Host 1:
Welcome to Insight Exchange, presented by L.E.K. Consulting, a global strategy consultancy that helps business leaders seize competitive advantage and amplify Growth. Insight Exchange is our forum dedicated to the free, open, and unbiased exchange of the insights and ideas that are driving business into the future. We exchange insights with the brightest minds of the day, the most daring innovators and the doers who are right now rebuilding the world around us.
Host 2:
In the United States, manufacturing businesses are currently dealing with an unprecedented confluence of challenges to discuss these challenges on how companies are planning for the future. In this episode, we welcome Eric Navales, Matt Wayne and Alex Rogalski. Gentlemen, please further introduce yourselves.
Alex Rogalski:
Hi, my name's Alex Rogalski. I'm a Managing Director in the Boston office of L.E.K. Consulting, and I help to lead our industrial equipment and technology practice.
Matt Wayne:
And this is Matt Wayne. I'm a managing director and partner in our industrials practice based in Boston.
Eric Navales:
Hello, my name is Eric Navales. I'm a managing director and partner with L.E.K. Consulting, and I lead our industrial equipment and technology group here in North America.
Host 2:
Great. Thank you all. So to get started, let's talk about the survey. Can we talk more about why you decided to do this manufacturing survey now?
Alex Rogalski:
Yeah, happy to. In our work this year with manufacturing executives, what we're hearing is that they're dealing with a truly unprecedented confluence of factors. So inflation at the highest rate in 40 years, supply chain disruptions from COVID-19, the war in Ukraine, that's also impacting both supply chain disruptions and geopolitical instability, and then labor shortages, the inability to attract and retain talent. So what we wanted to do is hear from executives how this is impacting their near and long term strategic priorities and what initiatives they're using to help plan for the future.
Host 2:
So Matt, can you tell us more about how you went about learning how executives were addressing these challenges and planning for the future?
Matt Wayne:
Yeah, certainly. So in a typical consulting fashion, we did a goal fashion survey. We surveyed about 160 executives, manufacturing executives in the US. This cut across original equipment manufacturers, distributors, companies that are making finished goods or components, and across a whole host of end markets and geographical regions. So we did an online survey with them, and then we also conducted a handful of very focused interviews with some of the most senior executives in our survey to gather their insights firsthand. And we conducted this over the course of, call it two to three weeks, and then synthesize the results and brought this together into a coherent view of... The consensus view of US manufacturing companies.
Host 2:
So Eric, regarding those companies, I guess there's a delicate balance act between addressing unprecedented near-term challenges against those with broader long-term challenges. So what are the key market trends that are impacting US manufacturing companies?
Eric Navales:
Well, unfortunately, there's no shortage of issues that are keeping manufacturing executives up at night. We have the lingering supply chain disruptions from COVID-19, but we also have rising material costs, tight labor market, which is not only restricting assets to skilled labor, but also increasing labor costs as well. And then geopolitical instability, obviously the war in Ukraine, but we also have the simmering tensions in China and Taiwan. On top of all that, and further out on the horizon, there are the longer term opportunities, but also potential threats if companies aren't continuing to invest in remaining competitive. Automation, electrification, environmental, social and governance issues and obviously the ongoing digital transformation of the manufacturing space are all issues that companies are really trying to do a pretty difficult juggling act.
Host 2:
So of all these trends, which ones are more near term?
Alex Rogalski:
Well, they're really more of the operational challenges, so things related to material costs, supply chain, labor shortages, and what we're hearing and seeing in the server results is that the manufacturing executives are putting a lot of time and attention on these to take care of these brush fires and allow the business to operate on a day-to-day. Unfortunately, when we look at are these issues going away and is that effort coming to fruition, we really see that there's a lot of time and attention that's going to continue to SAP management's resources away from their long-term goals going forward.
Host 2:
We see that the manufacturing companies that were surveyed by L.E.K., some of them are already undertaking numerous initiatives to address these near term market trends. What are these initiatives that you're taking?
