Narrator:
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:
Manufacturing is never simple, but it's rarely been as hard as it was in 2021. The year began with optimism as COVID-19 vaccines became widely available in the US. People began returning to more normal lives and economic activity rose. That optimism was short lived as the stresses of the past two years ravaged the supply chain, denying automakers and consumer electronics makers that chips needed to finish products, delaying arrivals of products from overseas as ships waited to unload goods at overcrowded ports and enforcing consumers to select option B, C or D when their first choices were not available.
In early 2022, IndustryWeek and L.E.K Consulting partnered together to survey manufacturers to ask how they're doing it all. The results are available in a research report and today's episode will cover four themes from the broader findings, including labor shortages, supply chain risk and rising input costs, rising shipping and warehouse costs, and finally, technology investments. We're joined today by Eric Navales and Darren Perry to look at how manufacturers are surviving. Please take a moment to introduce yourselves.
Eric Navales:
My name is Eric Navales, and I lead L.E.K Consulting's industrial equipment and technology practice here in North America.
Darren Perry:
I'm Darren Perry. I lead the global industrial digital practice for L.E.K.
Host:
Thank you. We look forward to your insights. Let's jump right in. The first area of concern is the labor shortages and resulting rising costs of labor. Can you tell us more about this?
Eric Navales:
Well, the manufacturing industry is certainly not immune to the broader trends in the US industrial labor force, where we've been seeing, for years, employers are just increasingly finding it difficult to hire skilled labor, and of course the pandemic just add more fuel to the fire. One interesting factor that really shouldn't go overlooked in any labor discussion is the impact of freelance work in the gig economy. We've seen that the growth rate in freelance work is six times faster than the growth of the overall employment base, and we're hearing workers see gig work at the very least as a good way to earn extra money, and at worst, as a viable alternative career path.
Factor in, we're seeing the highest interest and engagement in gig work in the younger generations. This certainly threatens continued labor shortages as the older generations continue to retire. When we speak with our industrial clients, we're seeing leading industrial companies responding to these labor issues in a variety of ways. First and foremost, employee engagement, retention, recruiting, these are getting senior executive attention and have very quickly become C-suite initiatives in 2022.
Secondly, we're seeing just continued investment in technology, specifically automation, to decrease reliance on skilled labor in the medium to long term, and we certainly have more to say about the technology trends in the post-COVID world later on in this podcast. Lastly, we're hearing an increased openness to alternative staffing models. We see outsourcing of non-core workers, such as security, landscaping, even maintenance and repair technicians, and we're also seeing, in a few cases, the use of what we call X as a service or pay-as-you-go models to further shrink the employee base.
Darren Perry:
Those are great points, Eric. I think the labor topic obviously is one that is top of mind for a lot of people right now. Clearly, much of the industry is feeling a great deal of pain on labor as an issue in terms of getting the right folks when they need them and keeping the business running and the business running in a way that can keep up with the high degree of demand that we're seeing. But two quick things that I would add to the points that you made, first, you highlighted technology, the use of automation, which I think is one of the many levers that firms have to use as they try to address this issue.
I think as we think about it, automation obviously is nothing new. It's been around since the 1960s. Probably two thirds of manufacturing firms in the United States claim some sort of automated process. But one of the things that we've seen in our client work that's really interesting is, in the last several years, probably before the pandemic, but certainly coming through the pandemic and with the issues that we're facing now as it relates to labor, is that we're seeing the reasons why firms investing in automation are really changing. It used to be that it was primarily about production efficiency.
But now one of the things that we're seeing is that employee satisfaction is actually a goal of automation, and it makes sense as you think about it. Firms are looking for opportunities to automate simple, repetitive tasks, things that might be less stimulating to make that job more rewarding for their workforce. Then obviously there are those tasks that are physically demanding, dirty or maybe pose injury risk. I think to the extent that firms can adopt that mindset and look to technology and look to automation as a way to actually make the job fundamentally better and fundamentally more satisfying is one of the many important things they need to think about as it relates to labor.
The other point that I would make is a little bit different, but it's more about how the war for talent is being played. You talked about the threat of gig economy companies, and obviously there we're talking about Uber, DoorDash and firms of that sort. I think it's important for manufacturing firms to understand that the threat from those types of companies goes far beyond just the compelling job characteristics, the added flexibility, be your own boss type characteristics that goes along with those. These firms actually are very sophisticated in the way that they market their jobs to people.
