We recently returned from the Wells Fargo Industrials Conference in Chicago, where we participated in a series of fireside chats and one-on-one meetings with senior executives from leading industrial and transportation companies. During these discussions, we heard industry leaders speak about the importance of reducing complexity and the need to invest in technology appropriately to position your company for success. Read on for our take on these key themes and others to consider in the back half of 2023 and to position your company for the years ahead.
1. Operating models and organizational optimization
Consider whether your company has the right operating model and if your current organization size will help you to weather changing economic conditions effectively. Participants discussed the need to develop regional or local business models, with the goal of becoming closer to customers. By regionalizing, companies hope to not only drive improved service creating stickiness with customers but also to enhance their flexibility to handle changes in the market. Nearshoring efforts support this move to a regional business model as well.
Given the current economic factors, companies have taken actions in 2023 to right-size their organizations. Some are taking a conservative approach by managing SG&A costs by attrition, while others have already taken more drastic measures in the form of layoffs. Numerous transportation companies stated their goal of maintaining a healthy balance of organizational positioning to respond once the market rebounds and demand returns to a historically normalized level.
2. Supply chain impact mitigation
Supply chain challenges are expected to continue to impact industries throughout the rest of 2023.
In the aerospace and defense industry, the supply chain continues to be constrained while demand remains strong. One attendee stated that their company is not seeing order pushouts or cancellations, resulting in a robust backlog of orders to be fulfilled. Maintaining diligent inventory planning and proactive SIOP (sales, inventory, and operations planning) cycles can help mitigate these constraints.
Transportation companies also discussed challenges in their industry, mainly related to service levels. For instance, railroad service overall, including intermodal, has improved since 2022, but rail carriers in the western U.S. have further improvements to make to return to levels needed to support their customers. Attendees mentioned that there is more volume to move from truck to rail if service can improve in 2023.
3. Inventory levels and potential solutions
The inventory glut remains. While many have seen improved inventory levels in the first half of 2023, there is still significant room for improvement. It appears that the oversupply of inventory will not be resolved in 2023 for most companies. However, circumstances are understandably unique to each company. One industrial company stated that they are not expected to return to "normal" levels until late 2025 or early 2026 as they plan to keep elevated levels of inventory as a buffer as they shift to new manufacturing plants nearshored to home markets. Alternatively, other attendees described ongoing and successful transformations in their own businesses to address excess inventory and other challenges through SKU rationalization, operations excellence, and outsourcing.
4. Technology opportunities
A key theme of the transportation sector discussion centered on the importance of having a customer-centric view that creates value. The importance of technology in driving efficiency was noted, while some made the case that it is required to bring value to customers by providing a level of "stickiness" to prevent customer churn.
During times of economic uncertainty, how much capital should be invested in technology? Are investments in technology considered table stakes to provide minimum service levels or to maintain cost competitiveness, or is this building for the future? During the recent freight recession, many transportation companies used this as an opportunity to reprioritize their technology pipeline but continue to push forward with investments to enable the most critical customer-facing functions.
Positioning for the future
In closing, we had the sense that some executives might be feeling a sense of numbness to the continued economic disruptions. To combat this, it is important to consider themes such as those we’ve discussed here while continuing to refresh your plans to mitigate impacts and build resiliency to handle the future shocks that are sure to come.