How to accelerate recovery: the automation and industrial machinery sector

As demand declines, many industrial companies are delaying purchases of new machinery, postponing scheduled upgrades, or cancelling existing orders. How can we accelerate recovery while safeguarding organizational structure and productivity?
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According to the most recent estimates regarding the recession, the eurozone has left the worst behind but the recovery will be very slow and uneven. Italy currently has the most pessimistic estimates (expected GDP fall in 2020: -11.2%) compared to other countries, almost double that of Germany. In this context, the European Commission also expects manufacturing to start catching up faster than the sectors most affected, such as tourism.

The plans for reviewing and innovating industrial machinery and production processes were defined and approved well before the crisis for most companies, however now, few can afford not to revise the investment.

As a result, the budget of their suppliers must also be questioned and reformulated to give a new direction to the company in line with the market.

For suppliers in this sector, this scenario has in many cases resulted in a reduction in orders and turnover mainly because of the uncertainties that B2B customers have about spending on investments.

On the one hand, management (if it has not already done so) must take action and prepare a budget review as soon as possible, analyze cash flow and update the budget analysis in order to create an up-to-date base for strategic planning. On the other hand, since we cannot control external variables that contract demand and turnover, we need to act on operations and internal processes to make new solid guidelines that can promote business recovery.

Identify the implications to assess consistency between business, context, and goals.

The first step is to consider the consequences of a reduction in investment. In general, you may see effects such as:

  • Legacy assets, equipment, and infrastructure remain in operation longer than expected, increasing risk and business costs (e.g. increased repair maintenance).
  • Cost reduction and production efficiency plans are delayed due to a slower introduction of new machinery, equipment, and innovative technologies.
  • Business development plans aimed at optimizing processes by creating synergies between people and enabling technologies are slowing down or stopping abruptly, putting at risk the investments already made.
  • A reduction in the purchase of services (e.g. maintenance, upgrades, service, design, feasibility studies) with a negative impact on the quality of infrastructure and the cash flow of suppliers.

Both customers and B2B suppliers are therefore called upon to take action to offset the negative effects of these implications. To do this, you need to leverage areas where targeted actions can generate short- and medium-term benefits. Rethinking operations and processes are therefore a possible way, if you choose the right actions based on your company’s specific characteristics and context.

To achieve this, management must configure a framework that considers the specific aspects of the evolution of its demand, of customer needs, available resources and know-how and current organizational structure.

The main variables to consider are:

  • Impact of the crisis on the sector (macroeconomic data).
  • Budget variances and analysis of economic changes in demand (expected in the next 3, 6, 12 months)
  • Impact of the crisis on customers and change in their purchasing behaviors in the last 6 months. Customers must be correctly classified according to parameters (e.g. impact on turnover, duration and quality of professional relationship, recent investments) that can provide information regarding the specific dynamics which are impacting their client portfolio.

The goal is to ensure that the conditions which create consistency between business processes and operations are still valid for changes in the market.

It may emerge that the current business structure is correct, despite the crisis. In this case, it may be sufficient to delegate strategic actions to area managers or different business units without rethinking the company’s structure.

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How to respond to speed up recovery?

Some manufacturers of components for infrastructure projects, for example, are feeling the crisis less. For them orders were not impacted negatively in the first half of 2020, while projects started before the lock-down have resumed almost at full capacity, others never stopped as they were related to essential activities.

Even in these cases, however, the need to verify the circumstances in which the company has reached its current condition remains. The next 12 months will be characterised by unconventional macroeconomic events that can be predicted, but it is not so easy to understand its effects on each singular business.

The employment market, for example, is mitigating the impact thanks to the protective intervention of governments. In the second half of 2020, the impact will be more obvious with consequences for productivity and organizational structures.

The fact that the company is doing well or not at this time should be measured based on the evolution of the market over the last 6 months. Even when it seems possible to make realistic forecasts for the next 6 months, no company should ‘navigate the new normal’ without having first examined the internal aspects on which it is it necessary to take immediate action to put the company on the right track also for the medium and long term.

For example, for companies who work on orders for the design and production of pumps or industrial fans, the management team need to define a framework that evaluates the implications for the areas of the business which are key to assessing if there is consistency with the context and growth goals. The main areas could be:

  • Customer needs vs current offer.
  • Asset and available know-how.
  • Organizational structure.

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Based on the above model, the consistency of each area needs to be measured against the current context and growth objectives. To define the best actions and the priority, you need to identify where the deviations are.

Here are some of the main actions that could emerge from the analysis:

  • Investigate the variation in customer perception of different design phases.
  • Rethink the sales network approach to seize new opportunities in line with new needs.
  • Focus logistics on products with greater market potential.
  • Adapt assembly and installation skills to customize the product.
  • Define a new risk map to ensure business continuity by modeling the pattern by which the company should react well in advance in the event of, for example, sudden fluctuations in demand, to enable quick, fact-based actions.

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