2021 Marcum National Manufacturing Survey

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THE 2021 MARCUM NATIONAL MANUFACTURING SURVEY

TABLE OF CONTENTS

Executive Summary

Financial Overview Leveraging Tax Credits to Innovate

Business Strategies Smart Manufacturing Delivers Huge Benefits

COVID-19: The Pandemic’s Impact Technology and Process Improvement IT Penetration Test: Review of Cyber Preparedness

Economics, Policy, and Taxes

Threats and Challenges

Underlying concerns remain, particularly with respect to recruiting and retaining skilled labor, keeping costs down, procurement and the possibility of increased taxes. “ ”

Survey Results

NATIONAL MANUFACTURING INDUSTRY SERVICE LEADERS

Jon Shoop

James Aspromonti

Michael Brooder

Kevin Cole

Tim Crosby

Joseph DiSimone

Cary Drazner

John Eckweiler

Ronald Friedman

www.marcumllp.com

EXECUTIVE SUMMARY

After a tumultuous year-and-a-half due to COVID-19, it’s no surprise that Marcum’s 2021 National Manufacturing Survey Report contains some contradictions. We polled leaders at many small and midsized manufacturing companies across the country to determine their principal concerns, expectations, and priorities in this incredibly challenging time. This year’s survey reveals that most manufacturers have weathered the pandemic well and expect to grow revenues in the coming year. But underlying concerns remain, particularly with respect to recruiting and retaining skilled labor, keeping costs down, procurement, and the possibility of increased taxes.

The survey also provides insights into how companies are prioritizing and leveraging technology, covering pressing issues like cybersecurity and the use of sophisticated Enterprise Resource Planning (ERP) systems. We also gain some understanding of the strategies and tactics manufacturers are using to remain competitive and gain an edge by driving efficiencies and addressing challenges and opportunities. This is an exciting time for manufacturing, full of innovation and possibility. We hope you benefit from the insights here, and we welcome your feedback on this year’s survey.

Jonathan J. Shoop, Office Managing Partner, Cleveland, Marcum LLP 216.242.0820 | jon.shoop@marcumllp.com

ABOUT OUR MANUFACTURING INDUSTRY GROUP

Marcum’s Manufacturing & Distribution Practice Group serves manufacturing- driven and consumer-pulled businesses. Marcum is uniquely qualified to serve manufacturers and distributors with seasoned professionals who understand the industry

and specific market forces that are driving business decisions.

To learn more, visit... marcumllp.com/manufacturing-distribution

John Gabriel

Paul Graney

Michele Lipson

Ted Lucas

Kevin McGann

John J. McGonical

Justin Nepo

Robert Spielman

Jeffrey Winkleman

THE 2021 MARCUM NATIONAL MANUFACTURING SURVEY

Most Companies Managed the Pandemic Well The onset of the coronavirus pandemic in early 2020 set off seismic changes that continue to reverberate throughout the world and across industries. Manufacturers, like everyone else, were forced to adjust to lockdowns, disruptions in supply chains, and deep economic uncertainty. The good news is our survey found that most companies have weathered this challenge with aplomb, adapting to “the new normal” and leveraging readily available bank financing and government assistance like the Paycheck Protection Program (PPP) and Employee Retention Tax Credits (ERTC) while riding an unprecedented wave of long-term macroeconomic growth. Overall Outlook Remains Positive The effect of all that growth is general confidence looking ahead. Despite a very tough road since the pandemic began, a remarkable 77% of respondents were optimistic about the coming year, while just 3% felt pessimistic. Although many manufacturers are wary of potential issues related to taxes, the pandemic, competition, and other challenges, we were pleased to see most respondents had a positive outlook. FINANCIAL OVERVIEW

80% expected higher revenues in the coming year

77% were optimistic about the coming year

60% reported lower revenue in COVID- impacted 2020 versus 2019

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WORKFORCE Recruitment and Retention Are Top Concerns Finding staff to drive growth is a big issue, however. With 87% of respondents expressing concern about recruitment and 69% calling it their greatest challenge for the coming year, staffing jumped out as the biggest worry for manufacturing companies. And 34% cited workforce acquisition and development as a problem, making it the top problem specifically called out in the survey. R&D/INNOVATION Technology Is Vital for Manufacturing Success Harnessing the latest technology is crucial for adaptation. Most respondents use technology to drive efficiencies, automate processes, and simply run their companies more effectively. Whether it’s through an ERP system or applying the latest in smart manufacturing and embracing the best in data analytics, technology will be the key to remaining competitive in this global economy. REVENUES Growth Forecasted for Most Manufacturers Nearly 80% of respondents said they expect higher revenues in the coming year. Just 5% predicted a decline. That’s despite the fact that nearly 60% of respondents reported lower revenue

in COVID-impacted 2020 versus 2019. This buoyant attitude matches what we’re hearing from clients.

