2023 Manufacturing & Distribution Pulse Survey Report

The Economy Begins to Slow: The Toll of Higher Interest Rates

Conventional wisdom suggests that it takes 12 to 18 months for elevated interest rates to begin to affect the economy. The Federal Reserve first started raising interest rates in an effort to suppress inflation in the spring of 2022. Certain segments have already buckled under the weight of higher borrowing costs. The single-family housing market, for instance, has been brought to a virtual standstill and several measures of manufacturing activity indicate a sharp slowdown over the first few months of 2023.

Other segments of the economy have proved surprisingly resilient in the face of higher borrowing costs and the sharpest inflation in over four decades. Labor market conditions, for instance, continue to be defined by an elevated demand for workers but an insufficient supply of available labor. While the 236,000 increase in payroll employment observed in March 2023 was the smallest monthly increase since December 2020, that’s still above average hiring by historical standards. The more than one million jobs added in the first quarter of 2023 was more than any three-month period between 1998 and the start of the pandemic. Meanwhile, the supply of available labor remains insufficient to meet the demand for workers. The unemployment rate stood at 3.5% as of March 2023, just above the lowest rate since 1969. As of February 2023, there were close to 10 million open, unfilled jobs. This is the lowest number of vacancies since May 2021 but still roughly three million more than at the start of the pandemic.

As a result of the imbalance between the supply and demand for labor, workers continue to quit their jobs at an elevated rate while employers have proved

reluctant to lay off employees. Approximately two and a half percent of all workers quit their jobs in February 2023, a higher rate than in any month on record before 2021, while the one percent of workers that were laid off or discharged in February is fewer than in any month before the pandemic began.

There are, however, some initial signs that the demand for labor is starting to wane. Initial claims for unemployment insurance have trended higher in the first quarter of 2023 and the nearly two million continued claims for unemployment insurance benefits is up 45% from the cyclical low in September 2022. Rising unemployment is largely confined to the highest earners. There has been a 533% increase in the number of households that earn over $200,000 annually claiming unemployment benefits over the past year. This is at least partially a reflection of weaknesses in the tech sector.

Consumer spending, powered by this red-hot labor market, has remained surprisingly resilient in the face of higher interest rates. Despite a one percent decline in retail sales in March, consumer spending is up a perfectly adequate 1.4% over the first three months of 2023.

Inflation, the defining element of the pandemic-era economy, remains a pressing issue. While the five percent year-over-year increase in the Consumer Price Index (one of the two primary measures of inflation) is the smallest annual increase since May 2021, it’s still well above the Federal Reserve’s two percent target rate of inflation. While it’s currently unclear if the Federal Reserve will raise rates again at their next meeting, borrowing costs will remain elevated until inflation falls closer to the desired level.

Of course, with the first rate-hikes having occurred just over 13 months ago, economic conditions could deteriorate in the coming months. Professional forecasters expect conditions to change for the worse. According to the Wall Street Journal’s “Economic Forecasting Survey,” the median forecast anticipates a 65% chance of the economy entering recession over the next 12 months, and more than three in four forecasters put the odds of recession over the next year at 50% or higher.

Despite that somewhat dreary outlook, most expect it to be a rather shallow downturn. The average forecast has the unemployment rate rising to a peak of 4.6% in the summer of 2024. That’s still exceptionally low by historical standards. For context, the unemployment rate never fell below 7.7% from 2009 to 2012. Inflation is also expected to

moderate, falling to the mid three percent range by the end of 2023 and into the mid two percent range in 2024.

After the highest inflation in four decades, a shallow and brief recession would be viewed as a win, but there are still downsides and risks. There are warning signs emerging from the commercial real estate segment, especially with regards to office space and the ongoing effects of remote work. While panic related to the banking crisis in early March has started to subside, the extent of the fallout and resulting weakness in the banking sector remains unclear. A particularly sharp tightening of credit conditions could be devastating for small businesses already being squeezed by inflation and labor shortages, and the most recent National Federation of Independent Business (NFIB) survey of small business owners showed their assessment of credit conditions at its lowest level since the Global Financial Crisis.

