data-driven culture in manufacturing operations that is rooted in governance and training - without stifling employee creativity and ingenuity,” concluded Gartner.