How Manufacturing CFOs Can Tackle Today’s Toughest Challenges
It wasn’t until the 1960s that many companies became so large and complex that financial management needed to provide more than administrative services and respond to inquiries from executives and managers. The role of the chief financial officer (CFO) quickly became common in organizational structures. It gained responsibility and stature when regulators like the Securities and Exchange Commission (SEC) and the Federal Accounting Standards Board (FASB) began requiring standardized financial reporting and imposed more stringent financial oversight toward the end of the decade and in the 1970s. Already late in the 1970s some CFOs and analysts asserted that CFOs should play a more strategic role and participate in key business decisions.
Since then, the CFO role has continued to evolve and become more significant. When, just a few years ago, you could still find the same message regarding the expanding strategic relevance of CFOs, that wasn’t because nothing happened in the meantime. But it took many years for this trend to expand from the world’s largest enterprises to other, smaller companies and across industries. Generational change helped bring a new cohort of finance executives to the top of the field: people who had an interest in taking a wider view and making a larger contribution to their organizations. Today, one of the tags frequently applied to the CFO is that of a multidisciplinary strategist.
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More Strategic Decisions Require Greater Insight
For many CFOs, expanding their reach meant using their expertise to bring greater decision-making intelligence to their companies. In 2015, 54 percent of all CFOs responding to an industry survey said that their duties included strategic business analysis, but in companies that generated one billion dollars or greater annual revenue, it was 70 percent of CFOs who stated this.
At the same time, especially in manufacturing companies, the types of decision-relevant data proliferated as data volumes grew at unprecedented speeds. CFOs had not only to keep up with the challenging trends in a globalized world and ensure that their businesses met increasingly demanding compliance mandates.
As their executive peers and organizations looked to them more and more for guidance in achieving best business performance, making sound investments, and developing competitive strategies, CFOs also had to make certain that they had access to the right analytical and business insight tools. Many explored how artificial intelligence (AI), machine learning (ML), robotics, and other, newer technologies could help them make finance and business management more successful and efficient.
Some CFOs may not have been used to being consulted regarding technology except when a company had to assess the ROI and business value of large investments like enterprise resource planning (ERP) systems or companywide hardware refreshes. They now needed to adapt and learn quickly about cutting-edge digital solutions.
Recovery From a Global Catastrophe
Then the pandemic hit almost without any warning. The work of manufacturing CFOs gained another dimension of challenge. Many companies had to temporarily suspend production, forcing many workers to seek employment elsewhere. In December 2020, U.S. manufacturers still employed 543,000 fewer people than in February, even as companies resumed operations and scrambled to reconstitute their teams. However, Dr. Chris Kuehl from competitive intelligence firm Armada, speaking at the Sikich Manufacturing CFO Summit 2020, anticipated relatively robust growth in the 4.7 percent to 5 percent range for 2021. Like other analysts, Dr. Kuehl expected recovery to be uneven across segments of the manufacturing industry and from company to company.
The pandemic was unusual in that it threatened lives and livelihoods worldwide, but manufacturing CFOs and their companies were already well used to a steady onslaught of disruptions and challenges from competitors, demand fluctuations, supply chain constraints, climate events, and societal changes. Some fortunate companies were able to rapidly adjust production to pandemic-driven demands for medical, sanitary, and protective products. Others, finding that they lacked the agility and visibility to make changes quickly, looked for technology solutions to help them overcome this disadvantage. For many manufacturers, increasing agility became a higher CFO priority than to pursue cost savings.
Technology to Enable Agility
Dr. Kuehl expected increased mergers and acquisition (M&A) activity in manufacturing, which would also call for greater organizational agility and intense CFO involvement. This resurgent trend is prominent across industries. Whereas the annual U.S. total M&A deal value in the years from 2016 to 2020 amounted to $1.8 trillion, through May 2021 it was already at $1.4 trillion.
As Dr. Kuehl pointed out, competing on labor costs is not a viable strategy for U.S. manufacturers. For them, technology is the key strategy to thrive, compete, and transform their workforces and operations. In a survey of manufacturers held shortly after the 2020 United States elections, 76 percent of the respondents said that they planned on increasing their investments in digital technology, which is approximately triple the rate of 2019. During our Manufacturing CFO Summit, Jesse Alleyne, Manufacturing Industry Leader at Microsoft, pointed out that companies are increasingly investing in technology to boost their agility, implementing supply chain management and insight solutions to more accurately anticipate changing demand and ready production to meet it.
