Manufacturing & Distribution Challenges

Updated: July 14, 2014
Industry Intelligence from First Research, a division of Hoover's (a D&B company)

Manufacturing Critical Issues

Highly Dependent on Consumer Spending - Production in the manufacturing sector depends on consumer spending and retail sales, and can change rapidly during an economic slowdown. For example, industrial production rose by about 2 percent per year on average between 2002 and 2007, but fell 10 percent between 2007 and 2010. In some subsectors, such as automobiles and primary metals, production dropped 25 percent or more during the late 2000s recession.

Competition from Low-Cost Imports - US imports of manufactured goods have increased, because products with large labor content are much cheaper to produce in countries like China and Mexico. To remain competitive, many US manufacturers have moved production facilities abroad or have shifted to products with higher technology content. The US imports nearly twice as many manufactured goods from China as it does from Canada, the second-largest source of US imports.

Warehousing & Storage Critical Issues

Demand Depends Highly on Flow of Goods - Economic slowdowns greatly impact the industry, as many business customers use public and contract warehousing mainly to handle peak demand. Industry production, import volume, and office vacancy rates are indicators of demand for warehousing.

Energy Costs - Cold storage and temperature-controlled facilities have high energy requirements, contributing significantly to operating costs. In times of rising costs, facility managers investigate new, more affordable technologies to reduce consumption. Electricity costs can make up a significant portion of cold storage building's ongoing operating costs.

Wholesale Critical Issues

Inventory Carrying Costs - Because many distributors finance their inventories, they're sensitive to interest rates. On average, distributors hold inventory equal to about 60 days sales. Inventories typically are larger for industrial equipment distributors, smaller for distributors of food and petroleum products. Because industry profit margins are low, financing costs have a large impact on profits. Inventory financing is often tied to the prime lending rate.

Large Retailers Bypass Distributors - Big retailers like Wal-Mart, Home Depot, and Costco buy much of their merchandise directly from manufacturers, bypassing distributors. Because they buy in large quantity and operate their own warehouse systems, these retailers don't need distributors. Superstores and warehouse clubs now account for more than 60 percent of sales of general merchandise stores, up from just 35 percent 10 years ago.

Other Business Challenges

Large R&D Spending, Capital Expenditures Required - Manufacturing companies must make large investments in production equipment and computer systems to improve efficiency, and in R&D to develop new products. R&D expenses for US manufacturing companies are typically about 4 to 5 percent of revenue, but can be as high as 10 to 15 percent. Capital expenditures can typically range from 3 to 6 percent of revenue.

Volatile Energy, Raw Material Costs - Scarcity of resources and long supply routes contribute to frequent changes in prices for energy and for many raw materials used by manufacturers. Steel prices, for example, can change by more than 30 percent from year to year. Crude oil and natural gas prices can also move more than 30 percent annually.

Extensive Government Regulation - To protect workers and prevent pollution, states and the federal government regulate many activities of manufacturing companies. Such regulations can add to the cost of production. Government regulations also affect imports and exports of many raw materials and manufactured products.

Dependence on Few Large Customers - Because of consolidation in many parts of the US economy, and because of their own specialization, many manufacturers depend heavily on a small number of big customers for a large part of their revenue. In many cases, because no alternative market exists, manufacturers are essentially production arms of their customers. In some instances, the US government is a company's major customer.

Vulnerability from Specialization - Some warehouses serve only one large customer or one specific industry, specializing their equipment and distribution system for particular needs. Specialization can lead to longer-term contracts and higher profits. However, greater customer exposure exists for these warehouses if the customer or the industry suffers a downturn. Diversification across several markets and customers might be important to mitigate this risk.

Competition from Larger Customers - Some manufacturers and distributors operate their own warehouses to maintain tighter control over service. Consolidation among companies in the US has created larger entities that may choose to operate their own warehouses rather than rent space from warehouse companies. Some large companies choose to outsource warehouse functions, however.

Good Locations More Difficult to Find - With distribution-type warehouses becoming larger, fewer prime locations are available for construction. Smaller, older facilities tend to occupy space along major transportation corridors. Large modern warehouses can exceed 1 million square feet.

Distribution Costs Sensitive to Energy Prices - Distributors that operate delivery fleets are sensitive to energy costs. Most vulnerable are distributors that make multiple deliveries per day to many customers, such as supermarkets or car repair shops. Diesel fuel prices rose soom 200 percent between 2002 and 2013.

Competition from Manufacturers - The increasing efficiency of logistics systems allows manufacturers to sell more goods directly to end-users, bypassing distributors. Direct manufacturer sales account for nearly 30 percent of total wholesale trade in the US. Consolidation in many manufacturing industries has produced large manufacturers with national distribution systems. Manufacturers have a large direct distribution presence in drugs, petroleum products, and chemicals, a small one in groceries and clothing.

Distributors Sensitive to Local Economic Conditions - Because most distributors serve a limited geographical market, they're sensitive to local economic conditions. Distributors of lumber and other building supplies are vulnerable to local real estate markets, while distributors of consumer goods like electronics are affected by local income and employment. Even distributors of basic goods like groceries are vulnerable to local economic slowdowns.


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