The State of Manufacturing in 2024

2023 came and went in a flash- we are again exchanging greetings with each other with novel and innovative ways to wish ‘Happy holidays’, the only slight difference being – many of those creatives and messages, even if personalized had a role of some Generative AI tool in the making. So, the recent year gone by has catapulted us all in the era of ‘Artificial Intelligence’. There are industries and segments which are impacted more than others.

What about Manufacturing?

Companies in Manufacturing segment cover a broad spectrum of consumer and industrial products, including but not limited to food and beverages, chemicals, machinery, Technology, heavy engineering, and transportation equipment. Over the last two years, volatility driven by supply disruptions due to the pandemic, war in Ukraine and middle east, high interest rates, reshoring from China back to US, volatility in commodities markets and labour shortage – all created a pungent cocktail of challenges for the manufacturing businesses across the world. In an environment where consumers demand personalization and B2B customers hold strong negotiation power, with a possible glut of suppliers ready to take over your most prized customer, the going has been tough for manufacturing executives- specifically CFOs and CEOs.

The above was further complicated with the easier availability and onset of technological disruptions, in specific reference to AI and the kind of disruption it has caused to ERP (Enterprise Resource Planning) and MRO (Maintenance Repair and Operations) of manufacturing businesses. The sheer interoperability with different technology platforms enabled through cloud, further creates a divide between the companies which are embracing technology marvels faster and those that are lagging. The magnitude is geometric in progression, not arithmetic.

The Challenges in Working Capital

It is very interesting to note that for the first time in five years, the DPO (Days Payable outstanding) metric fell in the annual Hackett Group Working Capital Scorecard for Top 1000 publicly held non-financial companies, 2023. What it means in real sense is -buyers changed supply chain strategies to build in redundant sources and find new suppliers and supply locations. What it meant was suppliers were paid earlier, instead of delaying payments to maximize liquidity. Since the dependency on the suppliers was higher to maintain production levels and meet demand, machine manufacturing and consumer durables witnessed highest drop in DPO number in the study.

This also indicated that more inventory was lying unsold for manufacturing businesses as visible from a rise in DIO (Days Inventory Outstanding) metric, illustrating the softness in consumer demand playing its role.

On the receivables side, there was a 1% increase in DSO (Days Sales Outstanding) meaning though manufacturing businesses were paying their suppliers early, they were indeed slow in recovering their money from the customers. One can pick up the financial statement for last year, as it will soon get published for the year-end and see the implications of this trend in action. Just look at numbers like interest expense paid and its growth %, connect it with the total spend number and how it fares when compared to inventories and accounts receivables. Even for companies with growth in revenue, this short analysis could offer meaningful insights.

As part of my role at Pinaka AI Inc, I had the privilege of connecting with many senior executives from enterprise manufacturing businesses, who confirmed and validated the above as true.

The roadmap for 2024

Then the moot question remains- how to plan a 2024 strategy, with so many parts moving and changing position so quickly. Of course, there are no templatized answers for this question, but for some areas like Working capital, a smart placement of technology like AI can help.

In manufacturing business, most of which operates on the principle of ‘open account’, a significant time gap exists from the moment when a customer places an order, till the time the moment comes to recognize and finally realize revenue from that order. Usually, the sellers will not have any visibility around the challenges the invoicing, delivery or payment can throw for the order. In this ‘dark phase’ of the order lifecycle, there is very limited visibility for the seller – they do not know what all has already gone wrong in the form of pricing issues, trade promotion gaps or what all can go wrong from a delivery standpoint.

If it’s possible to make things visible in a real sense, during this phase – it is possible to avoid the excessive working capital burden on 40% of the invoices which get paid late. This will also reduce the bad debt problem with 6% of the invoices. Manufacturing being the foundation for any industry, can lead the change for other sectors as well, since majority of the other industries (including services), either use the products made by manufacturing or supply their services to manufacturing-thus becoming part of the ‘cash cycle conundrum’ inadvertently.

Pinaka’s AI engine can play the role of a ‘torchlight’ for this ‘dark phase’ and can help manufacturing businesses sail through the tide in 2024.

A simple message, email, or a comment here- is all it takes to ignite the spark.

Mufaddal Enayet Dhorajiwala,

Vice President - Global Sales & Customer Relationship,

 Pinaka AI Inc.

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