Manufacturers, like everyone else, were forced to adjust to lockdowns, disruptions in supply chains and deep economic uncertainty. “ ”

THE 2021 MARCUM NATIONAL MANUFACTURING SURVEY

L E V E R AG E TA X C R E D I T S TO I N N O V AT E

by Jonathan J. Shoop | Marcum llp

Developing new products and improving existing products and processes were recurring themes in this year’s survey. Manufacturers recognize the need to innovate so they can remain competitive while keeping costs down. Great research and development (R&D) processes play a key role in driving this innovation, but they can be very expensive. That’s where the R&D tax credit comes in. The federal R&D tax credit is a dollar-for-dollar offset of federal income tax liability. Federal R&D credits are available for up to 14% of qualified research expenditures (QRE), both for in-house research and contract research. ELIGIBLE ACTIVITIES A wide variety of expenses can be considered QREs, but they generally include wages paid to qualifying employees and associated expenses used to develop a new product or process. Here are a few examples of manufacturing activities that may qualify: X Designing and testing prototypes. Most states provide a similar credit, so the combined federal and state credit can offset even more qualified spending. AN UNDERUTILIZED RESOURCE Considering the vast majority of survey respondents dedicate at least one full-time employee – and in many cases dozens – to R&D efforts such as new product development, innovation, and research, it’s likely that most companies are missing out on significant potential benefits. If the R&D tax credit offers so many benefits and helps manufacturers thrive in a deeply competitive global environment, you’d think everyone would use them — yet less than half of respondents are tapping into this program. Many eligible companies don’t realize they qualify for the credit and miss out on readily available assistance. X Designing manufacturing equipment. X Optimizing manufacturing processes. X Designing and developing tooling and equipment.

While lack of understanding plays a role, the program can be intimidating to navigate. In Ohio, for example, the R&D credit applies against the Ohio Commercial Activity Tax (CAT), but the R&D credit cannot reduce the CAT liability below the minimum fee. Any unused credit can be carried forward for seven years. WELL WORTH THE EFFORT Yes, R&D tax credits can be tricky and require careful planning, but the compelling value they deliver means that you should take full advantage. Just be sure to adhere to the rules and keep the proper paperwork your tax advisor will need to help you secure the credit and pass an audit. Most states offer credits ranging from 2% to 6%, potentially allowing your business to realize 6% to 14% of your original investment. That means effective planning can allow your business to reap twice the rewards from investing in your company’s future.

Accessing the R&D tax credit effectively without running into audit pitfalls is as simple as properly planning and working with the right tax advisor to ensure compliance. MORE USEFUL THAN EVER Since the pandemic has forced businesses to pivot and innovate more than ever, the R&D tax credit probably has a role in your company’s future growth. Consider all the ways you’re working to improve operations, rework products, and boost efficiencies – chances are good some of that effort meets the requirements of the R&D tax credit. Conducting an R&D tax credit survey is a fast and easy way to determine how your business can best use these federal and state programs to thrive. Marcum believes virtually all manufacturing companies can be leveraging this program, and it can facilitate a smooth and simple process.

Jonathan J. Shoop, Office Managing Partner, Cleveland, Marcum LLP 216.242.0820 | jon. shoop@marcumllp.com

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FINANCIAL OVERVIEW (continued)

EMPLOYMENT GROWTH/ RETENTION/RECRUITING Manufacturers Feeling the Labor Pinch Almost half of respondents had a smaller staff than they did a year prior, and 54% plan to increase staffing in the coming year. Not surprisingly, finding skilled labor was among the top three priorities for 72% of respondents, many of whom expect to be hit by a significant number of retirements in the next four years (15% expect to lose as much as a quarter of their staff in that timeframe). It’s no wonder 34% of respondents said losing skilled workers to retirement is their biggest challenge for the coming year. To address the staffing difficulties, more than 80% of respondents say they plan to increase wages and/or benefits. Many companies are also partnering with outside entities to train and recruit employees. For example, 47% of respondents are working with vocational schools and hosting events or interns, and 36% are collaborating with schools on training.

PPP LOANS Paycheck Protection Program (PPP) Loans Proved Invaluable

Manufacturers used PPP loans both to keep people working and to drive growth, with 74% of respondents tapping the federal program in 2020. PPP loans were designed to provide resources to maintain workforces and cover applicable overhead. For businesses meeting certain conditions, the loans converted to grants, making them an exceptional tool for protecting both workers and revenues.

PPP loans were designed to provide resources to maintain workforces and cover applicable overhead. When businesses met the right conditions, the loans converted to grants, making them an exceptional tool for protecting both workers and revenues. “ ”

THE 2021 MARCUM NATIONAL MANUFACTURING SURVEY

BUSINESS STRATEGIES

TOP PRIORITIES Finding Paths to Growth

AUTOMATION Automation Remains a High Priority The pandemic forced many companies to do more with less, and one way to accomplish that was by relying more on automation. Nearly half of respondents — 47% — cited automation as a tool for driving efficiency and reducing costs. Meanwhile, 17% said automation helped fill gaps and increase capacity, and another 17% said it provided a competitive advantage. Just 14% of respondents said automation was not a major factor in their business. Half of the respondents had launched a new automation or technology project in the prior year, which is not surprising given the many competitive pressures. As technologies improve, we anticipate a growing need to embrace automation and use the most up-to-date software, processes, and equipment to automate as much as possible. This need is even more acute in the tight labor market.

