Australian small and medium-sized enterprise (SME) manufacturers have witnessed a remarkable resurgence, with nine sectors reporting significant profitability gains, according to a recent report by inventory management software provider Unleashed.
Despite a tumultuous year marked by fluctuating margins, Q4 marked a turning point, with Australian manufacturers recording an average profit of $2.22 for every dollar invested in inventory. For nine of the 13 sectors analysed, this quarter represented their most profitable period in two years. Steady sales in Q4 defied expectations, with 74% of surveyed manufacturers noting demand either met or exceeded projections.
Jarrod Adam, Head of Product at Unleashed, attributed this positive trend to improving supply chain conditions throughout 2023. “Mapping lead time performance against stock levels shows the degree to which profitability has been positively affected by shorter – and more predictable – lead times in 2023,” Adam explained.
The report revealed a significant improvement in lead times, dropping from an average of 31 days in Q1 to just 15 days by Q4. This reduction, coupled with decreased overstock levels, from an average of $276,000 in Q1 to $187,000 in Q4, contributed to enhanced profit margins.
Adam noted, “The drop in lead times has allowed Australian firms to better maximize returns. Lower lead times in Q4 appear to have given manufacturers the confidence to shed some of their ‘Just in Case’ stock and shift towards more profitable ‘Just in Time’ strategies. Despite the overall positive outlook, concerns about high costs of goods and services persist, with 64% of manufacturers identifying it as the top business challenge. However, Adam remains optimistic about the future, stating that Q4 2023 positioned Australian manufacturers well for the year ahead. The report, based on gross margin return on inventory investment (GMROI) data across 16 manufacturing categories, highlights the resilience and adaptability of Australian SME manufacturers.
Beverage Sector Leads the Charge
Unlike the woe-begotten Beverage industry over the ditch in New Zealand, Australian beverage manufacturers ended the year with a strong $2.93 return on each dollar invested in inventory in Q4 2023. This is a huge resurgence from the relatively low $1.75 in Q4 2022. A combination of lower lead times of 12 days (3 days below the Australian average of 15) and strong customer demand for local beverage products has led to a vast uptick in profitability. Despite the positive signs for the broader beverage industry, brewer Dereck Hales of Bad Shepherd, said a multitude of issues continue to pressure smaller operators.
Construction Sector Faces Challenges Despite Progress
While Australian manufacturing in general is seeing healthy profits, Australian Building and Construction is in a tough spot. The Building and Construction industry faced continued revenue difficulties resulting in the relatively low profit margin of $1.32 (GMROI) in Q4 2023, almost a whole dollar below the Australian average of $2.22. This is the lowest profit margin for the construction industry since mid-2021 and is a measure of the issues facing the sector. Adding insult to injury are bloated overstock levels within the sector, with businesses on average holding $216,548 more than they needed in Q4 2023 – nearly $30,000 higher than the Australian average of $187,314. This is likely a reflection of a greater exposure to international supply chains in the construction industry, as well as a strongly held sense of risk around understocking, after the major supply chain issues seen during the pandemic.
Despite remaining higher than average, Q4’s overstock levels still amount to progress for the Building and Construction industry, which has more than halved its levels within the calendar year, from $433,042 in Q1 2023, down to $216,548 in Q4 2023. The difficulties facing the industry have proven too much for several high profile construction companies, which have gone into liquidation this year, as manufacturers feel the bite of price pressure on materials.
Auto Manufacturing Gears Up for Recovery
After dipping into the red with a negative profit margin of $0.91 per dollar spent in 2021, the automotive manufacturing sector is now cruising towards a recovery in Q4 2023. Current profitability levels sit at a healthy $2.09, and its best news is to be seen in the non- profit numbers, and other business metrics such as overstock levels and lead day performance point to improving sector health.Automotive Manufacturing made significant gains towards getting overstock levels under control, now sitting at $159,960 in Q4 2023. This is far below the average Australian overstock rate of Q4 2022 which sat at $241,636. And it marks the first time this industry has dropped below the Australian average.
Its average lead time is also a trim 12 days, three days below the Australian average of 15. Business metrics data of overstock and lead time point to Aussie auto manufacturing being in a good position going into 2024.
Food Producers Navigate Challenges Amidst Rising Costs
While beverage producers were one of the standout performers of Q4 2023, their counterpart food producers have been less successful. Food producers had an average profit of $1.87 per dollar spent on inventory, more than $0.30 cents below the Australian average of $2.22. But the main concern is the upward trend in overstock levels for food producers, now at an average of $222,370, up from $135,970 in Q12022. This trend puts increased pressure on businesses to move stock, and can create difficult decisions for businesses already in a tough spot. In positive news for food producers lead times are down to an average of 14 days, below the Australian average.
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