By Katlin Swisher, Ph.D.
While the onset of the coronavirus pandemic took a significant toll on the economy, the manufacturing industry across the country and in West Virginia remains a bright spot. As efforts continue to re-shore manufacturing, evaluate supply chains and integrate new technologies, manufacturing production will continue to rise.
As the nation’s economy seeks to rebound beyond the COVID-19 pandemic, one industry that has already seen growth is manufacturing.
With the onset of the pandemic just over one year ago, the manufacturing industry rapidly declined, with production decreasing approximately 20% between February and April 2020.
“The pandemic hit manufacturing hard. It was a very steep drop, comparable in many ways to the Great Recession,” says Chad Moutray, chief economist for the National Association of Manufacturers (NAM). “Some sectors, like motor vehicles, were hit dramatically harder than that. The good news is manufacturing has been a bright spot since then, bouncing back strongly.”
Following the first-quarter 2021 Manufacturers Outlook Report, a nationwide survey of manufacturers by NAM, Moutray expects manufacturing production nationwide will return to pre-pandemic levels by late spring.
“I see gross domestic product growing by at least 6% this year, which is strong,” he says. “Obviously, the U.S. economy shrunk by a half percent last year, which was the largest national decline since 1946. That shows you just how strong that rebound has been.”
West Virginia-based manufacturers have also seen similar production increases.
“The past year was surprisingly strong for manufacturing in West Virginia, being one of the only areas of economic growth in the state during the pandemic,” says Rebecca McPhail, president of the West Virginia Manufacturers Association. “We anticipate these trends to continue in 2021 as efforts increase to re-shore American manufacturing and address lessons learned about supply chain acquisition during COVID-19.”
Despite this optimism, Moutray cautions that there are still many ongoing obstacles as a result of the pandemic, including a workforce shortage, which is just under 600,000 less than it was pre-pandemic. Workforce was one of the most critical concerns in NAM’s outlook report, second only to increases in the costs of materials.
“That rebound doesn’t mean we are out of the woods. There are still many challenges out there,” he says. “The perennial challenge we continue to struggle with is workforce. Many of our member businesses tell us they are having trouble finding enough talent. This is something we’ve seen for a while. It is more of a structural issue as baby boomers retire and really questioning where the next generation of workers will come from.”
Supply chain disruptions also continue to be a problem, with nearly half of all manufacturers surveyed in the outlook report reporting challenges.
“Manufacturers continue to tell us about several supply chain disruptions that are really affecting them,” says Moutray. “The reality is that a lot of manufacturers slowed down overall activity when demand slowed down, and it’s taking a while for that to ramp back up now that overall demand is strong.”
Increases in material costs, the single biggest issue manufacturers noted at 76.22%, have also affected the supply chain.
“Production costs in China have increased. Logistics costs have gone up, so sometimes it makes more sense to produce materials here in the U.S. than making it elsewhere and shipping it,” says Moutray. “Those things have all played into it.”
Pre-pandemic, some manufacturers were already reevaluating their supply chains because of international trade issues and natural disasters like the Japan tsunami, Thailand floods and other one-time events that urged companies to consider duplicating or adding to their suppliers.
“This has forced companies to consider that maybe they don’t need just one supplier. Or, if they have one supplier, maybe they need to have different locations,” says Moutray. “The pandemic, though, has forced people to look at supply chains even harder. This is a unique window of opportunity for companies that were already on the fence about relocating in the U.S. to shift more production back here. It’s easier to monitor quality here.”
Another lesson learned from the pandemic is the importance of knowing the source of materials.
“I think the pandemic brings awareness to the need to balance our supply chain and sourcing—making sure that there are domestic options when it comes to critical manufacturing components as well as finished goods,” says McPhail. “Sourcing is very important for most manufactured goods to assure health and safety standards. Knowing where your products are sourced and the standards applied for quality of goods can ensure you know what you are getting and how the product will perform.”
While many manufacturing jobs are essential—frontline positions requiring on-site work—virtual work has become much more common where possible.
“We did have a survey last year where we asked about interest in working remotely. We heard from a large number of our companies that they were reevaluating opportunities that could be done virtually,” says Moutray. “On the shop floor, that’s not always possible, so you have a lot of companies reevaluating their production processes to see where they can put more social distancing in place. Our companies have looked at their production processes in different ways. Virtual is possible, but it also means companies are also relying a lot more on technology to make that social distancing possible.”