Labor is a big concern, and this spilled over into overall strategies. Among strategic priorities, 72% listed finding and retaining skilled labor. Cutting costs was the next highest- ranked answer, chosen by 58% of respondents. To get there, 50% of respondents say they plan to increase the use of technology, and a nearly equivalent 47% plan to increase investment in technology. Expanding by entering new markets was a priority for 44% of respondents, while 22% are looking to diversify their supply chains. Finally, 19% are exploring M&A opportunities.

100%

Q17 What is your strategy for the adoption of automation?

90%

80%

We use automation to drive greater efficiencies and reduce costs 47.22% (17) We use automation to fill gaps or increase capacity 16.67% (6)

70%

60%

50%

We use automation to create competitive advantage 16.67% (6)

40%

We have very little automation/ not applicable 13.89% (5)

30%

20%

Other 5.56% (2)

10%

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S MA R T M A N U FA C T U R I N G D E L I V E R S H U G E B E N E F I T S

by David Mustin | Marcum llp

MORE DATA, MORE SOLUTIONS Smart manufacturing leverages the Industrial Internet of Things (IIOT), a network of interconnected sensors and devices that collect data and assemble it all in one place. Because it involves multiple devices, it makes your production smarter and allows you to precisely track throughput. You can understand things on a granular and holistic level. By knowing which machines are running well and which aren’t, you can predict failure points before they happen. Or you can see how heat, humidity, or volatile gases are threatening a job, allowing you to take action to protect employees and machines to avoid downtime. The net result is better and safer production, which leads to lower costs and more sales. AVOIDING FAILURE POINTS One machine can create a cascade of issues in a manufacturing process. Smart manufacturing provides critical real-time data that arms you with the knowledge necessary to make much faster decisions about job scheduling. You can be proactive and not reactive. For example, smart manufacturing offers the option of setting alerts for a vast array of situations, including when a machine slows down or stops, when there are delays anywhere in the line, or even when there are issues related to the operator of a machine. Sensors can detect movement or people around dangerous areas and can either warn people nearby or even automatically stop the machine for safety. Alerts can be tailored to reach the appropriate managers along the chain of command so they can act fast. NOT THE SAME AS ERP ERP machines don’t see inventory in real time. They don’t have trackers and sensors to let you see where and when a product moves or know right away when inventory needs to be replenished. Unlike ERP, smart manufacturing also shows which machines are the most productive. If a machine is

Most manufacturing leaders have access to plenty of insightful data about their companies’ financial performance, and enterprise resource planning (ERP) systems have helped companies understand systems and processes better than ever. But there’s a lot more data out there that can provide real-time information about how things are going on the shop floor. You can capture all of that data by embracing smart manufacturing. Simply put, smart manufacturing helps your facilities run more efficiently, safely, and effectively. It uses sensors on your equipment to let you know what’s happening on the floor in real time, allowing you to find and act on challenges and opportunities immediately. BECOME MORE COMPETITIVE Manufacturers are always striving to reduce costs, increase capacity, boost efficiency, and beat the competition. You might have an ERP for data around your operations, but that information won’t tell you what’s happening right on your floor minute by minute. Smart manufacturing collects data and analyzes it to help you make better decisions. Smart manufacturing is simple and inexpensive to implement. It delivers five principal benefits: 1. Increased labor and equipment efficiencies. 2. Improved inventory management (you can precisely monitor supply on hand, reorder points, lead times, etc.). 3. Better understanding of service and maintenance needs, which reduces costly machine downtime. 4. Enhanced worker safety (preventing injuries that incur workers’ comp costs, lower productivity, and increase liability). 5. Higher quality (you can catch problems before they reach your customers).

failing, slowing down, or wearing out, you’ll know immediately – and you’ll know if it needs service or if the operator is the problem. Getting down to these root causes means you nip problems in the bud. And with automated tracking of inventory and production, you can avoid stockouts, order inventory in a timely and prudent manner, and stay proactive across every element of your operation. BUILT FOR THE FUTURE Smart manufacturing is perfect for any kind of manufacturing, but it’s especially ideal for additive manufacturing and technology like 3D printing, which allow you to pilot test products with very little investment. These new technologies are causing everyone to think differently about manufacturing. Smart manufacturing lets you be a nimbler, more flexible, and more profitable manufacturer regardless of what you’re making. GETTING STARTED Harnessing all that knowledge and data may sound daunting and expensive, but pilot projects are very cost-effective and can be done on a small scale. That means your first step can be very affordable, allowing you to see how smart manufacturing works and whether it’s helping your meet your goals. Pilot projects come together fast and can vividly illustrate the benefits. Marcum can do an assessment that helps you understand needs and budget, and help you pick the right solutions. This can be part of a broader assessment, allowing you to adopt best practices across your whole operation (including your ERP system) and harness the power of the IIOT. Marcum tailors every solution to meet the needs of each client. Whatever your goals – efficiency, inventory management, quality, or safety – Marcum can get you there.