I think we're all familiar with the way that CPG companies are very sophisticated in their digital marketing and they put their products in front of us digitally in ways that sometimes are so subtle that we don't even realize, but they're there disrupting our daily lives with the messages they want to get across about their products. I think it's important for manufacturers to know that the exact same thing is happening in recruiting now, and very sophisticated employers like Uber and DoorDash are engaging digital recruitment agencies to do the exact same types of things that product companies are doing.
They're being very disruptive digitally about getting job ads in front of potential hires. They're, again, placing that right job opportunity to the right person with the right message that's going to resonate, and get it to them in a web browser on their phone at the right time. It's highly, highly disruptive. I think the point for manufacturers is that it's going to be insufficient to simply make the job more appealing. They actually need to be savvy and disruptive in the way they go about in advertise and ultimately sell that job.
Host:
What about supply chain risks, and rising costs for raw materials and other inputs?
Eric Navales:
Yeah, similar to what we see on the labor side, again, leading companies are addressing these supply chain issues with really a basket strategy of multiple initiatives. First and foremost, companies are reducing imports and sourcing more locally to physically shorten their supply chains. We're also seeing companies diversifying their supplier base in order to avoid putting all their eggs in one basket, so to speak. Leading companies are also ordering larger volumes and managing inventory themselves. Now, it's important to note that this is not a full reversal of LEAN initiatives, but it obviously does provide companies with a bit more breathing room and capacity to work through supply chain disruptions.
Now, these strategies that I've just talked about tend to have positive results relatively quickly and are also easy to reverse. On the other hand, there are a small number of companies taking a much more longer term strategic view to addressing supply chain risks, and that's by vertically integrating backwards and acquiring or building out their own supply of critical raw materials and inputs. Now, obviously, this is not a feasible strategy for all manufacturers, but it does illustrate the point that manufacturers are putting all options on the table when it comes to addressing supply chain risks.
Darren Perry:
Eric, I think another thing that's happening here, and again, this is going to be a common theme, but is the investment in technology, specifically as it relates to the supply chain. In the recent study we're talking about, we saw that more than half of manufacturing firms in the US claimed that they either had recently invested or were likely to invest in new supply chain technology, and that cuts across a wide range of things, solutions associated with demand planning, procurement, or execution of supply chain tasks, broader supply chain management capabilities. They encompass everything from simple workflow automation to more advanced things like artificial intelligence for demand planning.
I think that that makes sense in light of what we've been seeing even before the pandemic and certainly through the pandemic, is that in our view, digital transformation of supply chain is really the next frontier for Industry 4.0. I think we know that anecdotally, but we also know it with hard data. Before the pandemic, L.E.K had conducted a study on digital success factors, in which we surveyed just about 600 executives globally across all corners of the industrial sector, large and small firms, different roles in the value chain, et cetera, where our objective was to really try to understand what investments and other management decisions were driving better business outcomes for digital transformation.
By business outcomes, we mean things like lower operating costs, shorter production times, lower inventory costs, et cetera. What we learned was interesting. Out of about 70 different factors that we studied related to Industry 4.0, four of the top five most impactful on those business outcomes were all tied to supply chain. I think what we were seeing there in that data is that many firms had already made advances with digital inside the four walls of the factory, but tomorrow's leaders are really pushing digital transformation beyond the four walls and looking for supply chain as an area to innovate.
Host:
Eric, what are you seeing in terms of shipping and warehousing costs?
Eric Navales:
Yeah, it seems as if no cost category has been immune to rapid increases, and shipping and warehouse costs are certainly seeing that. While shipping and freight costs have seen very modest price increases for several years pre-COVID, the last 12 to 18 months have seen prices skyrocket and everything from domestic trucking rates to transpacific container rates. It's worth noting that some of the company strategies we just discussed that address supply chain risks, such as ordering from more suppliers, ordering increased volumes, that's actually exacerbating demand for shipping freight and warehouse storage, which of course is just adding more fuel to the fire.
