Facing the headwinds: Strategies for manufacturers in 2017

By Kreg Brown | May 21, 2020

While manufacturing activity in the past two years has been slightly less robust than observers would have hoped for, the general trend is toward growth, and according to the Manufacturers Alliance for Productivity and Innovation (MAPI) the industry is expected to reach pre-recession production levels in 2018. Meanwhile, expectations for 2017 include modest growth overall, with some sectors (such as construction supplies, high tech, and healthcare manufacturing) and some regions (including Colorado) faring better than others.

To gain a deeper understanding of manufacturers' plans and challenges for 2017, EKS&H -- in conjunction with the Leading Edge Alliance -- recently conducted a national survey of U.S. manufacturing companies. More than 250 individuals (including more than 30 manufacturing executives from Colorado) participated during October 2016. The top-line key takeaway was that, while the industry faces significant challenges in the coming year, manufacturers can deploy a wide range of targeted strategies to overcome them and achieve their strategic goals.

Top strategic priorities for manufacturers

While cost cutting remains top of mind, manufacturers will need to practice strong strategic planning to stay competitive in 2017.

National results: Survey respondents identified cutting operational costs (47 percent), seeking new markets (46 percent), and long-term strategic planning (41 percent) as their top priorities for 2017.

Colorado results: For Colorado companies, top priorities were R&D (52 percent), cutting operational costs (42 percent), and short-term strategic planning and seeking new markets (36 percent), respectively.

Strategy: After years of reducing expenses following the Great Recession, manufacturers will need to be creative about areas to cut expenses, and may not find many new options. Meanwhile, many companies understand the importance of performing ongoing R&D and continuously optimizing their operational infrastructure to enable growth.

Figure 1: Top priorities for manufacturers in 2017

R&D investment

The R&D investments made by manufacturers improve the products they create, people, and processes, which lead to productivity gains.

National results: More than one-third of respondents indicated that less than 1 percent of revenue would be invested in R&D in 2017, while almost one-fifth of them indicated that more than 6 percent of revenue would be reinvested.

Colorado results: Only 16 percent of Colorado companies indicated that they would spend less than 1 percent of revenue on R&D in 2017, and 66 percent said more than 6 percent would be reinvested (including 19 percent who said they plan to spend more than 10 percent of revenue on R&D).

Strategy: Manufacturers can now use the R&D tax credit to offset payroll taxes up to $250,000, a powerful boost for certain start-up companies that may not yet have an income tax liability.

Figure 2: Expected R&D investments for manufacturers in 2017

Capital expenditures

Capital investments are critical to operations, but they are expensive and, therefore, require careful and deliberate planning.

National results: Just over two-thirds (69 percent) of survey respondents plan capital expenditures on equipment in 2017. Fewer identified plant expansion/modernization (38 percent) and computer software (37 percent) investments this year.

Colorado results: Three-fourths of Colorado companies expect to make capital expenditures on manufacturing equipment, while about a third expect to spend on computer hardware (39 percent), and computer software and plant expansion/modernization (32 percent).

Strategy: Section 179D provides energy efficiency deductions, and Section 179 allows companies to expense up to $500,000 on new, used, purchased, or financed equipment. Bonus depreciation, cost segregation studies, and state and local credits and deductions should also be fully explored.

Figure 3: Expected capital expenditures for manufacturers in 2017

Increasing costs

Understanding cost increases and attributing costs to product lines, divisions, and customer costs are key to developing spending strategies for the coming year.

National results: Of survey participants, 74 percent expect labor costs to increase or significantly increase, followed by 50 percent of respondents who believe this will be the case with materials costs, and 42 percent who expect tax costs to increase.

Colorado results: For Colorado participants, the percentage was similar for labor costs, at 68 percent but much lower for materials costs at just 32 percent and the same for tax costs at 42 percent.

Strategy: Manufacturing costs have shifted to a complex technology-based environment. As a result, cost accounting and activity-based costing have moved reporting in the direction to more accurately recognize specific product and service line profitability.

Figure 4: Expected cost increases for manufacturers in 2017

Mergers and acquisitions

Many dealmakers expect healthy levels of M&A activity in the manufacturing industry to continue into 2017.

National results: One in ten survey respondents indicated they explored a sale or merger, and nearly 17 percent indicated that they explored an acquisition in 2016. Those numbers increased to just under 13 percent indicating that they plan to explore sale or merger opportunities and 23 percent plan to explore acquisitions in 2017.

Colorado results: For Colorado companies, these numbers were significantly different; just 7 percent explored a sale or merger, but more than a quarter explored an acquisition in 2016. Looking ahead, only 3 percent of Colorado manufacturers plan to explore a sale or merger, but 41 percent plan to explore acquisitions in 2017.

Strategy: For sellers, elements such as operations, product line profitability and diversity, and customer concentration -- as well as the quality of financial statements and reporting -- can dramatically impact a potential sale price. Buyers should pay particular attention to targets' technology systems and processes as well as cultural factors.

Figure 5: Expected mergers and acquisitions for 2017

Hiring trends

The "make-versus-buy" decision applies not only to products, but also to people as well. Should talent be made (trained) or acquired (hired)?

National results: Of all respondents, 52 percent indicated they expected to hire more in 2017 than in 2016, 44 percent indicated their hiring would remain the same as in 2016, and just 4 percent indicated they expected hiring to decrease from 2016 levels.

Colorado results: With higher growth numbers expected, 71 percent of Colorado manufactures plan to hire more employees in 2017 than in 2016, while 26 percent expect hiring to stay at the same level, and 3 percent expect a decrease.

Strategy: The best answer to the "make-versus-buy" question as it relates to talent is a combination of the two, depending on timing and the technical skills required.

Figure 6: Hiring trends for manufacturers in 2017

Technology

The most successful manufacturers use technology as a strategic advantage, and those who don't are quickly left behind.

National results: When asked what top drivers impact their technology strategies, customer service/response time was selected by one-quarter of the respondents. Another 20 percent chose organization growth, and almost 20 percent selected reducing costs.

Colorado results: For Colorado companies, the top driver for technology strategies was growth expectations at 29 percent. Customer service/response time and cost reduction each followed at 19 percent.

Strategy: Quality data and the ability to analyze and interpret it improve decision-making outcomes, especially regarding supply chain, operations, inventory, customer data, financial recordkeeping, and asset management.

Figure 7: Technology trends for anufacturers in 2017

Conclusion

It is undebatable that a healthy manufacturing industry is mission critical to a thriving U.S. economy. What is under debate is the nature of the sector's growth and how individual manufacturers can temper the challenges and exploit the opportunities before them. These matters include talent, technology, customer demands, and ongoing globalization. Survey responses indicate that manufacturers are making continued progress toward growth and expansion. For additional details, readers can view the entire survey.

EKS&H help manufacturers with a range of issues, including accounting, tax, audit, technology, and transactions and corporate finance services. To find out more about how we can help your manufacturing company navigate today's challenges, contact Kreg Brown, Audit Partner at 303-740-9400 or kbrown@eksh.com.