David Mustin, Vice President – Strategic IT Consulting, Marcum LLP 440.459.5755

THE 2021 MARCUM NATIONAL MANUFACTURING SURVEY

BUSINESS STRATEGIES (continued)

PRODUCT R&D Companies Devote Considerable Resources to R&D

NEW PROJECTS Establishing New Offerings

Thirty-six percent of respondents launched a new product or service in the past 12 months. Some of these were in response to the pandemic, with manufacturers pivoting to make personal protective equipment (PPE) or other high-demand items. And 14% of these companies intend to permanently offer those new COVID-related products.

Growth-oriented manufacturers are always striving to find better solutions. Respondents indicated that they spend anywhere from half a percent to a high of 20% of revenue researching and developing new products, with most saying they are in the range of 5%. A variety of activities, including improving existing processes, developing new processes or systems, and creating new products or services all qualify as R&D expenses eligible for tax credits.

EXPORT/IMPORT Global Marketplace

Globalization continued to increase among manufacturers, with 64% of respondents saying they export (up 6% from our last survey) and 39% saying they import some of their goods. Among the exporters, 68% expect to increase or remain steady on exports in the coming year.

100%

Q20 Over the next 12 months do you expect to?

90%

80%

70%

60%

Increase your exports 38.89% (14)

50%

None of the above 27.78% (10)

Hold your exports steady 27.78% (10)

40%

Increase your imports 19.44% (7)

30%

Decrease your imports 5.56% (2)

20%

Decrease your exports 5.56% (2)

Hold your imports steady 5.56% (2)

10%

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COVID-19: THE PANDEMIC’S IMPACT

90%

Paycheck Protection Program (PPP) loans 74.29% (26)

Q21 Did you take advantage of any of the funding made available through the federal stimulus legislation?

80%

70%

60%

50%

40%

Employee Retention Tax Credits (ERTC) 22.86% (8)

30%

Other 17.14% (6)

20%

Main Street Lending 5.71% (2)

Economic Injury Disaster Loans (EIDL) 2.86% (1)

10%

We totally shifted to the production of several PPE-related product lines for several new customers. - SURVEY RESPONDENT “ ”

PPP2 Government Programs Provide a Boost The federal government continued to enact policies and programs to limit the economic threat from COVID-19. One element of this was a second round of PPP lending (PPP2). Companies that used their first round of PPP on eligible spending could apply for PPP2 loans. The majority of our respondents accessed PPP, and 49% planned to tap PPP2 while 6% were undecided. Stay tuned for next year’s survey to see how many respondents took advantage of PPP2.

THE 2021 MARCUM NATIONAL MANUFACTURING SURVEY

COVID-19: THE PANDEMIC’S IMPACT (continued)

Given that the virus remains a threat to physical and economic health, we were not surprised to find most respondents indicating they believe the pandemic will result in permanent changes to how they do business. “ ”

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100%

Q23 Will the pandemic permanently change the way you manage:

90%

80%

70%

60%

Workforce safety measures 45.71% (16)

Workplace environment 40.00% (14)

50%

Do more with less 40.00% (14)

Adoption and deployment of technology 25.71% (9)

40%

Workforce headcount 17.14% (6)

30%

Supply chain 20.00% (7)

Logistics 17.14% (6)

20%

10%

Other 2.86% (1)

PANDEMIC’S IMPACT Effects of the Pandemic Remain

LOOKING AHEAD Plenty of Uncertainty Ahead

Staffing challenges are not the only lingering side effect of the pandemic. After more than a year of unusual shortages and price spikes hitting everything from bicycles to lumber, it makes sense that manufacturers are wary about supply chain issues. Ongoing disruptions to the supply chain have hit manufacturers of all stripes. The most common supply chain challenge was controlling costs, with 40% of respondents expressing concern. At least 25% noted difficulty in sourcing raw materials. Given that the virus remains a threat to physical and economic health, we were not surprised to find most respondents believe the pandemic will result in permanent changes to how they do business. Given the general optimism in this cohort, we think those changes could mean efficiency gains or other beneficial approaches. The pandemic has accelerated change, and the best companies are adapting quickly.

Across the board, respondents are aware of the many physical and economic threats posed by COVID-19 and variants like Delta. Having gone from an optimistic outlook in the early summer to alarming case numbers and hospitalizations by the late summer, we still don’t really know when — or if — the coronavirus will stop affecting our daily lives. That uncertainty held true for manufacturers as well, with a majority saying the pandemic permanently changed how they do business. Enhanced workforce safety is a major focus, with 46% saying those measures will stay in place permanently and 40% saying the workplace environment is changed forever. Many manufacturers have also become more efficient during the pandemic, with 40% saying they are now able to do more with less moving forward, 26% adopting and deploying new technology, and 17% lowering long-term headcount. And after more than a year of supply chain disruptions and logistical challenges, 20% of respondents expect permanent supply chain changes and 17% anticipate permanent logistical changes.

