Strategic Financial Leadership: How CFOs Can Help Foster Innovation in Manufacturing

With supply disruptions lingering, CFOs across many industries are looking for new paths forward, with management and growth top of mind. The manufacturing industry is no exception. But manufacturers can't afford to wait – and CFOs can lead the charge to drive growth both now and in the future.

In such a dynamic environment, here are the key trends a manufacturing industry CFO must understand, and how the next generation of technology might evolve the industry.

Changing Perceptions of a Manufacturing Industry CFO

Innovation is at the heart of every high-performing manufacturer's operations. Manufacturers face intense competition from domestic and, increasingly, international competitors. Embracing innovation allows businesses to update their products, anticipate customer needs, and establish and maintain a relevant value proposition. It can also uncover operational efficiencies and help manufacturers embed sustainability and environmentally friendly practices.

CFOs can help create and encourage a culture of innovation, but they often face a perception problem, with many business unit leaders seeing them as a roadblock to innovation rather than a champion for it.

According to McKinsey & Company, there are five actions CFOs can take to change the perception of the CFO as an impediment to innovation: 

1. Embed innovation goals into the company's plans for growth: Identify how the organization plans to grow and the role of innovation in making it happen.
2. Scrutinize untested assumptions about an innovation project: Help the business unit explore new ideas by helping to establish the justification for moving forward, including the data needed to test, refine, and improve the idea.
3. Accelerate the standard budgeting process: Speed up the allocation of innovation-related resources, which could include monthly or quarterly meetings to revisit and reassign funding.
4. Develop innovation-related metrics with business units: Partner with business unit leaders to develop traditional and non-traditional performance metrics for innovative projects.
5. Upskill and empower the finance team: To fuel innovation and understand innovation and its drivers, expose finance employees to business units via job rotations. 

While these measures can help CFOs reposition the finance department as a supporter of innovation, what else can they do to pave the way to growth?

Adaptability as a Core Competency

To respond to dynamic market conditions and pursue technological advancements, every level of the organization could benefit from possessing a high degree of adaptability. This can be particularly challenging for some manufacturers, as employees are sometimes unaccustomed to change and resist a more agile approach.

The observations included in Deloitte's 2024 Manufacturing Industry Outlook underscore the importance of adaptability. The report identifies persistent talent gaps, a growing reliance on smart factories and the industrial metaverse, and supply chain digitalization as key trends driving the need for adaptability. Aftermarket services as a potential differentiator and increased investment in product electrification and decarbonization are additional pressing problems manufacturers might focus on in 2024.

Each of these trends will require manufacturers and the finance team to reimagine the department's role within the organization. While the manufacturing sector faces many challenges in 2024, adaptability will be critical to solving and evolving in an ever-changing economic landscape.  

Focus on the Numbers With a Data-Driven Approach

Enhancing efficiency and productivity requires access to timely, relevant, and accurate data – important information for a CFO. While there's no shortage of data from increasingly digitized operations, making sense of it requires advanced technical skills.

An article from PwC on the challenges facing CFOs in 2024 envisions a broader role for CFOs that extends beyond financial reporting and a need to embrace the "power of modern data, predictive analytics, and financial intelligence." 

Prepare for Key Trends Impacting Growth

With this broader remit and to prepare for what’s next, CFOs should stay on top of key trends with the potential to spark innovation, facilitate profitability, and capture growth. Given the inherent complexity of manufacturing, there are many areas where sophisticated technology can impact the enterprise's performance. Here are some top trends: 

1. Agile supply chain management: These adaptations can transform an organization’s responsiveness to its customers’ needs, but it depends on real-time data and sophisticated analytics and requires a sustained investment in technology. According to Chuck Gruber, CEO of Haws, a manufacturer of hydration and safety equipment, real-time and continuous product lifecycle management is vital to fueling business growth. "Manufacturing firms have the unique advantage of enabling close collaboration between customers, sellers, product designers, and manufacturing operations at all stages of a product’s lifecycle," Gruber says. And while cost management is important, he cautions manufacturers to consider the trade-offs. "If companies solely focus on driving their manufacturing to low-cost economies, those long-distance supply chains won’t usually allow for the immediate ongoing interchange that integrated, or even domestic, manufacturing offers naturally," Gruber adds.
2. Digital twins: Investing in digital twins, which are virtual software models of the entire supply chain, is another form of innovative technology that CFOs may soon receive requests to fund. According to a 2022 report from Accenture, one of the biggest advantages of digital twins is that manufacturers can leverage the technology without having to replace existing solutions – and drive faster time to value at a lower cost.
3. Strategic outsourcing: When it comes to the decision to engage third-party providers, the CFO's accounting, finance, and strategic experience can also play a critical role in ensuring a successful approach. Isaac Dietrich, Founder and CFO of Greenwave Technology Solutions, a scrap metal recycling and processing company, believes selecting the right partners can play a critical role in a manufacturer's financial performance. "Taking inspiration from Apple, we minimize our inventories so our cashflows operate as efficiently as possible. We aim to sell the metals we purchase within three hours to two business days, to meet our customers' needs without straining our balance sheet." Minimizing the amount of funds tied up in inventory is critical, but it should not compromise the quality of materials entering the supply chain. "With metal products, quality is everything," says Dietrich. "Our products are used to erect skyscrapers and build bridges. We invest the time, energy, and resources to ensure the metal products we sell into the market have the highest integrity – and the nation's top steel mills know it." 

Additional technologies such as the Industrial Internet of Things (IIoT), 3D printing, predictive maintenance, augmented reality/virtual reality, and data-driven and cloud-based enterprise resource planning (ERP) systems can each play a role in cutting costs, facilitating operations, and fueling growth.

CFOs at the Forefront

From assessing the cost-effectiveness of the proposed outsourcing relationship, to contract negotiation and oversight, CFOs help to capture, analyze, and report quantitative and qualitative data related to the outsourcing relationship.

Scrutinizing investments in these technologies requires CFOs with the training, patience, analytical skills, and strategic insight to help ensure that every investment achieves its goals. CFOs can then help shepherd investment requests through the review process, which includes timely and relevant feedback and the development of key performance metrics to increase the possibility a request for technology receives funding.

To keep tabs on the technology landscape and be an informed partner with the ability to support innovation, the finance team should consider continually monitoring the landscape for new and emerging forms of manufacturing technology. They can then collaborate with other departments and stay closely connected to operations to uncover potential areas for transformation.

The Takeaway

CFOs have always played a vital role in manufacturing firms. However, the current landscape requires the finance department to extend beyond its traditional role and embrace innovation in all its forms.

While the outlook for technology-driven growth in manufacturing appears extremely positive, it will require CFOs to facilitate the integration of technologies and pursue innovative and aggressive growth strategies. This includes overseeing the seamless integration of these technologies to maximize their financial performance.