In the following pages of this report, Citrin Cooperman's 2023 Pulse Survey succinctly demonstrates the current state of the economy and its effects on manufacturing and distribution companies. Though the future of our economy remains uncertain, the respondents in this survey offer helpful insights on how to stay ahead of the curve.

Anirban Basu

Dr. Anirban Basu Chairman and Chief Executive Officer, Sage Policy Group, Inc.

Resilient Results and How to Sustain Them

Over the past four years, manufacturing and distribution (M&D) companies have faced one challenge after the next. Despite disruptions including COVID-19, seismic supply chain interruptions, talent shortages, political divides, inflation pressures, rising interest rates, and a banking crisis, M&D companies have shown remarkable resilience in revenues and earnings growth during this period.

Year-over-year, financial performance among our respondents is good and admirable. Our 2023 Pulse Survey reveals common denominator actions being taken across M&D subsectors to create and protect value in their businesses in the present and for the future.

Our report focuses on the foundations of strong performance in these constantly disruptive times. These and other actions are being taken and leveraged successfully by this year’s respondents:

• Supply chain adaptability and diversification of suppliers

• Managing excess inventory

• Increased outsourcing to alleviate challenges including labor constraints

• More sophisticated forecasting and applied data analytics

• Adoption of emerging technologies like robotics, more automation in manufacturing processes, and the use of artificial intelligence (AI)

• Managing working capital and rising interest rates

• Sales price increases

• Investment of funds from employee retention credits and paycheck protection into company initiatives

In addition to reporting performance in 2022 and common performance drivers, we share trend lines from 2020 and 2021 - which encompases data collected for our prior year Pulse Surveys. We hope these benchmarks, analyses, and insights help you see the best way forward to create, protect, and build new economic value in your business today and prepare for what comes next.

Mark Fagan John Giordano Mark Henry

Mark Fagan Managing Partner of Industries

John Giordano National Co-Practice Leader Manufacturing & Distribution Industry

Mark Henry National Co-Practice Leader Manufacturing & Distribution Industry

About Our Research

For the fourth year in a row, we polled 200 senior leaders of M&D companies across the nation to measure the health of their businesses in the moment and take stock of future priorities, concerns, and challenges. Here is what your peers reported on the industry now and their considerations about what may come next. More information on the survey methodology and respondent demographics can be found on page 35 of our report.

Another Year of Revenue, Earnings, and Product Performance Growth

Over 90 percent of respondents reported growth in revenue. These are sizable gains on top of strong 2021 and resilient 2020 performances. Roughly one in four (27 percent) of companies polled said revenue grew significantly. The year-to-year revenue growth trend is positive, but is it sustainable? More on that to come.

27%

SAID REVENUE GROWTH FROM 2021 TO 2022 WAS SIGNIFICANT

REVENUE GROWTH: HOW DID YOUR COMPANY’S REVENUE PERFORM IN 2022 COMPARED TO 2021?

Mirroring revenue performance, 92 percent of respondents saw significant or modest growth in year-overyear earnings before interest, taxes, depreciation, and amortization (EBITDA). One in four said the growth was significant.

SAID EBITDA GROWTH FROM 2021 TO 2022 WAS SIGNIFICANT

25%

EARNINGS GROWTH: HOW DID YOUR COMPANY’S EARNINGS PERFORM IN 2022 COMPARED TO 2021?

Products tended to perform much better in 2022 compared to 2021 CITRIN COOPERMAN

tended to perform somewhat better in 2022 compared to 2021

27% Products

tended to perform about the same in 2022 compared to 2021

Products

tended to perform much worse in 2022 compared to 2021

• 8 in 10 respondents said products performed at least somewhat better in 2022 compared to a solid 2021.

• 27% said products performed much better in 2022 compared to 2021.

GROWTH DRIVERS

The Drivers of Financial Health: Past, Present, and Future

The revenue, earnings, and products year-to-year gains were achieved despite new headwinds like recession warnings and inflation atop sustained challenges like supply chain disruptions.

