After the COVID pandemic, the world is going through a devastating economic crisis that is affecting economies throughout the globe. The world is witnessing skyrocketing inflation, energy cost, and interest rates, making it difficult for businesses to thrive in these difficult situations. Companies that do manufacturing which includes local and imported raw materials are affected the worst.
Businesses are shutting down, laying off people, and restraining their operations from surviving these challenging times, but a current wave of political uncertainty globally has multiplied the impact. Businesses are tumbling as the world embraces a new era of recession, where survival is pretty challenging.
Among those challenges, we have scrutinized ten significant challenges that manufacturing businesses face in this recent economic crisis. We will also discuss the role of management solutions like ERP software in managing these challenges and compensating businesses efficiently for the damage the financial crisis is causing.
10 Challenges Faced By Manufacturing Industry In Economic Crises
- High Raw Material Costs
- Increased Competition From Lower-cost Countries
- Pressure To Reduce Prices
- Difficulty In Accessing Finance
- Uncertainty Over Future Demand
- Volatile Exchange Rates
- Rising Energy Costs
- Skills Shortages
- Red Tape And Regulation
- Political Instability In Key Markets
1. High Raw Material Costs
Raw material costs are one of the most critical factors affecting manufacturing businesses. When raw material costs increase, it can cause companies to raise prices, which can lead to lost sales and customers. Additionally, raw material costs can affect a business’s bottom line and profitability.
There are several reasons why raw material cost is increasing globally. One reason is that the demand for raw materials is rising faster than the supply. This is especially true for commodities such as oil and metals. Another reason is that transportation and energy costs have increased, making it more expensive to ship raw materials worldwide. Additionally, many countries have restricted exporting raw materials to keep them domestically, which has caused prices to increase.
ERP software tries to contribute positively towards this cause by ensuring that the business has a stable supply chain to ensure that there is no shortage or emergency backup for the raw material, which causes additional pressure on the cost of raw materials.
2. Increased Competition From Lower-cost Countries
The most recent economic crises have led to increased competition from lower-cost countries. Companies are looking for ways to cut costs and increase profits. In addition, the global economy has become more interconnected, making it easier for companies in different countries to compete against each other. Manufacturing businesses in countries where currency devaluation and inflation are increasing are challenging to complete in the international markets.
Manufacturing businesses that have their units in countries with a less volatile currency and have a better opportunity to cut their labor cost are doing much better and have a competitive edge over the businesses that are from countries with high prices of operations.
ERP software contributes positively towards this by adding a system that can help manufacturing businesses keep track of their employee’s performances and utilize their resources better to ensure they are used with higher productivity.
3. Pressure To Reduce Prices
During a recent hike in inflation, as businesses are crumbling because of the higher cost of manufacturing, the consumer is getting its worst effect. Every government is trying to relieve its consumers, which is why they are pressuring businesses to reduce their prices to ensure the consumers are somehow saved from the damage of the inflation rally. This pressure has become a hurdle for the manufacturing business. It is making it difficult for companies to manage the high manufacturing cost besides the pressure to reduce the prices.
In this tug-of-war, maintaining seamless operations is a difficult task. In hard times, businesses are laying off people and reducing their expansion to ensure survival. The pressure to reduce prices hurts manufacturing businesses because it cuts their profits. To compete, manufacturers must find ways to reduce their costs, often cutting corners and compromising on quality. This can lead to defective products and unhappy customers.
On the other hand, ERP software tries to help businesses with a better opportunity and position to cut their prices without hurting their current margins and operations. ERP software provides detailed insight into the business’s financials, making it easier for managers to find the moles. It also helps in better allocation and utilization of resources to ensure that the company is operating at better productivity levels.
4. Difficulty In Accessing Finance
When an economic crisis hits, it causes inflation to rise to levels that are beyond the considerations of central banks, which causes them to increase interest rates. When interest rates increase, it becomes difficult for businesses to access funds to finance their operations, which causes a shortage of funds or a higher cost of debt financing. The same happens during this recent financial crisis because debt costs are increasing, making it difficult for businesses to manage their pricing and operations.
On the other hand, ERP software tries to help manufacturing businesses in these challenging times by ensuring they are utilizing all of their resources. With the help of a detailed reporting section, the ERP software gives you a detailed overview of the business’s financials, making it easier for managers to make better decisions and access financing by utilizing assets and other available financing lines.
5. Uncertainty Over Future Demand
When an economic crisis hits, it damages every industry’s future outlook and disturbs aggregate demand. Distortion in the demand curve causes huge business issues in planning their future productions. In a recent economic crisis, the market’s future outlook is uncertain because the perspective of the problem is still uncertain. And with a clear view, manufacturing businesses can invest in more production and expansion of operations.
