Manufacturing CEOs throughout the UK are reporting that pressures on margins are likely to continue into the coming year as input costs remain high. Although there has been some relief on inflation pressures, manufacturing CEOs state that the overall cost base for manufacturing remains challenging because of high raw materials costs, energy costs, logistics costs, and worker wages. Thus, manufacturing CEOs are turning from growth to increasing efficiency and managing costs.
Volatility in raw materials still emerges as a priority area. CEOs of manufacturing companies state that the pricing of metals, chemicals, and industrial products has continued to be unpredictable on account of imbalances in supply and demand across the globe, along with geopolitical risks. Though a few commodities have become stabilized, those commodities are still ranging on a volatile graph, indicating uncertainty in pricing and procurement for the long term. CEOs state that a surprise increase in pricing of raw materials can cause a considerable reduction in margins for a manufacturing firm operating on a fixed pricing contract.
Another significant factor that impacts margins is energy prices. Even though wholesale prices have eased up from their former peak levels, UK manufacturers pay considerably higher prices for energy than before the crisis. Sectors that largely utilize energy, for instance steel, chemicals, and ceramics, have been most affected by rising energy prices. Additionally, according to CEOs of affected firms, these increased prices make it less favorable for them to compete with foreign manufacturers.
Labor costs have also been increasing steadily over time. With skills gaps that continue to exist in engineering and technical fields, manufacturers have had no choice but to offer higher salaries and fringe benefits. While the executives agree that their company needs to invest in their employees, the inability to raise labor-productivity synergies continues to be a challenge for the company.
To address such difficulties, most manufacturing industry CEOs today are focusing on operational efficiency. Research and development spending on manufacturing technologies has been accelerated in order to cut waste and increase productivity. The use of manufacturing technologies has been cited in previous interviews by such industry CEOs as helping to enhance overall resilience against cost threats.
Pricing strategy is a further tightrope to walk. While certain producers have introduced selective price hikes, CEOs point out that consumers are becoming increasingly resistant – especially in more competitive export markets. This has led to a marked shift in corporate philosophy, with prices hiked only where their justification can be clearly identified – with subsequent supplier contracts or optimized product mixes to shield the bottom line.
The restructuring of supply chains is also receiving greater attention. Industry leaders are re-evaluating their supplier bases to de-emphasize dependence on regional sources. Near-sourcing and dual-sourcing alternatives are now being considered to mitigate risks of disruptions, no matter how small, on a global scale, although at a slightly higher short-term expense. The leaders consider it to be a good trade-off.
Looking ahead, manufacturing CEOs are cautious but realistic. Although they are not expecting a quick relaxation of pressure on costs in the short term, they are also quite optimistic about the potential benefits of better forecasting and optimal resource utilization, which may alleviate the pressure on margins. However, CEOs are also of the view that a stable energy price environment would be needed. In the end, UK manufacturers’ leadership is beginning this new year more focused on resiliency than expansionist strategies. As margins continue to face pressure from all sides, these leaders are honing their focus and leveraging technology to help see them through difficult times. Their take? Even as demand is expected to remain stable, successfully managing input price is what will make all the difference in the year to come.