Overall, our respondents stayed agile and adapted to economic and environmental obstacles over the past three years by rapidly shifting production, adopting new technologies, embracing sustainability, collaborating with partners, and investing in workforce development. The past three years have been a boot camp of sorts, and those making it through the strongest have a solid plan for the future in place.

Respondents and other leaders revealed that many high-performing companies:

1. Emphasize a culture of agility by encouraging experimentation, risk taking, and continuous improvement

2. Build partnerships with suppliers, customers, and other stakeholders to enable the company to respond to market changes

3. Build a diverse workforce by prioritizing hiring and retaining a workforce that brings different perspectives and experiences to the company

4. Invest in technology including cloud computing, big data analytics, and artificial intelligence (AI) to improve efficiency and identify market changes quickly

5. Develop a culture of learning by encouraging employees to continuously learn and develop new skills

Below are drivers of financial health amid the seemingly constant state of disruption, which we look at in detail on the following pages:

1

APPLYING ADVANCED TECHNOLOGY

2

FREQUENT, VIGILANT FORECASTING AND KPI FOCUS LEADS TO BETTER, MORE EFFICIENT DECISION MAKING

3

RISING TO CUSTOMER EXPECTATIONS

4

SUPPLY CHAIN AND LOGISTICS ADAPTABILITY

1. Applying Advanced Technologies

The long-held promise of applying analytics, artificial intelligence (AI), machine learning (ML), or intelligent automation to improve business decision making and business performance remains promising. Our research revealed progress is being made and more is left to be realized.

Larger companies, not surprisingly, are ahead of smaller players. The top three current uses of data analytics among respondents are to improve efficiency or product sourcing (68 percent), to better understand buyer behaviors (66 percent), and to improve profitability of products (63 percent).

HOW ARE YOU CURRENTLY USING DATA ANALYTICS?

PROGRESS ON THE ROAD TO ADVANCED TECH IMPLEMENTATION?

37% had fully implemented tools and processes

18% planned to implement tools and processes

were currently implementing tools and processes

36% had no plans to implement tools and processes

10%

TOP THREE DRIVERS OF SUCCESSFUL IMPLEMENTATION

Buy-in and support from leadership

Encouraging employees to adapt to a digital culture

Ensuring appropriate tools are in place

Goals and Benefits of AI and ML Implementation

AI and ML continue to revolutionize the manufacturing industry. Algorithms are advancing beyond predictive maintenance and quality control. Manufacturers with heavy assets and complex production apply AI to reduce their reliance on experience, intuition, and judgement. Since variations in operators' qualifications can affect efficiency, AI's ability to preserve, improve, and standardize knowledge has become a game changer.

EMILY RICHI PARTNER

HOW IS AI OR ML BEING UTILIZED BY YOUR COMPANY?

automation

engagement

We are not using (AI) or (ML)

74% 66% 61% 9%

Question allowed for multiple responses

HOW HAS ARTIFICIAL INTELLIGENCE (AI) OR MACHINE LEARNING (ML) BENEFITED YOUR COMPANY?

Given us ability to gather and utilize data outside of our company (suppliers, customers, other outside sources)

Given us ability to predict events (maintenance, quality issues, employee behavior)

Given us the ability to predict customer behaviors

It has automated some repetitive tasks

We are not using AI or ML

Question allowed for multiple responses

2. Frequent, Vigilant Forecasting and a Focus on KPIs Leads to Better, More Efficient Decision Making

In the face of constant disruption, M&D companies shared what they are doing to run their businesses with better information and more sophisticated decision making tools. Here are the highlights of what we saw regarding forecasting and key performance indicators (KPIs) in this year’s Pulse Survey.

69% of respondents forecasted revenue and costs quarterly.

80% used a strategic planning system to assist with forecasting. Larger companies are much more likely to use these systems.

96% used an ERP system, for larger companies it was 100%.

94% said that their ERP system is integrated with their company’s inventory sourcing partners.

88% of executives monitored KPIs using financial dashboards. Larger and higher revenue companies were more likely to be using financial dashboards KPIs.

Chart Title

WHICH OF THE FOLLOWING KPIS DO EXECUTIVES AT YOUR COMPANY MONITOR?

