wwAs UK electronics manufacturers continue to deal with the after-effects of Brexit, the Covid pandemic and the war in Ukraine, the increasing number of costs has left the industry facing enormous financial challenges.
But where are these rises in costs coming from, are they what we think, and what can be done to protect the bottom line?
The rise in inflation.
This is perhaps one of the biggest contributors in the cost of manufacturing. As explained here:
Inflation is measured by looking at the Consumer Price Index (CPI). This is calculated as a basket of goods and services and how much they cost over time. The CPI is used as an indication of how much prices are rising or falling in general terms. The Bank of England (BoE) defines inflation as “a sustained increase in the general level of prices”. In other words, it is when prices go up compared to last year or last month or last week. Inflation occurs when there is more demand for goods than supply and this drives up their price.*
To continue to make a profit, manufacturers must grow at the same rate of inflation, which is challenging and, in many instances, unsustainable.
Global supply chain shortages.
For example: a large amount of semiconductor manufacturing components are manufactured in China, and during Covid these manufacturing sites were immediately shut down. Since then, these have been reopened and closed repeatedly according to the varying restrictions that were placed on them during lockdowns, and some of the sites haven’t yet reopened fully because of local lockdowns within the country.
This has caused a massive ripple effect through the supply chain – businesses are struggling to return to pre-covid production levels because of the fewer number (and therefore, higher demand) of manufacturing components available.
The War in Ukraine and shortage of fuel.
The continuing conflict of Russia invading Ukraine has had a massive impact on the costs in manufacturing, particularly in the fact that both countries were one of the main suppliers of fuel.
The resulting fuel shortage has led to an increase in fuel prices and energy costs. For example, long distance shipping, either by vehicle, train or by air has been impacted by the increase in fuel prices.
Increase in energy prices.
The huge increase in energy prices has had an enormous impact on the cost of manufacturing. To put it simply, if it costs more for the energy needed to produce the product, the manufacturer is forced to either increase their own prices to compensate, which may result in less sales from their consumers, or absorb the costs, which means less profit.
Shortage of materials.
Another reason for the rising costs in manufacturing is the shortage of materials and the rapid increase of costs associated with them.
This means manufacturers are left with no option other than to pay more for the materials they need, which then in turn forces them to increase their own product prices or risk losing money.
Brexit.
The shortage of materials has been caused by numerous factors following Brexit – supply chains have been disrupted by increased costs and delays when getting materials through customs, and in many cases have found the only way to obtain the necessary materials is to import them from outside the EU, which is inevitably much more expensive.
The value of the pound has also fallen significantly since Brexit, adding further to the expense when importing from other countries.
Cost of living increase and labour shortages.
The rapid rise in the cost of living has meant employees are demanding an increase in wages. In turn, this has led to strike action within many areas, which has resulted in the decrease (or in some cases, a complete halt) of production and a disruption to supply chains. The war in Ukraine has also resulted in labour shortages as workers have fled the country.
Changes in consumer purchase patterns.
The way and amount in which consumers purchase products has changed since the pandemic, which has resulted in an increase in demand in some areas, and a drop in others. As manufacturers struggle to meet a higher demand, they have been forced to increase their own prices to continue to make a profit
So far, so doom and gloom!
The good news is while there are elements which are inevitably out of your control, there are things that you can do to help balance the scales and protect your profit margin from being eroded.
Some businesses have to scrap a lot of product, rework a lot of product, or repair a lot of product, and this is something customers are not paying for – nor should they be expected to.
These are costs a business has to absorb which puts massive pressure on the quality of manufacturing. By quality leaders focusing on getting the product right first time you can reduce the amount of scrap, reduce the amount of rework and those non-value added costs.
When it comes to energy prices for example, there isn’t a great deal you can do about them, but you can make the most of the precious materials you do have and focus on not creating unnecessary waste. For some businesses scrap and rework can run into millions of pounds a year and this is where I can help.
By helping your team improve their competency, making them understand the impact of what they do they, equipping them with the skills and abilities to be able to create product right first time, you can recoup huge savings.
Get in touch if you’d like to explore how.
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* https://www.silverstonetechnologycluster.com/inflation-effect-on-manufacturing/
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