The challenges and opportunities in UK manufacturing sector

The challenges and opportunities in UK manufacturing sector

Despite global trends towards outsourcing and shifting economic priorities, the manufacturing sector remains a vital component of the UK economy, contributing 9.5% of total economic output in the first half of 2023. Manufacturing is also one of the most productive industries, outstripping productivity growth in the services sector, keeping the UK as the ninth-largest producing nation globally.

In spite of all this, the industry has been grappling with a host of challenges in recent years – some particular and some general, including rising costs, overseas competition, economic disruption and new technology. But despite these hurdles, there are also numerous opportunities for growth and innovation.

Kapil Davda explores the changing manufacturing landscape and shows how businesses can find new opportunities for evolution and resilience.

 

Manufacturing in a globalised economy

Over the last two decades, manufacturing priorities have shifted in the UK. It’s no longer practical to compete on cost and scale with the national industries of China or the emerging manufacturing process of South-East Asia. Instead, UK manufacturers have been moving into more niche production, leveraging unique expertise and networks to make specialised products which make commercial sense with local markets.

However, the sector is still vulnerable to the same macro-headwinds that have affected industries all over the world, including:

• Disrupted supply chains increasing prices and lead times for components
• Labour costs, shortages and changes in work habits
• Increasing sophistication from overseas competitors
• Soaring energy costs and overheads
• Unstable consumer and business demand
• Volatile credit conditions

Managing these changes requires strategic attention from business owners, investing in the right technology, processes and planning to ensure that manufacturing businesses in the UK can remain competitive, profitable and pioneering in their sectors.

 

The manufacturing labour crisis

As in every industry, the needs of workers in manufacturing, especially young ones, are changing fast. Signs indicate, however, that the UK manufacturing sector has struggled to keep up with these shifts, as productivity, recruitment, and training lag behind international competitors.

Part of this issue is general – the ‘Great Resignation’ hit many industries, as workers re-evaluated their goals and plans in light of changing conditions. Trends like remote and hybrid working are particularly challenging for manufacturers, with the physical, site-specific nature of much of their activity. This has been exacerbated by skills-shortages following Brexit, which cut off sources of foreign labour on which manufacturers had long relied.

For manufacturers, this is a significant issue – machinery may require a certain headcount to operate and staff shortages can harm output, leading to production downtime and missed opportunities, but there are solutions:

• Investing in modernised machinery that requires less manual input, reducing the necessary headcount for full production. This can create opportunities to provide more flexible scheduling, reallocate team members to more appropriate tasks or increase overall output.
• Retraining team members or developing new career pathways to attract and retain more staff, including those from underrepresented backgrounds within the industry, as well as young people looking for meaningful development.
• Adapting production processes to provide more flexibility for staff in terms of location, input or hours to enable wider participation.

 

De-risking the supply chain

Supply chain disruptions have been a major challenge for the manufacturing sector in recent years – this has been a global phenomenon, as networks built on Just-in-Time (JIT) deliveries, cheap freight and low inventory models buckled in the face of disruption.

Additionally, leaving Europe has introduced additional customs hurdles for UK goods that can delay or add costs to imports, making the clockwork timing of modern production harder. Meanwhile, businesses looking to de-risk their inventory models are now holding more stock, reducing available warehouse space and raising prices.

However, there are upsides. Global disruption has highlighted the risks of total outsourcing to far-flung places, leading some retailers and businesses to consider the advantages of bringing manufacturing nearer to home, with less logistical risk – a potential opportunity for UK manufacturers on Europe’s doorstep.

Making this a workable opportunity will require solving the weaknesses highlighted, including:

• De-risking supply chains to find contingency suppliers for key parts.
• Tactical outsourcing of upstream production, for example using a third party supplier to create a component if that part can’t be sourced directly.
• Implementing flexible product lines that can focus on creating products with the materials available, if certain components can’t be sourced.

 

Margin and efficiency

Inflationary forces, rising costs for utilities, and variable consumer demand have put significant pressure on manufacturers to reduce costs and overheads. This has led to an increased focus on improving margins and efficiency within the sector, aligning with other key trends reshaping the sector.

• AI and IoT technology: New machinery often comes equipped with technology that can connect, measure, and react if things go wrong, reducing the need for constant on-site presence. These can also monitor everything about a piece of machinery, from output and performance to service history, significantly reducing downtime.
• Diversifying sourcing: Source from more places and use machinery with fewer dependencies to maintain production levels and protect margins.
• Strategic sustainability: Businesses can reduce environmental impact and costs by installing solar panels and wind turbines.

 

Finding the right support for your business

At Haines Watts, we’ve worked with hundreds of clients in the manufacturing sector to help them build resilient strategies that can adapt to this fast-changing market. While challenges are often general, we know that success on your terms is unique, which is why we build our services and advice around your specific needs, acting as an extension of your team.

Working hand in hand with your business we can ensure you have the right information, support, and control to thrive, including adapting your financial systems to new market pressures, highlighting issues through audits, identifying potential risks, and spotting tax planning opportunities such as R&D allowances and deduction schemes.

 

To find out how we can help you succeed, get in touch with one of our team.