Transcending Efficiency
In the Sikich experience, the companies that use technology most successfully and become digital leaders know that they can achieve transformational outcomes within an ongoing process that involves
the entire organization, not by pursuing a one-time endpoint. They also invest more in technologies that enable them to innovate their business and empower people, and maybe not as much as they used to in running the same processes and teams more efficiently.
Some of these organizations take advantage of a trend that began a few years ago when it became possible and affordable to monitor industrial products and equipment through sensors connected to the internet of things (IoT) and keep tabs on their performance or wear and tear. Those data streams can help improve the productive returns from machinery and equipment and offer customers proactive maintenance and upgrade services.
From Products to Services
When companies explore new, data-fueled services to envelop their products, CFOs and finance managers need to be ready to work with production and service teams to model what these new offerings might look like and what it takes to make them profitable, not just generate additional revenue. That may require them to make more use of analytical tools that allow them to test various scenarios for new product and services capabilities and see how they perform in the context of what the business knows about the needs and challenges of customers and available markets.
So far, not many manufacturers have completely transformed products into services, also because their customers and markets are not always ready to welcome the shift. However, manufacturers have successfully used the service model to generate recurring revenue. Especially for companies that produce small numbers of high-ticket items, that can make a huge difference when demand flags. Microsoft’s Alleyne and Sikich industry experts agree that service transformation of manufactured products is going to be a sustained and broadening trend.
Digital Twins: Lower Cost, More Choices, and Better Results From Product Development
Manufacturers are also re-creating how they develop and design products, for instance, by using digital twins, which can help contributors anywhere focus their collaboration. As a complete, digital model of an industrial machine or other product, a digital twin offers more options to explore the outcomes of engineering choices on product performance quickly and inexpensively, streamlining the final development and eventual production. In the industry survey we mentioned above, 24 percent
of the manufacturers indicated that investing in digital twinning technology would be a critical investment in 2021.
Across industries more broadly, digital twins have already made greater inroads, with 87 percent of executives saying that they are essential for their ability to collaborate in strategic partnerships.8 For CFOs aiming to generate higher returns from a manufacturer’s data assets, digital twins offer one way to achieve more with information a company already owns.
CFOs Can Drive Workforce Transformation
Gaining better, role-optimized visibility with dashboards and reporting tools feeding off a manufacturing company’s live and historical data can be an empowering experience for CFOs and many other roles in an organization. However, it tends to run into limitations if manufacturers do not also give people the freedom to think and act on the data intelligence they receive.
At an immediate, tactical level, companies are using digital tools to automate everyday tasks and remove drudgery from employees lives. As working from anywhere, generational change, and the need to keep production employees safe prompt companies to reconsider how they recruit, retain, and manage people, CFOs can also take a broader approach to workforce transformation. Manufacturers and others have for years enlisted CFOs to help them win the war for talent, elevating traditional HR concerns to the executive suite and treating them strategically.10 Even before the pandemic, automating routine processes, more innovative talent development, and changing the culture of where and how people work became priorities for many CFOs.
The pandemic brought innovative workforce management to the foreground. It forced many manufacturers to act practically overnight to enable employees to serve customers and keep processes moving from any location. Large numbers of workers retired or lost their jobs, which made new-hire recruitment, training, and empowerment business-critical as manufacturers returned to operations at full capacity. Already in a key position at the juncture of finance, sales, and operations, many CFOs saw a further extension of their roles to also collaborate with HR to perform workforce planning and seed the ground for the right technology investments.
Technology Partner That Speaks the Language of CFOs
Sikich has helped hundreds of manufacturing companies become the most productive and competitive organizations they can be. Working with manufacturing CFOs, CIOs, CEOs, and other stakeholders, we help you review and optimize processes, deploy and modernize technology, plan hardware and software investments, and empower your people to do great work, no matter their location. Sikich is a technology as well as a business consultancy. With a single point of contact as your partner, we provide our technology services to complement and align with consulting offerings like business succession planning, business forensics, transaction advisory services, compliance management, marketing and communications, and others.
We have watched the developments of the ever-expanding CFO role for many years. Sikich consultants understand what matters to CFOs and which complexities they face every day. As the CFO in your manufacturing organization, we work with you to help you make a larger impact and drive the organizational change you want to bring about.