Predictive maintenance

Cash demand period (days sales outstanding and days payable outstanding)

Demand Cash demand period (DSO, DPO)

Customer complaints/satisfaction Labor usage

usage Demand forecasting

Capacity utilization forecasting

Capacity utilization

Inventory turnover

Inventory turnover

Order fulfillment performance

Order fulfillment performance

Material costing

Material costing

Quality control performance

Quality control performance

2023 2022 2021 39% 32% 34% 21% 36% 40% 44% 32% 37% 27% 57% 65% 71% 55% 51% 20% 29% 43% 33% 32% 18% 40% 43% 40% 43% 44% 48% 51% 51% 53% 56%

Top KPIs that executives monitor include quality control performance, material costing, and order fulfillment performance

19 | Spring 2023 Pulse Survey

The Importance of Decision-Making Information to Remain Competitive

Measuring your business’ financial performance is an important activity that should be performed with your management team at least annually, if not on a monthly basis. Creating a dashboard of key metrics and forecasts that are the most meaningful to the company can help shape your management team’s focus and create a vision for the year ahead. The only way to drive momentum for your business is to constantly set goals, measure them, and track your progress.

MARK HENRY CO-PRACTICE LEADER, MANUFACTURING & DISTRIBUTION PRACTICE

The survey showed that companies desire information that will help them more efficiently predict supply chain activity, inventory lead times, and customer behaviors. Enterprise resource planning systems (ERPs) have the ability to track all of these activities and provide customers with the transparency they now crave.

For a strong future, businesses should link these data points for complete transparency of the supply chain, from sourcing to customer delivery. Companies with these capabilities will have a clear advantage over competitors.

WHICH OF THE FOLLOWING DO YOU BELIEVE IS NEEDED NOW OR IN THE NEAR FUTURE TO KEEP YOUR COMPANY COMPETITIVE? The

3. Rising to Customer Expectations

Even amid supply chain improvements, product availability remained the most important customer satisfaction driver for our Pulse Survey respondents. This was followed by range of products, customer service, and pricing.

reported product availability as most important in 2020 (at the height of COVID)

reported product availability as most important in 2022

How Companies are Adapting to Customer Demands

While the importance of product availability has become less acute since our first survey in 2020, the need to rise to meet consumer availability demands is paired with related challenges like e-commerce agility, handling price increases, managing inventory shortages, and the rising costs of inventory.

INCREASING PRICES

85% 65% 89% 66% 71%

said e-commerce sales grew significantly or more than doubled in the past year.

of respondents passed production and added supply chain costs to their customers through raising their prices at least quarterly. One in five did so monthly.

MANAGING INVENTORY DELIVERABLES AND COSTS

said inventory is currently behind scheduled delivery dates.

experienced an increase in inventory prices over the past 12 months.

of respondents anticipated that the cost of inventory would be higher in the next 12 months.

Know Your Buyer

Even during the current inflationary period, cost is not necessarily everything. Buyer satisfaction today is not strictly relegated to the cheapest option. Consumers seem willing to pay more as long as:

• The customer is getting perceived value for the additional pricing

• The product is customized to their specific needs

• The seller provides exceptional customer service

• There is justification for the increased pricing

JOHN GIORDANO CO-PRACTICE LEADER, MANUFACTURING & DISTRIBUTION PRACTICE

More important than pricing, buyers today want their product to be readily available. Since 2021, challenges throughout the global supply chain have resulted in various bottlenecks in getting products on the shelves and into the hands of consumers. Those that have maintained a high level of success have been able to maintain inventory levels by avoiding stockouts and backorders. With increased competition, and low barriers to competition as a result of e-commerce, buyers can move on very quickly if they are not finding what they are looking for.

4. Supply Chain and Logistics Adaptability

Successful M&D companies continue to adapt to supply chain challenges, even as conditions have improved. For 72 percent of respondents, disruptions to global supply chains have caused them to change how their products are sourced.

The majority (80 percent) now have more diversification of suppliers. Over half are reshoring to the United States (U.S.) and outsourcing manufacturing. Respondents report top hurdles to reshoring include cost of U.S. labor, lack of access to skilled labor, and capital investment costs.

