Balancing risk and reward is key to sustainable growth during recession

Peter Hatfield is a Managing Consultant at Vendigital. He recently shared his insights with The Engineer.

Few industrial manufacturers are optimistic about what the future holds for Q1 2023 and beyond. However, balancing risk and reward with care could allow them to turn the economic downturn to their advantage.

High inflation and spikes in energy prices have dampened demand for some manufacturers; creating a challenging outlook as they focus on cost management and improving operational efficiency. However, experiences have varied from sector to sector. Some producers, such as those in the food and drink manufacturing sector have achieved growth against the odds. For industrial manufacturers, depressed output is leading to some contraction, but there could be opportunities to diversify or otherwise drive revenues in order to increase market share in the future.

To achieve sustainable growth, industrial manufacturers should be consistently looking for ways to enhance operating and production processes and introduce technological advances that are designed to improve their overall efficiency. In some cases, these improvements could be expensive to implement, so weighing up the risk versus any potential reward accurately is key.

Any planned capital expenditure should be considered with the order book in mind and an understanding of how demand might change in the future. Machines, equipment and most other physical assets depreciate year-on-year, so it is important that the volume of orders is sufficient enough to offset these losses. Spent wisely, capital expenditure can support growth by allowing the business to take on more orders, or it can leave the business with extra capacity and wasted resources. It can be difficult to strike the right balance, as has been shown by some major collapses, such as that affecting Britishvolt. To mitigate such risks, decision makers need reliable, up-to-date data and dynamic models that enable them to take the right decisions, while taking account of an everchanging market.

Greater cost volatility and demand uncertainty means manufacturers must become more agile and flexible to adapt to shifts in customer demand. This is where smaller manufacturers sometimes have an edge, as they can react to market changes more quickly, whereas larger manufacturers may take longer to respond. Assessing operational efficiency, supply chain capacity and how quickly it takes to fulfil orders can help to identify areas for improvement. An action plan can be made and implemented to address the findings and support the business in driving growth. In an uncertain and competitive market, customer satisfaction and quick turnaround are essential to success.

Nearshoring is another trend that could help some manufacturers to improve their agility as having a shorter supply chain can help to mitigate the risk of disruption and facilitate closer, more collaborative management. Getting high quality orders delivered to customers quickly is imperative to repeat business and sustaining a good reputation. Nearshoring can also be a factor in winning new business, as many companies ask about a company’s ESG strategy and carbon footprint as part of the tender process.

While there are many advantages of nearshoring it is important to weigh up the benefits versus any increased costs. There will be a ‘sweet spot’ where the two are balanced, but there will be many other variables to take into account, including the product itself, engineering methods, customer demand levels and fulfilment timelines.

The main considerations when balancing risk and reward are cost control and dynamic forecasting models. While prices for raw materials are fluctuating dramatically, agreeing a long-term, fixed cost from a reliable supplier will provide greater certainty. While there is always the chance that prices could fall, this strategy gives the business space to focus on the quality of the product and securing orders, rather than constantly switching suppliers to get hold of the raw materials they need.

In the current economic downturn, many manufacturers are striving to protect revenues and maintain their market position. However, balancing risk and reward could enable them to achieve sustainable growth during recession by reacting quickly to a changing market.