Leading companies are again taking a variety of measures to rein in some of these shipping and storage costs. As we mentioned before, sourcing more locally can shorten supply chains, but also, obviously, lower freight costs. We're also seeing companies considering flexible storage solutions, such as ISO tanks for liquid storage, and rental trailers for dry storage. These solutions are not only cheap, but can be flexed up and down quickly based on the business environment. Lastly, companies are, of course, investing in warehouse automation to increase efficiency and throughput of their storage facilities.
Darren Perry:
Yeah, Eric, I think that warehouse automation story, in many ways, parallels what we just talked about as it relates to technology investments across broader supply chain activities. But worth really underscoring and noting here just how critical a good logistics strategy is going to be. As I think of ... As we all appreciate, we've just gone through what is the most significant consumer behavior reset in any of our lifetimes. eCommerce is well on its way to becoming 25% of all consumer purchases. 80% of all US consumers have made a purchase on their mobile phone at this point, and 150 million US consumers are now Amazon Prime members.
As a result, they've been trained to expect next day delivery on more than 15 million items. That has obvious implications if your business is part of the consumer value chain. But it's equally important in a B2B world as well as you think about, again, that 80% of US consumers who've made a purchase on their mobile phones or the 150 million who are trained on next day delivery based on their Amazon Prime membership. That has to spill over to their expectations in their roles in the business world as well. Equally important for B2B businesses to understand. That obviously presents massive challenge for firms trying to meet those expectations. But those who do will be very well positioned.
Host:
Well, Darren you've mentioned technology investments quite a few times today as a solution to many of these problems. Can you tell us how manufacturers are responding?
Darren Perry:
Yeah, absolutely. Manufacturers are absolutely responding to the challenges of today, obviously the last couple years, by doubling down on digital transformation, and we've seen it in a lot of the work that we've done. With that said, prior to the pandemic, you'd argue that digital transformation already had a full head of steam, and we saw 50% of CEOs were being challenged by their boards to make progress on digital. More than 40% of CEOs had made digital their number one strategic priority, which is really remarkable when you think about all that's [inaudible 00:14:21] CEOs played and what he or she may be making as a priority that digital would be the number one strategic priority.
The average firm had six major digital transformation projects underway in one form or another. Clearly, there was a lot of activity, there was a lot of momentum before the pandemic. But what we're seeing now as a result of the pandemic is really quite profound. In our research, more than 80% of firms are accelerating their investments in digital transformation, really jumping years ahead of where they would've been otherwise. It makes sense because there are so many opportunities for them to address the challenges of today with those efforts.
Take, for instance, robotics where firms are facing challenges with under-resourced teams and workstation de-densification, and now the equation has changed where investment in robotics may make sense to address those challenges. You have people looking to remote monitoring and predictive maintenance solutions, where they're able to manage assets across sites or in the field in ways that they might not have been able to otherwise. We've already talked about artificial intelligence for things like demand planning or inventory management as the next frontier.
Then of course there are investments in collaboration tools, customer portals, et cetera, which will really enhance or in some cases even just allow work with clients or supply chain partners to carry on. With that said, I think it's important that people understand this is not a rising tide lifts all boat story. In fact, in the work that we've done, if we double-click on that 80% of firms that claim to be accelerating their investments and their digital transformations, we found that firms that would claim to have been digitally advantaged before the pandemic are actually meaningfully more likely to be the ones that are making that acceleration, and that is probably for a variety of reasons.
For one, they probably have better comfort evaluating and investing in digital projects. Two, they've made prior investments there as proof of concepts. They probably understand the ROI. Three, maybe they've invested in a digital team, so they have more infrastructure and capability in place to onboard these initiatives. There's no shortage of reasons. But the implication here is that we actually see a widening of the digital capability gap going forward. If you haven't made progress here, you need to, and if you have made progress, I think the right mindset to take on is to be encouraged with that progress, but not be satisfied.
Eric Navales:
Yeah, Darren, I think that last point is a really important one as we look at the state of US manufacturing in 2022. Look, it's no surprise that technology investments can address many of the near term issues facing the industry today. But it's increasingly clear that these investments will also pay off for years to come if done thoughtfully and strategically. While the business environment has its challenges today with respect to labor and supply chain challenges, we do see a path forward for leading companies, not just survive, but thrive in their core markets of the future.
Host:
Well, thank you both for discussing how manufacturers are surviving. Manufacturing is always changing and we appreciate L.E.K's insights.
Narrator:
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.
