During the recession, employment and production in the manufacturing industry declined sharply. According to the Bureau of Labor Statistics, between December 2007 and December 2009, manufacturing job losses totaled more than two million employees. But there are brighter days ahead. The U.S. economy is on the upswing and the manufacturing industry is experiencing a resurgence. Still, as manufacturers shift their focus from securing demand to meeting demand, different challenges are emerging.
The 2014 Manufacturing BDO RiskFactor Report, which analyzes the top risk factors noted in the 10-K filings of the 100 largest public U.S. manufacturers identified a number of key risks, one of which we will discuss below.
Supply Chain Challenges Pose Threats to Product Quality
As competition and consolidation heat up in the manufacturing industry, getting the right products to customers at the right time is crucial for success. All companies in the study cite supply-chain issues as a risk this year, up from 83 percent in 2013. Chief among those concerns are vendor relationships and management of costs, quality and controls. In the past, vendors were more likely to placate customers when negotiating costs, but as the level of demand increases, vendors are being less flexible. Many manufacturers are therefore looking to alternatives to avoid passing along cost increases to the end customer. While this strategy alleviates some cost pressures, it intensifies the risk of faulty or lower-quality products.
Moreover, as supply chains often have international touchpoints, risks related to the international economy are a top concern. While it once seemed more logical to conduct operations in low labor-cost countries, the increased delays associated with transportation and issues with product quality can outweigh the benefits, as any tweaks in process can take weeks to solve.
Manufacturers should make sure they have quality checks in place during every step. Conducting thorough due diligence on all vendors is crucial, as is careful contract negotiation. Despite vetting, errors do happen, and manufacturers should be looking for ways to limit future liabilities during negotiations.
Although challenges abound, the good news is that manufacturers are on a path towards growth. Through careful consideration of product quality risks and active steps to mitigate against them, manufacturers will be in a keen position to capitalize on increased demand.