Those technologies range from robotics and autonomous machinery to 5G mobile data.
“Companies are going to continue to invest in a whole host of technologies,” says Moutray. “Robotics is important, as are autonomous technologies—not just vehicles but driverless forklifts and other machinery to move products around the shop floor. As telecommunications continue to invest in 5G technology, that’s something that can help enable even greater efficiencies on the shop floor. Augmented reality, the notion that you can look through some glasses and they’ll show you how to do something, is another possibility. There are many technologies that have a lot of potentially practical uses on the shop floor that companies will continue to invest in, not just to improve productivity but to help with on-the-job training.”
The shift to remote work is also seen at West Virginia-based manufacturing companies, where possible, while also establishing social distancing protocols for essential employees who work on-site.
“While many in manufacturing are frontline employees who observe social distancing, mask wearing and other safety protocols, those who work in administration or sales are able to work remotely,” says McPhail. “Manufacturers lead the way in making health and safety a top priority, and the COVID-19 pandemic is no different. Despite the challenges, manufacturing, an essential industry, adapted quickly to respond to pandemic protocols. We are pleased to report that there have been no outbreaks of significance to date in the facilities of our members.”
Despite these ongoing obstacles, NAM’s first-quarter 2021 Manufacturers Outlook Report shows an increase in optimism from manufacturers for the third straight quarter. The survey found that 87.6% of manufacturers felt either somewhat or very positive about their company’s outlook. The number increased from 33.9% in the second quarter of 2020, which was the worst since the Great Recession. The report notes that this feedback suggests manufacturers had the strongest outlook in two years, since the first quarter of 2019.
“The economy is going to bounce back strongly,” says Moutray. “There are a lot of tailwinds helping us this year. There is a lot of pent-up demand in terms of both consumers and businesses as more Americans get vaccinated. You’re going to continue to see this rebound in spending as the year continues. Hopefully the unemployment rate will continue to fall. There are still a lot of people who are suffering, but there is movement in the right direction.”
Supply Chain and Third-Party Risk Management Considerations for Manufacturers
Supply chain disruption due to the pandemic has many manufacturers rationalizing their suppliers and giving more consideration to the locations from which their materials come. In addition to a more nationalist sentiment about sourcing domestically, there is also a trend toward qualifying secondary and back-up vendors. Although a good strategy, it’s important to perform the appropriate due diligence procedures to avoid potential risks and to utilize a third-party risk management (TPRM) program.
Management should create an inventory of their third parties, including those in the supply chain, by reaching out to all departments with authority to enter into third-party contracts. At a minimum, they should be able to identify all their third-party relationships and understand the nature of each one. Ideally, they should evaluate the types of risks associated with each third party and prioritize them by severity and likelihood of risk exposure. Third-party relationship analyses should be completed at an enterprise-wide level, which will highlight concentrations of exposures to individual third parties as well as concentrations by risk type.
Management will then be able to prioritize and focus on the highest concentrations with the greatest risks garnering the most attention. For example, consideration might include which raw materials are the most critical to have on hand versus those that have substitutes. It might also include the manufacturer’s ability to source the materials from a secondary vendor and the financial/operational impact.
Typically, third-party vendors are first subject to a due diligence review that evaluates the quality of their operations and helps define their inherent risk profiles and long-term viability. Once the review is completed, management must assess additional risks associated with the third party relative to data security, customer interaction, brand reputation, liability, fraud, intellectual property rights, business continuity and geo-political issues. A determination can then be made from a risk acceptance or mitigation perspective as to whether the risks posed by the potential third party can be remediated contractually or mitigated to an acceptable level by internal controls at the company. To achieve the most impactful program, companies should establish a single TPRM framework that is employed consistently across the entire company. The TPRM should address all dimensions of the company/third-party relationships, including alignment with the business strategies and goals of the company, the selection of third-party providers and the contractual agreements to be made with them, the necessary ongoing oversight and monitoring requirements and the processes to terminate relationships as risk exposures change.
Sourcing strategies will change, and a manufacturer’s inventory of third-party providers is dynamic with new risks and disruptors constantly emerging. These combined inputs create a highly complex situation that has the potential to create significant disruption and distraction if outlier risks are not adequately identified and controlled. A centralized, comprehensive and integrated third-party oversight framework should become the lever to managing the influence of outside sources on this system.