THE 2021 MARCUM NATIONAL MANUFACTURING SURVEY

Ransomware, in particular, has affected businesses of all sizes, and access systems. The pandemic accelerated this, as cybercriminals developed fake vaccine sites and other virus-related tools to illicitly gather information. “ ” research has shown that human error is the most common way criminals

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TECHNOLOGY AND PROCESS IMPROVEMENT

OUTLOOK Technology a Key Tool for Driving Improvements

Our survey revealed the extent to which manufacturers are using technology to build and protect their businesses and prepare for the future. While everyone indicated they were using technology, there were some notable gaps in critical areas like ERP, cybersecurity, and data analytics. Keeping these systems robust and consistently using the latest technologies will be critical for future success. We see considerable opportunities for all manufacturing companies to get ahead by taking advantage of cutting-edge technologies. IT PENETRATION TEST OR REVIEW Just as the pandemic altered the landscape of our physical world, it opened many new avenues for cybercrime. As more companies relied on networks to keep business moving, criminals found new weaknesses in cybersecurity systems. And this growing threat is no longer confined to massive companies. Ransomware in particular has affected businesses of all sizes, and research has shown that human error is the most common way criminals access systems. The pandemic accelerated this trend as cybercriminals developed fake vaccine sites and other virus-related tools to illicitly gather information. Manufacturing companies are not immune, and while more than half of survey respondents said they were confident in their network security, only 57% had conducted an IT penetration test within the last year and 14% had never conducted one. With cybersecurity threats constantly evolving and criminals becoming savvier every day, it is critical to keep IT networks secure with both the latest systems and given the vital role of human error in most attacks, the most up-to-date training for employees. OF CYBER PREPAREDNESS Cyber Threats Keep Increasing

THE 2021 MARCUM NATIONAL MANUFACTURING SURVEY

TECHNOLOGY AND PROCESS IMPROVEMENT (continued)

I T P E N E T R AT I O N T E S T : R E V I EW O F CY B E R P R E PA R E D N E S S

by Drew Reusser | Marcum llp

Everyone is talking about cybersecurity — you cannot escape it. When you open a newspaper or magazine, or pull up your news feed, you instantly see a headline about a company getting hacked or falling victim to ransomware, or worse. You might think to yourself, “That is someone else’s company, we are secure. Who would want to target us?” The days of living in the shadows with relative anonymity are over. Everyone leaped at the chance to get online, and with 21st-century tools come 21st-century problems. The speed at which the security landscape changes is measured in hours, and resilience is the key to surviving today’s modern connected world. According to the 2021 Marcum Manufacturing Survey, 54% of respondents felt confident or very confident that their technology is protected against cyber threats. Forty- three percent said they were neutral and 3% said they felt panicked. That tells me that about half of the participating companies have looked at their cybersecurity readiness and feel it is adequate. The rest either know their status and know they are not in the best place or, more worryingly, don’t know their current cybersecurity readiness. One of the best ways to know your cybersecurity status is to have an IT professional perform a penetration test and/or a cyber-preparedness assessment. According to Marcum’s survey, 57% of respondents have performed a review/assessment in the last year, and 23% have done so in the last two years. Concerningly, 20% said they have not performed a review/assessment in the last five years or have never performed an external review/assessment. That 20% of companies are very exposed to threats.

In any manufacturing company, your four biggest systems are the accounting system, enterprise resource planning (ERP) system, email, and the voice system. In the survey, Marcum asked how long it had been since the last major ERP system update was performed. A respectable 43% said that it had been less than a year, while 31% said one to three years, and 26% said greater than three years. While some manufacturers come out with patches rather infrequently, some vendors release patches monthly. Not performing upgrades to your ERP system leaves one of your four most critical systems exposed to known, and possibly actively exploited vulnerabilities. As I mentioned in my opening paragraph, resilience and speed are key to not falling victim to the latest headline- grabbing hack. There are a few ways to increase resiliency and give yourself a fighting chance: Isolate your production systems from your back- office users and the internet. Use a modern spam and anti-malware email gateway to filter incoming/outgoing emails. Store good backups of your data and validate that they are solid on a regular basis. Implement good security awareness training, which helps educate your employees and contractors about cybersecurity and threats. Regularly review your policies and procedures to ensure they are up to date and meet the needs of the ever-changing security landscape. If you would like to know more about how Marcum can help you with these and other services, please visit: https://www.marcumllp.com/services/advisory/ technology-consulting/cybersecurity-digital-forensics/ cyberinspect X X X X X

Drew Reusser, Senior Manager – Cybersecurity Defense & Threat Management, Marcum LLP 949.236.5718

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100%

Q29 What ERP (Enterprise Resource Planning) are you using as your primary system?

90%

80%

70%

60%

Other 48.57% (17)

Microsoft (SL, GP, NAV, AX, Dynamics, Business Central, Other) 5.71% (2)

IQMS 2.86% (1)

50%

40%

Oracle (Netsuite, Oracle ERP, Other) 8.57% (3)

Infor (Syteline, Cloudsuite, M3, other) 5.71% (2)

30%

Global Shop Solutions 8.57% (3)

20%

Epicor 11.43% (4)

Sage (50, 100, 300, 500, Intacct, Other) 5.71% (2)

10%

None 2.86% (1)

Acumatica 0.00% (0)

Syspro 0.00% (0)

SAP (Business One, S/4Hana) 0.00% (0)

ERP ERP Keeps Evolving

OPERATIONS MANAGEMENT INITIATIVES Staying Lean Remains Important

Most manufacturers use some kind of ERP system to track and measure critical business activities, but many could be missing out on the latest offerings for manufacturers in this quickly evolving segment. Only 43% of respondents had completed an ERP update within the last year, and many respondents are using large-scale ERP systems that may not be tailored to the needs of small and mid-sized manufacturers. The latest ERP systems offer flexible solutions designed for manufacturers of all stripes. They are typically cloud-based, modular platforms that can be highly specialized to customers’ needs. A good technology advisor can help navigate the options and possibilities offered by these newer systems, which are variably priced and much easier to implement than legacy systems.

