Dan Shea Gives Insights on the Business of Manufacturing & Distribution
The Business of Manufacturing & Distribution Q&A is produced by the L.A. Times B2B Publishing team in conjunction with Objective, Investment Banking & Valuation.
After the many unprecedented operational changes that businesses in every sector had to make over the last two years, a whole new landscape has emerged in the manufacturing and distribution sectors in terms of labor, international relations, access to capital and, of course, supply chain issues. Even the most seasoned manufacturing professionals, thought leaders and advisors have found themselves struggling to find answers to crucial questions over the past couple of years.
Are the changes, protocols and best practices that have emerged trend-driven or here to stay? What should manufacturers and industrial goods distributors be focusing on in terms of new standards?
To take a closer look at the latest development trends in the business of manufacturing and distribution, we have turned to one of the region’s leading authorities, Dan Shea of Objective, Investment Banking & Valuation, who graciously weighed in for a discussion and shared insights.
Q: As a trusted advisor to manufacturers and producers of industrial goods, what do you consider to be the most challenging obstacles facing them in 2022?
One of the most challenging obstacles is inflation. Inflation is hitting manufacturers across the entire expense structure, from rising costs of production inputs such as steel and plastic to bigger monthly bills for office supplies. Fuel prices are a particularly acute issue too, negatively impacting inbound and outbound freight expense as well as the cost to run manufacturing equipment and heat buildings. As such, management teams are forced to consider a range of actions to mitigate inflationary pressure, such as price increases to customers and enhanced efforts to find production efficiencies through investments in technology and other means.
Q: What are some of the silver linings that leaders of manufacturing firms continue to learn from or adopt as a result of COVID-related challenges?
COVID has caused a greater emphasis on communication and contingency planning within the manufacturing ecosystem. The multiple, intermittent, and unpredictable shutdowns that we all experienced led to a host of daily issues such as sourcing disruptions, absent works, and missed delivery dates. While all manufacturers struggled with these challenges, many have learned to adapt and have actually become stronger businesses as a result. Manifest in strategies such as dual sourcing, closer inventory management, expanded staffing, and more deliberate communication of good and bad news up and down the supply chain, many manufacturers are better positioned for success as we emerge from COVID.
Q: What are some of the latest trends in supply chain management?
Given the supply chain disruptions of this past year, there has been increasing effort to near-shore and on-shore supply chains where possible. U.S.-based manufacturers who have historically relied mostly on Asian suppliers for production inputs are looking to shift sourcing closer to home, to suppliers in Mexico and Central America as well as to companies within U.S. borders. The labor rate advantage of Asia has narrowed considerably and closer geographic proximity to the U.S. can mean less transportation cost, less chance for supply disruption and shorter lead times. And two favorable trade agreements (USMCA and CAFTA-DR) mean lower barriers for trading between the countries of North and Central America, making near and on-shoring worthy of increased consideration.
“Inflation is hitting manufacturers across the entire expense structure, from rising costs of production inputs such as steel and plastic to bigger monthly bills for office supplies.”
— Dan Shea
Q: Are there any specific supply chain challenges that we should be considering as we think about the next year or two?
Several factors have conspired to cause current supply chain challenges. To some extent, these issues are in the process of being resolved. COVID has had a significant impact on the global capacity to produce products due to forced factory shutdowns that were intermittent and often unpredictable, as breakout illnesses spread within organizations. As COVID subsides, this issue is being resolved. Other factors, however, will likely have longer tails and include shifts in demand due to potentially longer-term changes in customer purchasing behavior and over-taxed manufacturing and logistics capacities across the globe. Time and investment are required for worldwide production and delivery infrastructure to catch up.
Q: Considering the workforce, there is a lot of upward pressure in the economy to pay employees better, whether it’s in manufacturing or across the board. How are manufacturers responding to upward trends in wages?
The simple answer is to pay people more. As such, wages are on the rise. Hand in hand with higher pay are price increases. Manufacturers are selectively raising prices on their products thereby transferring, to some extent, labor cost increases on to consumers. This trend is very evident in recent inflation figures. Two other pronounced responses by manufacturers include a skewing of focus towards producing higher-margin products and reducing or eliminating less lucrative offerings. Finally, manufacturers are investing more in automation. Automation is a broad topic and includes solutions such as robots and cobots (robots that work alongside humans), internet-enabled sensors to help with preventative and predictive maintenance, additive manufacturing (3D printing), and the use of AI for enhanced quality control, to name a few. These technologies, many of which have been around for a while, are being employed to a greater degree, subject to careful cost/benefit analysis, to mitigate labor and other cost increases.
Q: What are investors looking for in a manufacturing company these days?
Most investors are looking for a sustainable competitive advantage, which comes in many forms. It is particularly evident in manufacturing companies that have their own proprietary products (and brands), supported by an active R&D effort geared towards constant innovation. In these situations, competition becomes less threatening and price is of less importance - you are the only game in town. This dynamic, while most notable with tech products like smartphones and TVs, is also seen in seemingly more mundane things such as electronic fuses and plumbing products and can really result in extraordinary returns for investors.
Q: What’s your overall forecast for the industry for the next five years?
A lot can be accomplished in five years. The overriding message is that manufacturing is set to rise further, continuing a positive trend established in the U.S. even prior to the COVID outbreak (this fact surprises many people). The broad themes will include further efforts to protect IP by producing locally, more automation of production lines, a focus on quick-turn customer needs - which cannot be met by distant overseas suppliers, and the overall shortening of supply chains to reduce lead times and late deliveries. We will continue to see foreign investment in the U.S. as manufacturers f rom abroad seek expanded access to our large economy and our talent.
“U.S.-based manufacturers who have historically relied mostly on Asian suppliers for production inputs are looking to shift sourcing closer to home, to suppliers in Mexico and Central America as well as to companies within U.S. borders.”
— Dan Shea
Q: Is private equity interested in acquiring manufacturers in this economic climate?
The private equity universe is expansive, with a significant number of firms focused partially or exclusively on investing in manufacturing companies. These firms stratify themselves by deal size and often target specific segments of the manufacturing sector that they believe are primed for success (e.g., aerospace, electronics, medical devices). Many of these firms like to invest in companies making “engineered components” where the product offering is about applying engineering and process expertise across a wide variety of industries and end markets. It is often the case as well that these firms employ (or affiliate with) not only transaction professionals but also former operators of manufacturing companies; these professionals can add much-needed operational insight into companies being considered for investment.
Q: What advice can you give to owners of manufacturing companies who are thinking about selling?
Advance preparation and planning are critical. When done properly, the odds of reaching a closing at maximum value go up considerably. Input from transaction-oriented accountants and lawyers will ensure the books and records are in top shape and that all transaction structure options are considered. It is also important to consult an investment banker who can advise on matters including the overall process involved in selling, your company’s likely valuation, prospective buyer ideas, key investment considerations, and ways to mitigate profile and process risk. Given the importance of these matters, please remember, as Benjamin Franklin said, “By failing to prepare you are preparing to fail.”