Manufacturing is a highly competitive industry, especially in today’s global marketplace. It’s important for finance officers to understand what drives value and then make strategic decisions that add value to their companies. Here are key areas for manufacturers to focus on and optimize.

Assets

A manufacturer’s ability to generate value is tied to its underlying tangible assets, including receivables, inventory, equipment and real estate. Finance managers must stay on top of these accounts to ensure that they’re being used to their full capacity and contributing an appropriate return to the organization’s bottom line.

For example, delinquent accounts should be identified and collected as soon as possible. Some accounts may need to be adjusted for bad debts. And credit policies may occasionally need to be revised based on market conditions.

Likewise, inventory may include obsolete or unsalable items that need to be written off, and procurement policies may need to be optimized. For example, critical materials and supplies should be identified, and reorder points should be calculated based on operating trends, not gut instinct.

Machines and other fixed assets should be properly maintained and utilized to full capacity in the production process. When replacing outdated equipment, consider leasing instead of buying, to maintain flexibility and avoid being saddled with outdated technology.

On the flipside of the balance sheet, it’s important to monitor contingent liabilities, such as pending lawsuits, environmental obligations and warranties. These hidden costs can be expensive and potentially harm the company’s reputation and long-term value.

Intellectual Property

Most manufacturers also possess valuable intangible assets. Examples include customer lists, patents, formulas and proprietary processes. Such assets may go unnoticed by finance managers because they aren’t recognized on the balance sheet if they’re generated internally. So, it’s important to first identify these items and then take proactive measures to protect them.

For example, your company should file for patents on novel technology, register trademarks, and require workers to sign noncompete and secrecy agreements. You should also implement security protocols to protect against theft of customer and financial data, as well as other types of intellectual property. Cyber breach and response insurance can also help recoup losses and resume operations if hackers gain access to your IT systems. Traditional business liability policies typically don’t cover cyberattacks, so you’ll need to purchase a separate policy or an addendum to your existing policy.

Human Capital

Some of the biggest challenges manufacturers face are workforce related. These challenges include 1) finding and retaining skilled workers, and 2) rising labor and benefits costs.

Finance managers need to identify skills gaps and implement strategies to bridge them. For instance, rather than spending time and money to find external candidates, some manufacturers provide in-house training to upskill existing workers. Giving employees the opportunity to advance their careers can engender loyalty — but it can backfire if newly upskilled workers leave your company to work for a competitor. Another strategy to improve retention is providing a robust benefits package. Cafeteria-style plans — where employees pick the benefits they prefer — are often a cost-effective solution.

It’s also important to monitor worker productivity and costs. Labor-related metrics, such as the average units of production per machinist and overtime per shift, can help gauge worker efficiency and labor costs. If these metrics deviate from historic norms, the finance team needs to find the root cause.

To illustrate, a tool and die shop unexpectedly lost two seasoned workers, a senior machinist and a repair technician. The vacancies caused machine downtime and a sharp increase in overtime hours. Fortunately, the finance manager identified the lapse in productivity and asked questions. The root cause was quickly identified, and contractors were brought in to temporarily fill the positions until full-time replacements were found.

Risks

Another way to enhance value is to minimize risks. A major risk virtually all manufacturers face comes from across the border. Notably, foreign manufacturers often have cost advantages over domestic firms, including cheaper labor, lower taxes, less stringent regulatory oversight and reduced risk of litigation. However, supply chain shortages experienced during the pandemic exposed vulnerabilities of relying on offshore production, which may cause customers to revert to U.S. suppliers. In addition, domestic manufacturing provides other advantages that should be marketed to customers. These include lower shipping costs and tariffs, fewer cultural differences, and reduced quality control and safety concerns.

Company-specific operating risks also need to be identified. Then the finance team can implement strategies to minimize them. For example, if your company relies heavily on a few key people, a mentoring program could help train your company’s next generation of leaders. Or if a supplier of materials or parts represents more than 10% of annual purchases, you could find alternatives to help alleviate unexpected price increases or shipping delays.

Manufacturers also need to be increasingly vigilant about cost containment in today’s inflationary markets. High materials and energy costs, as well as environmental and safety compliance costs in many sectors, can quickly erode profits. Demanding customers may prevent your company from increasing prices to pass along cost increases. Manufacturers should closely monitor utilization rates and scrap and, if possible, consider automation to preserve profits. Frugality is a habit that valuable companies ingrain in their management teams, allowing that mindset to filter down the organizational chart.

Think like a prospective buyer

When evaluating your company’s performance, it pays to put yourself in a prospective buyer’s shoes — even if you don’t intend to sell any time soon. What would make a buyer pay a premium to acquire your company? These are strengths that you should optimize and protect. Which performance indicators would turn off a prospective buyer? These are weaknesses that may require corrective actions, additional investment or divestitures.

Contact us to help to understand the factors and strategies to build long term value in your manufacturing organization