The manufacturing industry continues to grow, even with labor and supply chain challenges. According to the May 2022 Manufacturing ISM Report, the US manufacturing sector’s economic activity grew for the 24th consecutive month. The May 2022 Manufacturing PMI index was 56.1 percentage points (scores above 50 meaning growth).
The indexes within the industry seeing growth include new orders, production, raw material inventories, and a backlog of orders. However, a few indexes indicate trouble areas for the industry, including employment, supplier deliveries, and customers’ inventories. Manufacturers should navigate these elevated risks while advancing technology and process priorities to maintain their growth momentum. This article explores four manufacturing industry trends to help companies turn risks into advantages and capture growth.
TOP US MANUFACTURING TRENDS & ISSUES IN 2022
Workforce shortage continues to be an issue for the manufacturing industry, with most companies looking to hire additional employees and seeing high turnover rates in those they can employ. The ISM’s Employment Index (which measures if employers feel the labor market is stronger, the same, or weaker than the previous month) came in at 49.6% for May 2022, a slight contraction from the 50.9% in April 2022. Although hiring continues to be a challenge, the survey showed some signs of improvement, with 7% of May 2022 respondents saying they noted greater ease in the hiring process, up from only 1% in April 2022. According to survey respondents, employment levels remain the top issue affecting further output growth for the industry.
Due to issues with the small pool of applicants and the significant turnover of employees, many companies in the industry are focusing more on ways to attract and retain talent. Executives must find ways to balance internal goals for retention, culture, and innovation with the flexible work environment many industries are moving into in the post-pandemic world. Engagement with a broader talent pool to reach diverse, skilled individuals may help offset the recent exits. Manufacturers that can navigate workforce shortages and changes are poised to come out ahead.
SUPPLY CHAIN INSTABILITY
Supply chain issues remain at the top of the manufacturing industry’s list of challenges. According to the May 2022 ISM Report, the ISM Price Index registered 82.2%, indicating raw material prices increased for the 24th consecutive month. The leading drivers of price increases include oil and fuel, packaging supplies, commodity materials (copper, steel, and aluminum), and petroleum-based products. However, there was an indication the industry may be slowly moving into price softening, with 5.6% of respondents reporting lower prices in May.
Another issue within the supply chain for manufacturing companies is the delay in supplier deliveries. The ISM’s Supplier Deliveries Index registered 65.7%, showing suppliers still have difficulties meeting demand. With the current labor issues mentioned previously, along with new COVID lockdowns hitting some of the major cities in China, deliveries are expected to continue to remain a major headache for the industry. Due to transportation issues in China, many companies in the industry are beginning to move their supply chain back within the US if they can find their inputs at competitive prices compared to what they would typically pay overseas suppliers. Another strategy being used is diversifying supply chains from historic vendors and spreading orders around to multiple, so even if one is unable to meet a deadline hopefully the other will. Companies have also begun to place orders earlier in their process to allow longer lead times before the product is needed.
Although much of the talk around the manufacturing industry is typically around the issues surrounding the supply chain and employment, the demand for manufacturing is strong and continues to grow. The ISM’s New Orders Index registered 55.1% in May 2022 (meaning demand for new orders is growing), an increase of 1.6% over April 2022. Of the 18 manufacturing industries within the survey, 11 reported growth in new orders in May, and only one reported a decline. The ISM’s Backlog of Orders Index also registered 58.7% in May 2022, a 2.7% increase over April 2022. Respondents noted backlogs continue to expand as they bring in new orders, and output remains constrained. In order to deal with this increase in demand, companies can increase pricing if the number of orders being placed is unfeasible for the company to meet. By increasing prices, a few of the customers may go elsewhere, allowing for the company to see increases in revenue while not overloading their backlog at the same time.
Another sign of high industry demand is the number of customer inventories companies have on hand. The ISM’s Customers’ Inventories Index registered 32.7% in May 2022; 4.4 percentage points lower than April 2022. This decrease indicates company’s inventories are too low to meet demand and is the 68th consecutive month of them being too low. In many cases, businesses are shipping products out as soon as they are manufactured, as they typically wait on supply-side issues to finish orders on time. A positive of this low inventory issue is customers continued demand for the product, allowing room for growth in production as employment and supply chain issues begin to be resolved.
One thing companies can do to assist their employees and managers in the current environment is to invest in new software or update existing software. Software updates can help improve efficiencies and organization and make managers’ jobs easier. This could include updates to payroll software, project management software, and inventory management systems, just to name a few.
As noted previously, manufacturing companies are currently seeing high turnover in employees. Improving the software employees are using to complete their daily tasks may make their jobs run smoother with less stress placed on them, which could lead to improved retention rates. New software may also include improved capabilities that help with the current supply chain instability strain. For example, new software may have features to help managers better understand the status of their supply chain and help them get ahead of future shortages and/or delays.
It is important to closely analyze these aspects of your manufacturing business – from hiring employees to improving technology to meeting customer demand – and likely much more. This article is based on the May 2022 version of the Manufacturing ISM Report, these reports are issued monthly and are available on the ISM website. If you have questions or need assistance with a manufacturing tax, accounting, cash flow, or technology issue, we can help.