72%

53% have changed how their products are sourced

are reshoring to the U.S. and outsourcing manufacturing CITRIN COOPERMAN

Respondents said they managed increased costs of products by raising sales prices, relocating sourcing closer to consumers, and outsourcing more manufacturing to third parties, among other measures. Most respondents reported inventory costs were up at least 10 percent. In response, the vast majority (80 percent) said they are using third-party warehouses or logistics companies to help manage products internally, among other measures we examine in this report.

WHICH OF THE FOLLOWING ARE WAYS YOU ARE MANAGING PRODUCT COST?

Question allowed for multiple responses

The ability to understand the status of supply chains, let alone being able to predict them, is complex because existing monitoring tools are rather scarce and, in most cases, do not allow the tracking of the real-time evolution of economic variables showing distress. The U.S. developed Global Supply Chain Pressure Index (GSCPI) and the EU developed the Supply Chain Alert Notification (SCAN) use quasireal time movements in quantities and prices.

MARK FAGAN MANAGING PARTNER OF INDUSTRIES

While global indicators are helpful, the sourcing of materials for a particular company is much more specific, as Boeing recently experienced. Even though Boeing was sourcing a certain part from three different vendors, quality issues sidelined two of those vendors, over-loading the third and forcing delivery delays for the 737 Max airplane.

Some specific examples of how these drivers produce positive results include:

1. Amazon uses machine learning algorithms to analyze customer behavior and predict their preferences.

2. Nike uses customer journey mapping to understand how customers interact with its brand across different touchpoints. The company also collects and analyzes data from customer interactions to identify areas for improvement and to create personalized marketing campaigns.

3. Procter & Gamble partnered with its suppliers and logistics providers to develop a "control tower" to monitor and manage its global supply chain.

4. Amazon launched a $700M program to upskill its workforce in high-demand fields such as cloud computing, machine learning, and robotics.

5. Nestlé has been using blockchain technology to improve transparency and traceability in their supply chains.

These are just a few examples of how M&D companies have stayed agile and adapted to economic and environmental obstacles over the past three years. By adopting new technologies, diversifying their product portfolios, optimizing their supply chains, investing in their workforce, and embracing sustainability, these companies have been able to mitigate the impact of disruptions and remain competitive.

THE FOUR DRIVERS - STAYING AGILE IN ACTION

Risks, Growth, and Challenges

Immediately Ahead and on the Horizon

Today’s Challenges

Thirty-eight percent of respondents said that their company’s current biggest challenge was supply chain volatility — this increased significantly from 2021 as an area of concern and focus. Rising inflation (35 percent) and interest rates (30 percent) were new top challenges to our survey this year — reflecting current market conditions, headline news, and what all consumers saw in everyday purchases. Challenges, like changing the business model to respond to crisis, have ebbed in the post-COVID era.

Loss

WHAT ARE YOUR BIGGEST CHALLENGES TODAY?

Ability to finance growth

Loss of market share to companies like Amazon or e-commerce pressures

Managing cash flow

Inability to retain/attract adequate talent

Inability to retain/attract adequate talent

Changing the business model to adapt to crises like COVID-19

Changing the business model to adopt to crisis like

Inability to keep up with technology requirements

Inability to keep up with technology requirements

Rising inflation

Rising interest rates

Implementation of environmental, social, and governance (ESG) strategy

Other

Respondents were asked to select their top 3 choices

Growth Hurdles/Keys to Future Growth

As we see throughout this report, stabilization of the supply chain was a top problem and an area for action for M&D companies. This challenge topped the list of keys to future growth.

WHAT ARE BIGGEST KEYS TO YOUR FUTURE GROWTH STRATEGY?

Other most frequently named keys to future growth were utilizing best in class technology and stabilizing the workforce. Building on the connection between growth and workforce stability, the second chart below suggests that most anticipated a significant increase in the workforce over the next three years as well as significant capital investments.

WHICH OF THE FOLLOWING, IF ANY, DO YOU ANTICIPATE OCCURRING FOR YOUR BUSINESS OVER THE NEXT THREE YEARS?

