While the impact of Covid-19 pandemic is still being felt on supply chains, Ireland remains one of the most productive hubs in Europe, says Bank of Ireland’s head of Manufacturing Sector Conor Magee.
The words ‘surge’ and ‘booming’ made a welcome recent return to the language of both Irish and EU manufacturing.
In the most recent Sector Development Insights report from the bank, head of Manufacturing Sector Conor Magee said that manufacturers are reporting considerable buoyancy as updates from industrial players like Kingspan (+24pc sales), Smurfit (+6pc sales), Caterpillar (+12pc sales), Sandvik (+12pc orders) show.
“Manufacturing will indeed over time become less global and more local as digital and automated technologies trump labour cost advantages of low-cost economies”
However, notwithstanding the positive momentum, Magee said manufacturers continue to be heavily impacted by supply chain shortages associated with the headwinds of Covid-19, Brexit, container availability and high pent up demand.
This, he said, drives a bullwhip effect and stockpiling behaviours as manufacturers try to second guess real supply chain needs. In the short term this is putting inflation pressures on material supplies, and end customers may be impacted with significantly extended delivery times and higher prices.
Keep those supply chains rolling
Conor Magee, head of Manufacturing Sector at Bank of Ireland
ThinkBusiness caught up with Magee to assess the opportunities and challenges facing the manufacturing sector in Ireland.
Has the Covid crisis resulted in supply chain issues for the manufacturing sector in Ireland?
The Covid crisis has negatively impacted and continues to do the supply chain and Irish Manufacturing in following ways:
Employee Safety and wellbeing: Safety first, while always number#1 priority in manufacturing, has taken a new dimension with Covid and the additional requirement to protect employees from the disease including temperatures testing, rapid antigen testing, higher levels of workplace cleanliness, employee tracking, social distancing. Coupled with that many functions continue to work remotely. These new ways of working influence “the cut and thrust” and “problem solving” dynamics of manufacturing and for sure impact supply chain performance. A good example that highlights this new Safety dimension is the need to add additional shifts for same output levels just to comply with social distancing rules.
Operational Performance Nosedives: Lost Capacity, Higher Rates of Absenteeism, Lower Rates of Productivity,
When manufacturing capacity is lost it is “lost forever” and the shortfall must typically be recovered through various measures including overtime, additional shifts, weekend work, additional labour, equipment investment.
Covid has shuttered factories for several weeks, raised absenteeism to double digit levels, reduced output productivity due to social distancing and so have rendered the above usual remedies much less effective.
Container Availability: When Covid hit and supply chains hit the brakes because of restrictions, global transport schedules were severely disrupted and containers effectively ended up in different and the wrong parts of the globe. This impacted availability, and triggered a three-fold increase in costs. This has resulted in longer leadtimes for many supply components
Key Commodities Shortages – Steel and Semiconductor Chips: Steel output capacity has reduced, prices are up by 30pc since January 2021. Covid has triggered a spike in demand for all things electronic (laptops, gaming, tablets etc.) combined with online shopping (Amazon, server farms) and this has in turn escalated an already tight supply of semiconductor chips. Data centre chips command higher margins so automotive, consumer goods are pushed down the supply chain pecking order.
Stockpiling and Bullwhip Effects: When all of above are in play, manufacturers try to second guess their supply needs, probably over compensate and stockpile to safeguard their order books. This of course ripples across the entire supply chain.
All of the above combined with renewed high demand only serve to exacerbate the backlog and extend recovery to normal delivery lead times.
A recent survey by Inter trade Ireland of 775 business across different sectors concluded that 37pc of Manufacturers claim to be still not be “fully operational” when asked “what level of service are they operating at”. 33pc of Manufacturers cited Covid as the main impact on their business compared to Brexit at 7pc.
Ireland is home to some of the most advanced, hi-tech manufacturers on the planet – how do you think the sector will continue to face off challenges from rival geographies like Asia or do you foresee a trend of manufacturing closer to market changing the game?
Irish manufacturing has benefited hugely from FDI with 90pc of value coming from this cohort. With a large presence in high value pharma, medical devices and ICT, OECD ranks Ireland as the most productive country in the world. We score €96 GDP per hour worked compared to €53 per hour for EU.
The drivers behind this phenomenal success are:
- Low corporate tax
- Friendly business Regime
- State bodies supports
- Highly educated and trained work force
- English Speaking
- Customer and relationship-centric approach to business
- High quality R&D centres of excellence across industry and RTOs
There are however some headwinds coming from:
- Corporate tax harmonisation
- ‘Slowbalisation’, ‘Protectionism’, ‘Self-sufficiency’: Globalisation has slowed in last 12 years with disruptors of 2008 financial crisis, populist leaders and now Covid.
- Deep pockets of US, China, UK to win the technology race and increase self-sufficiency. They have budgets of $1400bn, $300bn, $22bn respectively
Ireland can and will mitigate these challenges with our “strong anchors” of:
- Highly educated talent pool
- Government, state bodies, RTOs (Research & Technology Organisations) commitment to digital transformation and green agendas
- Strong and integrated manufacturing base.
- Strong R&D track record
- Our high value networks and diaspora
- Resilience and customer centricity of our manufacturing base
- Supply chain configuration which addresses the lessons learnt from Covid and Brexit. (dual sourcing, technology transfer in house, supplier substitution)
While corporate HQs will always look at footprint optimisation, I believe the manufacturing roots are strong in Ireland and there is a mind set and culture of continuous improvement and innovation. Furthermore the Corporate tax rate is muted to increase to 15pc which in of itself will not deter continued strong FDI into Ireland.
Manufacturing will indeed over time become less global and more local as digital and automated technologies trump labour cost advantages of low-cost economies. Shorter supply chains (Eastern Europe, Africa) versus China will emerge. Supply chains will strike a balance between the trade-offs of resilience, delivery times and landed costs.