Most survey respondents apply at least one formal operations management approach to keep production processes lean and optimized. Using Lean Six Sigma elements was the most common, followed by others like kaizen. Formal systems for getting and staying lean help improve quality, productivity, and financial results. DATA ANALYTICS Data Analytics Is an Opportunity for Most Manufacturers can access more data than ever before. They can even track how individual machines perform a given task under an array of circumstances. But that data is only useful if it’s properly gathered and analyzed. Just 14% of respondents said they have both a robust data warehouse and real-time dashboard systems, meaning almost everyone has room to make huge improvements here. Using data to drive your decisions and, in many cases, to ensure compliance is critical. And it doesn’t have to be difficult. Data analytics services can be tailored to your specific goals and needs.

THE 2021 MARCUM NATIONAL MANUFACTURING SURVEY

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ECONOMICS, POLICY, AND TAXES

TAX INCENTIVES Most Manufacturers Use Tax Incentives Our survey revealed that 80% of respondents use some kind of tax incentive. The R&D tax credit, which we detail elsewhere in this report, was the most popular, with companies also using accelerated depreciation/cost segregation, the Employee Retention Tax Credit, and various state and local credits. Given the many legacy tax incentive programs and newer ones that have emerged during the pandemic, it could be a good time to carefully review how and where you’re using tax incentives to ensure you’re not leaving money on the table.

IMPACT OF BIDEN ADMINISTRATION Administration Change Brings Challenges, Possibilities With a new administration and a new party in power in Washington, we asked how that might affect business. Like the vote in the country itself, the results here were evenly split. While 40% expected either a positive impact or no impact, 40% worried about a negative impact. Another 20% were unsure. Given the possibility of increased spending on projects that benefit manufactures (like infrastructure) coupled with

the likelihood of higher taxes, a split vote is unsurprising. POLICY PRIORITIES AROUND NEW ADMINISTRATION Political Priorities for Manufacturers

Digging deeper, we asked what priorities manufacturers would like the Biden administration to pursue. The top responses, with 51% each, were lower taxes and promoting workforce training. Initiatives to boost domestic manufacturing were a close second, followed by investing in infrastructure and reducing tariffs.

Q34 Are you taking advantage of the following tax incentives?

100%

90%

80%

70%

60%

Employee Retention Tax Credit 31.43% (11)

Accelerated depreciation/cost segregation 42.86% (15)

R&D tax credit 48.57% (17)

50%

State and Local tax credits 31.43% (11)

40%

30%

None of the above 20.00% (7)

20%

Work Opportunity Tax Credit 0.00% (0)

10%

THE 2021 MARCUM NATIONAL MANUFACTURING SURVEY

THREATS AND CHALLENGES

BIGGEST CONCERNS MOVING FORWARD As companies build strategies for the future, they naturally consider their most significant challenges. We asked what those were, and respondents overwhelmingly chose issues surrounding labor as the top threats. Sixty-nine percent expressed concern about finding skilled labor; other top concerns included workforce training (40%), spiraling healthcare costs (37%), retirement of skilled laborers (34%), and succession planning (23%).

Worries about government also weighed heavily, specifically higher taxes (31%) followed by increased regulations (17%). A notable cohort of 23% remains concerned about the continuing impact of the pandemic. Fundamental business challenges were also an issue, with 23% worried about managing their supply chain relationships and 17% worried about increased competition.

Q38 What are your top supply chain challenges?

100%

90%

80%

70%

60%

Production scheduling 11.43% (4)

50%

Controlling costs 40.00% (14)

40%

Raw material sourcing 25.71% (9)

Meeting customer

30%

expectations 14.29% (5)

On-time delivery 8.57% (3)

Others 0.00% (0)

20%

10%

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Q35 How do you anticipate your business being impacted by the proposed economic policies of the Biden administration?

100%

90%

80%

70%

60%

50%

Negative impact 40.00% (14)

No significant impact 22.86% (8)

40%

30%

Don’t know/Not sure 20.00% (7)

Positive impact 17.14% (6)

20%

10%

THE 2021 MARCUM NATIONAL MANUFACTURING SURVEY

SURVEY RESULTS 1| What is your job function? President/CEO/Owner 60.47% CFO or financial lead 18.60% COO or operations lead 0.00% GM/plant manager or equivalent 2.33% Human resources/personnel 13.95% Other (please specify) 4.65% 2| Which one of the following best describes your company’s primary business?

5| How did your company’s 2020 revenues compare to 2019?

Up 10% or more

25.64%

Up about 5%

7.69% 7.69%

Flat (no growth) Down about 5% Down 10% to 20% Down more than 20%

10.26% 33.33% 15.38%

6| Looking back on the last 12 months, did your company’s workforce grow, shrink, or stay about the same?