Growth Through Acquisition and Sale Plans

The most difficult part of growth through acquisition is finding quality targets, though the degree of difficulty is dropping year-over-year. Respondents reported that financing the acquisition has become harder — the number of those who named it as a challenge doubled from nine percent to 18 percent over the last two years. Just under half said they are considering a potential sale of the business in the next three years.

WHAT IS THE MOST DIFFICULT PART OF GROWTH THROUGH ACQUISITION?

IS YOUR COMPANY CONSIDERING A POTENTIAL SALE OF YOUR BUSINESS IN THE NEXT THREE YEARS?

Methodology

Our respondents were recruited by Quest Mindshare, a global leader in providing opt-in online survey samples. There were a total of 200 surveys completed. Respondents were screened for working at a company involved with manufacturing and/or distribution and working at a company with $10M+ revenue size. All respondents received an incentive for completing the survey.

Some numbers throughout the report do not equal 100% due to rounding. The field dates are as follows:

• February 1, 2023 – February 14, 2023

Respondent Demographics

Position/job title

• CEO, COO, or C-level: 51%

• SVP or VP of Operations: 28%

• President or Managing Partner: 16%

• Company owner or Founder: 6%

Manufacturing: 33%

Distribution: 26%

Both manufacturing and distribution: 41%

Company revenue size

• $10M-$99.9M: 20%

• $100M-$249.9M: 20%

• $250M-$499.9M: 20%

• $500M-$1B: 21%

• $More than 1B: 20%

*Question allowed for multiple responses

Industry*

• Industrial Products: 52%

• Consumer Products and Retail: 49%

• Distribution and Logistics: 43%

• Food & Beverage: 18%

• Medical Equipment & Healthcare: 5%

• Energy & Gas: 3%

• Pharmaceutical: 3%

• Life Sciences: 2%

• Other: 5%

Company employee size

• 0-100: 5%

• 101-500: 7%

• 501-1,000: 19%

• 1,001-2,500: 30%

• 2,501-5,000: 16%

• 5,001-10,000: 19%

• More than 10,000: 6%

Region

• Northeast: 16%

• Midwest: 16%

• South: 33%

• West: 36%

Physical presence or inventory in multiple states

• Yes: 92%

• No: 8%

Physical presence or inventory internationally

• Yes: 74%

• No: 26%

About Us

Inside Citrin Cooperman's Manufacturing and Distribution Practice

Citrin Cooperman is proud to be home to one of the leading manufacturing and distribution practices in the country. Our dedicated team leverages our deep industry expertise to provide a full range of assurance, tax, and business advisory services to assist our clients with achieving their business goals. We strive to provide value to companies by helping management make informed decisions that improve efficiencies, reduce costs, and ultimately improve the bottom line.

Subsectors We Serve

Consumer Products and Retail

Distribution and Logistics

Food and Beverage

Industrial Products

Manufacturing

About Citrin Cooperman

Citrin Cooperman is one of the nation’s largest professional services firms. Since 1979, the firm has steadily built their business by helping companies and high net worth individuals find practical, actionable solutions to help them meet their short-term needs and long-term objectives.

Citrin Cooperman clients span an array of industry and business sectors and leverage a complete menu of service offerings. Citrin Cooperman & Company, LLP, a licensed independent CPA firm that provides attest services and Citrin Cooperman Advisors LLC, which provides business advisory and non-attest services, operate as an alternative practice structure in accordance with the AICPA’s Code of Professional Conduct and applicable law, regulations, and professional standards. The entities include more than 400 partners and 2,400 total professionals.

To learn more about Citrin Cooperman and how our Manufacturing & Distribution Practice can help your business, click here.

"Citrin Cooperman" is the brand under which Citrin Cooperman & Company, LLP, a licensed independent CPA firm, and Citrin Cooperman Advisors LLC serve clients’business needs. The two firms operate as separate legal entities in an alternative practice structure. Citrin Cooperman is an independent member of Moore North America, which is itself a regional member of Moore Global Network Limited (MGNL).