Thanks to tightened lead times and improving supply chains, Australian SME manufacturers experienced a rebound in profits during the last quarter.
A new report from inventory management software provider Unleashed reveals that Australian SME manufacturers ended Q4 with an average profit of $2.22 for each dollar invested in inventory, the highest since 2021 In fact, 74 per cent of those surveyed saying demand had been either better than, or as they’d, expected thanks to steady sales during the quarter.
The industries that posted record profit margins in Q4 were: automotive and auto supplies; industrial machinery; office equipment and supplies; beverages; furniture and fixings; clothing; footwear and accessories; electrical and electrical components; health and medical supplies; and equipment and sport entertainment recreation.
Jarrod Adam, Unleashed’s Head of Product, cited the steadily improving supply chain conditions throughout 2023 as a key factor in their profitability.
“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 said. “Short lead times allow firms to carve back inventory levels, creating a virtuous cycle of improved cashflow – as well as lower supply chain costs – that leave them more flexible and able to invest in response to demand.”
The report noted that in 2023 lead times (defined in the report as the time taken between a customer placing a purchase order and receiving the goods) went from an average of 31 days in Q1, to just 15 days by Q4. Over the same period, overstock levels (the value of inventory held over and above optimal levels for that business), went from an average of $276,000 in Q1 to $187,000 in Q4.
The report further stated that the combination of these two factors allowed firms to increase profit margins – from $1.82 profit per dollar in Q1 to $2.22 in Q4, Adam said.
“The drop in lead times has allowed Australian firms to better maximise 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,” Adam said.
Despite the positive developments though, 64 per cent of manufacturers said high costs of goods and services remains the primary concern.
“The Q4 2023 results reflect the strength of Aussie manufacturers in a difficult environment. But the broad uptick in profit was not spread equally across all industries, and sentiment from businesses shows there remain difficulties ahead,” Adam added. “However, the fact remains that Q4 2023, has set Aus. Inc in a good position heading into 2024.”
The Manufacturing Health Index report draws on GMROI (gross margin return on inventory investment) data – a measure of the profits made on inventory – across 16 manufacturing categories and surveys manufacturers to gain first-hand insights into the specific challenges and opportunities they face.