Discrete manufacturer

46.51%

Process control manufacturer Combination of discrete and process control manufacturer

9.30%

Grew 10% or more

15.38%

Grew 5%

2.56%

18.60% 18.60%

Stayed about the same

33.33% 15.38% 25.64%

Other

Shrunk 5%

Not applicable

6.98%

Shrunk 10% to 20%

Shrunk more than 20%

7.69%

3| Howmany employees (full- and part-time) does your company employ in all its facilities?

7| Is workforce recruitment a critical issue for you? Yes

Less than 25

18.60% 41.86% 27.91%

87.18% 12.82%

26 – 100

101 – 500 501 – 1000

6.98% 4.65%

8| Over the next two years, howmuch do you expect to adjust average compensation (including benefits) to attract new workers?

More than 1000

4| In 2020, what were your company’s annual revenues? We are pre-revenue 2.56% $0 – 10 million 41.03% $11 – 50 million 35.90% $51 – 150 million 10.26% $150 million + 10.26%

More than 10%

12.82% 35.90% 33.33% 10.26%

5 – 10%

1 – 5%

We are not adjusting compensation.

Unsure

7.69%

Not applicable - We do not struggle to recruit new workers

0.00%

9| Looking ahead the next 12 months, do you see your manufacturing revenues:

Increasing? Decreasing?

79.49%

5.13%

Staying the same?

15.38%

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15| At a very high level, what are your company’s TOP THREE business strategies? (Please rank order them – 1 being highest, 3 being lowest)

10| In the next 12 months, does your company expect to increase or decrease the size of its workforce, or will it stay the same?

1(Highest)

3(Lowest)

Increase (by 10% or more) Decrease (by 5% – 10%)

53.85% 10.26% 35.90%

Product/service expansion and innovation 55.88% 29.41%

14.71%

Stay about the same

Geographic expansion

15.79% 42.11% 42.11%

11| Looking ahead four years (2021-2024), what percentage of your employees will need to be replaced due to retirement?

Expand through acquisition

25.00% 15.00% 60.00% Compete on price 36.36% 27.27% 36.36% Offer/introduce/expand customized/specialized manufacturing 25.93% 48.15% 25.93% 16| Which of the following actions are among your company’s top priorities:

0% – 5%

53.85% 30.77% 15.38%

6% – 15% 16% – 25% 26% – 30%

0.00% 0.00%

>30%

12| Excluding PPP loans, over the past year, has your ability to secure financing:

Seeking M&A opportunities Supply chain diversification

19.44% 22.22% 47.22% 58.33% 50.00% 44.44% 72.22%

Investing in technology

Increased Decreased

25.64%

Cutting costs

5.13%

Increasing the use of technology in your company (Industry 4.0/digitalization)

Stayed the same

69.23%

Entering new markets

13| Looking ahead over the next 12 months, do you expect your ability to secure financing to:

Recruiting skilled workers

17| What is your strategy for the adoption of automation? We use automation to drive greater efficiencies and reduce costs. 47.22% We use automation to fill gaps or increase capacity. 16.67% We use automation to create competitive advantage. 16.67% We have very little automation/not applicable. 13.89% Other (please specify) 5.56%

Increase Decrease

38.46%

2.56%

Stay the same

58.97%

14| Rate your outlook for the manufacturing industry in the coming year:

Very positive

41.03% 35.90% 17.95%

Somewhat positive

Neutral

Somewhat negative

2.56% 2.56%

Very negative

THE 2021 MARCUM NATIONAL MANUFACTURING SURVEY

SURVEY RESULTS (continued)

21| Did you take advantage of any of the funding made available through the federal stimulus legislation?

18| In the past 12 months, my company has started new projects including: …actively engaging with high schools, vocational schools or community colleges by hosting plant tours, internships,or similar activities for students 47.22% …collaborating with local educational institutions for workforce training and recruitment 36.11% …the development of a formal, company-sponsored training or apprenticeship program 33.33% …the development of a formal strategic growth plan 33.33% …initiating a merger or acquisition 5.56% …launching a new product or service 36.11% …launching a new automation or technology project within our operations 50.00% …implementing a new or upgrading an existing ERP system 33.33% …launching a new cyber security program to protect our facilities, equipment, intellectual property and IT systems 33.33% …“big data” or predictive analytics to help facilitate decisions 13.89% …launching a 3D printing/additive manufacturing capability for prototyping or product production 16.67% …launching digital manufacturing, internet of things, connected machines, or similar technologies 16.67% 19| Do you export or import? Export 63.89% Import 38.89% Neither 27.78% 20| Over the next 12 months do you expect to? Increase your exports 38.89% Decrease your exports 5.56% Hold your exports steady 27.78% Increase your imports 19.44% Decrease your imports 5.56% Hold your imports steady 5.56% None of the above 27.78%

Paycheck Protection Program (PPP) loans Economic Injury Disaster Loans (EIDL)

74.29%

2.86% 5.71%

Main Street Lending

Employee Retention Tax Credits (ERTC)

22.86% 17.14%

Other

22| Do you plan to apply for PPP2 loans? Yes

48.57% 45.71%

Uncertain or don’t know enough

5.71%

23| Will the pandemic permanently change the way you manage:

Logistics

17.14% 20.00% 45.71% 17.14% 40.00% 40.00% 25.71%

Supply chain

Workforce safety measures Workforce headcount Workplace environment

Do more with less

Adoption and deployment of technology

Other (please specify)

2.86%

24| Did your company make production pivots (e.g., PPE or shift to alternative product lines, adoption of new product lines) since the beginning of the pandemic?

