Despite the decline in British manufacturing since the 1970’s, when manufacturing contributed 25% of UK GDP, the UK is still the ninth largest manufacturing nation in the world. On average, the UK’s industrial sector has increased by 1.4% Y-o-Y since 1948, according to a recent report from the Office for National Statistics (ONS). The ONS attributes the sustained growth to a better quality/more skilled workforce; a shift in production from low to high productivity goods; improvements in automation and technology; increased investment in R&D, and a more integrated global economy. According to Make UK (formerly EEF), UK manufacturing currently:
- employs 2.7 million people, earning an average of £32,500
- contributes 11% of GVA
- accounts for 45% of total exports totalling £275bn
- represents 69% of business research and development (R&D)
- provides 13% of business investment
Although the contribution of manufacturing to GDP has declined on paper, many of the services provided to manufacturers which would have once been considered part of manufacturing (catering, cleaning, building services, security, logistics etc.) are now allocated into different areas of the economy. Those contributions however are directly reliant on manufacturing for continued business which could be considered as a part of manufacturing’s GDP input. As such, many are calling for the true value of manufacturing to be recognised, a move which would see the widely cited figure of 11% of GVA more than doubling to 23%.
Risks, challenges and opportunities within the UK manufacturing sector
The UK is undoubtedly still a leader in manufacturing innovation but is facing many new challenges and opportunities reflecting a changing market dynamic. A greater competition for talent could limit manufacturers’ abilities to evolve, grow and adopt new technologies.
The costs and rewards of operating in different countries around the world continue to evolve making decisions about where to design, make and service products increasingly difficult, whilst manufacturing leaders are struggling to find the best people and skills to develop the next generation of products.
Whilst apprenticeships are being created, more must be done to encourage young people to become engineers. Staff retention is also an increasing challenge, while recruitment of smart and innovative people is vital to the industry, our younger generations are more evidently more attracted to more “glamourous” sectors such as Technology.
Every year Hennik Research publishes the Annual Manufacturing Report. The 2019 Report reflected on a surprisingly resilient mood among UK manufacturers, surprising to those who haven’t been paying attention to the uncertainty surrounding the recent Brexit negotiations. The key findings were:
- 81%say they are ready to invest in new digital technologies to boost productivity
- 71%of UK manufacturers say Brexit is damaging strategic-planning and business prospects
- 64%say Brexit will cause chaos for the manufacturing sector
- 55%say the government could do more to promote exports
- 57%say the education system is a disaster for industry and needs a total overhaul
- 66%say the British people do not understand the importance of manufacturing to the economy
The UK has now left the EU, but that’s certainly not the end of the Brexit story. As negotiations on the future trading relationship of the UK and the EU start, UK manufacturers will need to remain agile to respond to the risks and opportunities this new world will present.
So, what is the role of a CFO in an ever-changing manufacturing landscape?
A truly effective manufacturing CFO may need to provide guidance in areas such as revenue growth, inventory costs, supply chain management, M&A, product lifecycle management, sales and operations management.
The role of the CFO continues to evolve to include casting a protective eye over security, regulations, and compliance, all critical issues with high stakes attached. Now, as the digital revolution sweeps through manufacturing, the role of the CFO must evolve again. Today, the manufacturing industry needs the CFO to be less concerned about finances and more engaged in strategy.
It may be a new hat to wear for some CFOs, but one that is a good fit for individuals who understand the value of investing capital back into the facilities, expanding market presence, and growing through modernisation. Many CFO’s certainly have the background, insight, and understanding of the market landscape needed to advise the company as it moves forward through new terrain.
The CFO position is transforming as manufacturing businesses are increasingly bringing operations back to the UK and shifting gears from cost-cutting toward growth. Investor interest in the sector has blossomed alongside the manufacturing renaissance in the US. In a recent survey of private equity executives by BDO, manufacturing was the industry sector most frequently cited as being the ripest area for new investment. Investment activity tends to invite change in the C-suite and puts different pressure on the skills CFOs need to be successful.
With these factors in play, broader industrial businesses are seeing an increased turnover at the CFO level.