On the other hand, ERP software tries to manage this challenge by analyzing the sales trend and developing a model of future demand trends that shows a clear image of how business has to play safe. With the help of ERP software, manufacturing businesses can be in business without changing their plans and still be protected from any uncertainty.
6. Volatile Exchange Rates
Most manufacturing businesses either export their products or import their raw material from international markets, meaning they have to deal in different currencies. During an economic crisis, exchange rates get volatile because of currency depreciation and decreasing purchasing power. When combined with political uncertainty, economic uncertainty causes exchange rates to get highly volatile, making it difficult for manufacturing businesses to enter a trade agreement. Eventually, they must enter into currency options and swaps, increasing their operations cost.
ERP software cannot manage economic uncertainty, and no other management software can handle the volatile exchange rates, but it can help you manage your currency exchange wisely. If your manufacturing business has different currency accounts, it will be better for you to utilize them at the right time.
7. Rising Energy Costs
Rising energy costs are a challenge for manufacturing businesses for several reasons. First, energy is a significant input cost for many manufacturing processes. As energy prices increase, the cost of producing goods also rises. This can price some manufacturers out of the market and make it difficult to compete with foreign competitors. Second, many manufacturing businesses are energy-intensive, meaning they use much energy relative to other companies.
This makes them particularly vulnerable to increases in energy prices. Finally, many manufacturing businesses are located in regions of the country that are particularly reliant on energy-intensive industries, such as the Midwest. This means that rising energy costs can have a disproportionate impact on manufacturing businesses in these regions.
ERP software tries to compensate for the increasing cost of energy by giving you the best alternatives for shipping and the best way to maintain your inventory levels and raw materials from your suppliers.
8. Skills Shortages
There are several reasons why skills shortages can be a challenge for manufacturing businesses during an economic crisis. First, as businesses downsize or close altogether, there is a pool of unemployed workers with specific skills that manufacturing businesses may need.
Second, as businesses compete for a limited number of qualified workers, wages for those workers may increase, which can put pressure on already tight profit margins. Third, skills shortages can lead to production bottlenecks and delays, which can impact customer satisfaction and ultimately sales.
ERP software with its human resource management system can help you utilize your available resources to their best capacity to provide the best yield for the business. Even after laying off employees, businesses find it difficult to maintain good margins. With ERP software you can identify the loops in the system and can fix them for better efficiency.
9. Red Tape And Regulation
The recent economic crisis has highlighted the importance of compliance and regulations for manufacturing businesses. Many businesses have failed due to their inability to comply with regulations, leading to costly fines and penalties. In some cases, businesses have been forced to shut down due to their inability to meet regulatory requirements. Compliance and regulations are essential for manufacturing businesses to protect their investments and ensure long-term viability.
The current economic crisis has made it difficult for manufacturing businesses to comply with regulations. This is because many businesses have had to cut costs to survive. As a result, they have been forced to reduce staffing levels and cannot invest in the necessary compliance infrastructure. This has made it difficult for them to keep up with changing regulations and resulted in fines and penalties.
ERP software itself is a compliance and regulatory requirement for many jurisdictions. So having ERP software will help you keep an eye on your regulatory requirements. You can create restrictions and alerts from your software to keep all things aligned for regulatory purposes.
10. Political Instability In Key Markets
There are many reasons why political instability in key markets is a challenge for manufacturing businesses. Political instability can lead to trade disruptions, impacting the supply of raw materials and components needed for manufacturing.
In addition, political instability can lead to social unrest, impacting workers’ ability to safely and effectively carry out their duties. Finally, political instability can lead to changes in government regulations that can impact a manufacturing business’s ability to operate profitably.
The recent political crisis in Europe because of the Russia-Ukraine war and political instability in the UK has caused a difficult situation for businesses. Travel restrictions with fear of potential war businesses are refraining from getting into new and risky contracts that include raw material from Russia and European countries near Russia.
ERP software cannot help any business manage any political instability; there is nothing a business can do about it. All we can do is manage our operations so businesses can avoid being in risky positions. ERP software can help you manage your operations wisely in difficult times and help you save your business.
Bottom Line
All these challenges that manufacturing businesses are facing because of the recent economic crisis will eventually fade away as economies start to get better at coping with inflation and decreasing consumer confidence. ERP software like CISERP is playing its role in maintaining a sustainable platform for businesses to manage their operations without the hassle of getting deep into these challenges.
You have to put up the modern means to manage modern challenges. In the end, it all comes to the drivers that drive the operations: managers and executives. ERP software gives them the right tools to manage these challenges.