Matt Wayne:
Yeah. So there's not a one size fits all approach for all companies. We actually saw quite a host of different approaches and different strategies that companies were undertaking just given that they're all different, there's different sectors, there's different acuteness of these within their industry, et cetera. But there were a couple themes or approaches which were a bit more common than others. So as we think about things related to supply chain, for example, which has been unfortunately a lingering issue and continues to be an issue, we're seeing people really building in more redundancy into their supply chain. So that might be expanding their supplier base using suppliers and more suppliers than they've used historically. It may be increasing the use of onshore or nearshore suppliers. So we're not having the transportation issues of goods being stuck in different countries and in coming over, they're also doing things around some of their manufacturing practices, right?
So we're hearing about the use of... Trying to use more common parts. So you have to source not a thousand parts, and if one of those a thousand parts isn't available, you've got a problem. But trying to reduce that into more common parts. So you are only focused on a fewer number of skews and components that are needed to manufacture. So there's less chance of there being supply issues in certain areas. People are also building up inventory buffers, right? So making sure that they've got a bit more inventory on hand should a problem arise again. And then they're also, I guess as we think about one of the factors that Eric mentioned around this pricing environment, I think one of the positive things that we're seeing here, at least from the manufacturer's standpoint, is they're actually being able to pass along much of the pricing increases that they're facing.
I think there's an understanding in the market that prices are up and that most of the pricing increases have been able to be absorbed, and I think accepted by customers by and large, which is still able to maintain some of those margins that they've been able to achieve historically. Finally, I'd say that they're focusing on the retention piece with... We talked about labor shortages. People are investing in their people, they're investing in training programs, they're investing in retention, and some of that's through the form of compensation. They're investing in up-skilling some of their staff to be doing more higher value type of activities. But there's a lot of stuff. I mean, I kind of listed off a laundry list of things here, which I think just talks about just how frantic and how many different challenges the executives are trying to put out and deal with at one time.
Host 2:
Thanks, Matthew. And yeah, there is quite a bit of a list there. And so when you compare these trends and the initiatives that you're taking, we spoke about some of the short-term, so when it comes to the long-term, how might the priorities been shifted to address the long-term trends?
Eric Navales:
Yeah, well, yes, that's certainly the case, and that's forced companies to really prioritize where they focus their management effort and time. There's only so many brush fires that a management team can put out simultaneously, and so a lot of the focus has really shifted toward those near term threats. And that's really taken away time and resources from some of the longer term initiatives such as digital transformation, electrification, automation, and sustainability. From our survey, we heard a very clear signal that companies are deprioritizing their efforts on those longer term trends. Only about a third of companies that we spoke to are actively addressing these longer term strategic goals, such as digital transformation, electrification, automation, and sustainability.
The rest are really just putting in the minimal effort for now just to remain somewhat competitive with their peers who are also, again, dealing with the very same economic brush fires and issues that they are. And I think there's just a general hope that business conditions will improve over the next year or two, which will allow them to return more focus effort to these longer term initiatives. And so we think this actually opens up an opportunity, right? An opportunity for those manufacturing companies that are able to address these near term threats very quickly. We think that any sort of investment today in longer term initiatives, again digital transformation, electrification, et cetera, and those investments today, we think are actually going to set them up for long-term success.
Host 2:
So Eric, you mentioned competitive advantages. So what are some of the trends that executives could focus on now today to enable this competitive advantage?
Alex Rogalski:
I think two areas that I'd point executives to would be automation and then electrification. Automation is particularly interesting because what we heard is that over 50% of manufacturers are experiencing labor shortages, and they expect this continue through 2022 into 2023. If you think about automation that can help solve for labor shortages, and it can also help enable cost advantages going forward. What we're looking at and what we're seeing on the survey is that over two thirds of companies are making investments into facility automation, robotics, manual process replacement, and they expect to increase to over 85% of this doing the next three years. So this helps solve not only for the near term issues with labor shortages and retention, but also that cost advantages going forward. On the electrification side, this really depends on what your business is and what end market you're focused on, but we're seeing quite a bit of investment into new products that are electrified, upgrading or adjusting existing products. And this can help provide competitive advantages in the marketplace as well.