85.71% 14.29%

Yes

25| If yes to question 28, do you plan to continue producing these new or alternative products?

Yes, permanently

14.29%

Yes, for the near-term future (e.g., through the COVID-19 pandemic)

14.29% 71.43%

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30| How long has it been since your last major update to your ERP?

26| Has your company delayed the purchase of equipment due to the pandemic?

< 1 year 1-3 years 3-5 years > 5 years

42.86% 31.43%

Yes

45.71% 54.29%

2.86%

27| How confident are you that your technology is protected against cyber threats?

20.00%

Don’t know/not applicable

2.86%

Very confident

8.57%

31| Are you experiencing issues in any of the following areas:

Confident

45.71% 42.86%

Neutral

Inventory management/control

20.00% 28.57%

Shaky

0.00% 2.86% 0.00%

Operational efficiency/effectiveness

Panicked

Preventative maintenance

5.71%

Don’t know or don’t understand this question

Quality control

17.14% 34.29% 22.86%

28| When was the last time you had an IT professional perform an IT penetration test or review your cyber preparedness?

Workforce acquisition and development

Supply chain management Worker health and safety None/not applicable/unknown

5.71%

25.71%

Within the past month Within the past year Within the past 2 years Within the past 5 years

31.43% 25.71% 22.86%

32| Do you currently have any of the following roles or have you implemented any of the operations management initiatives below:

5.71%

Never

14.29%

Green Belt Yellow Belt Black Belt

20.00% 11.43%

29| What ERP (Enterprise Resource Planning) are you using as your primary system?

8.57%

Gemba Walks/Kanban/Kaizen

20.00% 28.57% 28.57% 42.86%

Acumatica

0.00%

5S-6S/Root Cause Analysis/5 Whys Other lean manufacturing initiatives

Epicor

11.43%

Global Shop Solutions

8.57% 5.71% 2.86% 5.71% 8.57% 5.71% 0.00% 0.00%

None

Infor (Syteline, Cloudsuite, M3, other)

IQMS

Microsoft (SL, GP, NAV, AX, Dynamics, Business Central, Other) Oracle (Netsuite, Oracle ERP, Other) Sage (50, 100, 300, 500, Intacct, Other)

SAP (Business One, S/4Hana)

Syspro

Other None

48.57%

2.86%

THE 2021 MARCUM NATIONAL MANUFACTURING SURVEY

SURVEY RESULTS (continued)

36| Rank your company’s policy priorities for the new presidential administration:

33| How are you using data analytics from your operations:

Increase tariffs Reduce tariffs Reduce taxes

17.14% 31.43% 51.43% 34.29% 25.71% 17.14% 11.43% 51.43% 40.00% 42.86% 5.71%

We have no data analytics capabilities. We have historical accounting reports. We have historical accounting and limited shop floor efficiency data. We have a real time accounting dashboard. We have a real time shop floor dashboard. We have a robust data warehouse and real time dashboard systems. We have predictive dashboards that help us understand what is coming and help us prepare.

14.29% 22.86%

34.29%

Additional COVID-19 stimulus funding Promote infrastructure investment

5.71%

14.29%

Promote immigration reform

Improve trade relations with China Promote clean-energy options

5.71%

Promote workforce training

2.86%

Reshoring of manufacturing to the U.S.

34| Are you taking advantage of the following tax incentives?

Buy America programs

Others

2.86%

37| What do you anticipate will be your greatest challenges in 2021?

R&D tax credit

48.57% 42.86% 31.43%

Accelerated depreciation/cost segregation

Employee Retention Tax Credit Work Opportunity Tax Credit

Securing skilled labor Succession planning

68.57% 22.86% 34.29%

0.00%

State and Local tax credits

31.43% 20.00%

Retirement of skilled workers Workplace health and safety

None of the above

8.57%

35| How do you anticipate your business being impacted by the proposed economic policies of the Biden administration?

Workforce training Healthcare costs

40.00% 37.14%

Lending/access to capital

5.71%

Higher taxes

31.43% 17.14% 22.86% 22.86%

Positive impact

17.14% 22.86% 40.00% 20.00%

Increased regulatory environment Continued impact from pandemic Managing supply chain relationships Keeping up with technology/innovation

No significant impact

Negative impact

Don’t know/Not sure

8.57%

Cybersecurity foreign sources

11.43% 17.14%

Increased competition

38| What are your top supply chain challenges? Meeting customer expectations

14.29%

On-time delivery Controlling costs

8.57%

40.00% 11.43% 25.71%

Production scheduling Raw material sourcing

Others?

0.00%

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