For financial professionals eyeing a CFO position in the next year or two, it will be critical to seek out opportunities that help to demonstrate operational prowess, a mindset toward growth and strong fiscal leadership.
Industrial companies tend to be among the most risk-averse when it comes to hiring talent. The executive ranks are largely populated with people who have grown up in the industry. In recent years especially, CFO candidates tend to be plucked from within an organisation’s ranks, and it has become increasingly difficult for competitors to entice strong candidates to jump ship.
An increasing amount of these CFO candidates are coming directly from, or have recently rotated through, general management roles. CFOs in the manufacturing world today must have a thorough understanding of how to drive growth and find efficiencies in their operations and the supply chain, especially with rising interests in bringing certain functions back to the UK.
Larger industrial companies continue to create new positions where finance professionals are exclusively supporting the supply chain. Experience in a management or operational finance role enables candidates to demonstrate an understanding of lean manufacturing techniques, process improvements and how to run a P&L, arming them with a fuller appreciation of the directional responsibilities required when stepping into a top finance seat. Operational knowledge is invaluable for managing enterprise risk as well, which will continue to be closely scrutinised in the coming year.
A rotation in general management also allows CFO candidates to acquire first-hand knowledge of the right technological investments that will propel the organisation forward. Technology is at the heart of the manufacturing resurgence, and candidates who are savvy about investments in new R&D that advances manufacturing processes or more sophisticated analytics that hit the bottom of the organisation will be well positioned to handle these responsibilities.
As confidence has grown in the domestic economy and the appeal of offshoring has lost some steam, optimism has returned to the manufacturing sector. Controlling costs and predictably growing margins has been the main purview of manufacturing CFOs for some time, but now shareholders are putting pressure on growth and innovation. CFOs are hearing a steady drumbeat about being a partner in their company’s growth strategy, but there are fewer candidates applying for the job that have previous “growth mode” experience.
CFO candidates should look for projects that provide exposure to funding innovation or making smart investments that give the company a competitive advantage. Equally important, CFOs must have a keen eye on what drives shareholder value and ensure the right metrics are in place to track success. In order to build experience in this space, financial executives could take a prominent role in a process improvement program or initiative, such as Six Sigma or lean manufacturing, which helps the finance executive better appreciate how the business improves and protects value. Additionally, gaining exposure with investor relations and analysts sharpens one’s perspective toward the enterprise initiatives that can move the needle in shareholder return.
CFO candidates should search for exposure by working with rating agencies, banks, investors and the board. As manufacturing draws increased investor attention, it also brings with it activists and analysts.
A strong CFO candidate should be able to prove that they can stand strong in the face of adversity and exude a confidence that will bode well with shareholders. They must also be able to effectively build relationships that can help strengthen the company’s reputation to secure financing and access to the capital markets. Operational experience is beneficial here as well, as is rotating through a treasury or financial planning and analysis role.
From the outside, looking in
Candidates with limited experience in the manufacturing industry will likely find it extremely difficult to make an industry leap. Large industrial companies may offer more opportunities for an outside to be brought on as CFO, since there are numerous people inside who understand the nitty-gritty of the business and can help provide a critical industry-specific lens. However, it continues to be perceived as a significant leap.
Candidates seeking to penetrate the industry should consider the unique CFO capabilities they bring to the job that will help further the organisation’s goals. Experience with investor relations or prior experience leading a transaction could translate well, depending on how and where the organisation is trying to create value.
For example, a manufacturing organisation might be looking to take a product business or engineering advisory and develop it into a more legitimate services business. A candidate without deep industry experience could point to parallel experience taking their current firm in that direction.
Shaping the future
CFOs have an opportunity to help shape the future of manufacturing as it enters an exciting new chapter. Strong candidates will be distinguished by their ability to help guide company growth and uncover new paths for innovation, in order to gain a comprehensive edge. Operational knowledge and strong leadership abilities will outweigh strong technical skills as CFO’s become more of a partner in influencing the company’s future.
If you would like to confidentially discuss how Norman Broadbent Group could help you overcome your business or people challenges, please contact, Marcus Blackburn, on 07483 015595 or via email@example.com