Host 2:
So what are some of the initiatives that executives are spearheading?
Matt Wayne:
Yeah, so picking up on what Alex mentioned, as we think about automation and the use of automation for all the great benefits that Alex mentioned, what we're really seeing is there's probably three primary things that are going on. One is replacing traditional manual tasks with automated ones, right? So being able to take the need of labor out and doing what that would be with an automated system. So maybe that is some of the movements of goods. Maybe that's some of the unloading of vehicles. Maybe it's some of the... If you start to get more advanced, getting into some of the quality control using vision systems, et cetera, whatever that may be, trying to replace some manual processes would be number one. The second piece would be around broader facility automation. So thinking about the kind of ultimate goal and what people always talk about is lights out manufacturing where there's literally no one in the building.
You don't even need the lights on because everything's automated. We're not saying we're there or we're quite there, but finding ways to increase automation with the way that processes are being done that can really help drive down costs and reducing that as well. And then finally, just broadly the use of robotics. We're seeing robotics come into play in a lot of these manufacturing facilities. A lot of companies using them in part of their assembly line, which again, these may have traditionally been more manual, but using the robotics, which are getting a bit more advanced, are able to do a bit more complex activities, and they're using that to rely on that. When it comes to electrification, I think the companies that we surveyed and that we spoke with, they're reporting continued investment in electrification that would be investing in new and existing products.
We had about two thirds of them said that they were doing this over the past three years. And then when we ask about the future over the next three years, 90% of those executive surveys said that they would be increasing their investments in electrification. I think there's a lot of activity and benefit to electrification from all the ESG trends. There's also some performance trends, some electrified components is frankly what consumers are demanding and what they're looking for. So a lot of trends going into that.
Host 2:
So regarding electrification, you mentioned that several times. How is this impacting companies initiatives?
Eric Navales:
Yeah, well, I mean, it's obviously not as simple as just ripping out the engine and putting in an electric battery, right? There's a fair amount of new product development research that is required to develop an electrified version of whatever the traditional product is. So certainly there's a fair amount of effort in new product development and research. There's expansion of the supply chain to gain access to now new critical components and subsystems such as batteries and charging equipment. There's also an increasing openness to revisiting the entire business model and sort of thinking through what parts of the customer experience with an electric product that companies can participate in. As you think about the electrification revolution in transportation vehicles. Besides passenger vehicles, we're seeing a lot of interest in off-road and heavy-duty vehicles as well. Well, that opens up an opportunity for OEMs that have traditionally made these off-road and construction vehicles to now think about, well, how should they participate in the charging infrastructure?
How should they participate in the battery maintenance and recycling services? As you think about the transition to new energy sources, there is an opportunity for OEMs to really expand the permission space of how they interact and serve their customers, not just at the time of purchase, but potentially through the life cycle of the product or the vehicle. So as you can see, companies are really juggling a lot of initiatives today, both to address the near term issues, but also to hopefully gain some ground here on some of those longer term opportunities such as automation and electrification. And we really do believe that those companies that can make strong investments today can actually widen the gap between themselves and their closest competitors and really strengthen their competitive position in the long term.
Host 2:
All right. Well, this has all been very valuable information on manufacturing. Thank you, gentlemen, for your insights today.
Eric Navales:
Well, thank you.
Matt Wayne:
Thank you very much.
Alex Rogalski:
Thank you.
Host 1:
Thank you, our listeners for joining us today at the Insight Exchange presented by L.E.K. Consulting. Links to resources mentioned in this podcast can be found in the show notes. Please subscribe or follow for future episodes wherever you listen to your podcasts. Also, we encourage you to submit your suggestions for future insights online at lek.com.
