The Top 5 Challenges Facing Building Products Manufacturers in the Construction-Driven MarketHow to Meet Them Head On

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Table of Contents

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Introduction

Business Challenges and Opportunities

Tapering Industry Growth

Demand Up Due to Natural Disaster

The Impact of Tariffs

Prefabricated Construction Gaining Traction

Adoption of Technology and Innovation

Microsoft Dynamics 365: Meeting Challenges in Building Manufacturing

About Alithya

Notes

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The construction market is a key driver of both the global and

domestic economy. After making strong gains in 2017 and 2018,

2019 growth plateaued, then COVID-19 and 2020 hit.

While it will be years before we can fully assess the pandemic’s

impact on any industry, manufacturing for construction

included, corporations have had to act quickly to respond to

the virus. As such, 2020 has generated an onslaught of new

concerns. For building products manufacturers, those concerns

include demand disruptions, workforce stability and safety,

manufacturing ecosystem viability, digital capabilities, financial

stability, and the overall concern of a global recession.

Outside of COVID-19, the long-term demand for building

materials continues to rise despite widespread labor shortages.

For both discrete and process manufacturers whose products

are largely driven by the construction market, insight into what’s

happening in this robust industry directly correlates to their

business.

This eBook looks at manufacturing market sectors that are

particularly impacted by fluctuations in construction activity —

and examines the challenges they share with an added lens of

where the global pandemic fits in. It also presents how Microsoft

Dynamics solutions can be effective tools for building products

manufacturers to meet those challenges head-on as they

pursue their enterprise objectives.

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1. IntroductionThe construction industry is a major contributor to our nation’s economy. According to Ken Simonson, Chief Economist for the Association of General Contractors, over $1 trillion in structures are created each year in a robust industry that employs over 6 million workers.1

Analysts and economists anticipated a slowdown in growth in 2020.2 According to FMI, total engineering and construction spending in the U.S. was forecasted to end up 1% in 2019, compared to 4% growth in 2018.3 With the novel coronavirus starting in 2019 and fully taking hold of the world economy in 2020, growth projections are currently difficult to accurately evaluate.

It’s an industry that’s not without its major challenges and uncertainties. It continues facing one of the longest running labor shortages in US history with no end in sight. Companies that manufacture products that go into the building of commercial and residential structures are affected by changes in the construction market.

The building products manufacturers that are bearing the brunt of the pressures from changes in the construction market include:

Architectural and structural metals and minerals: Manufacturers of metal-framed windows and doors, sheet metal work, ornamental or architectural metal products, prefabricated metal buildings and structural metal, metal plate work products, countertops and architectural stones.

Plastic resin and synthetic fibers: The construction industry has become one of the largest users of plastics in the United States. Plastics are used to make decking, roofing materials, piping, structural insulated panels (SIPs) and windows. Building products manufacturers continue to find new applications for plastics.

HVAC equipment: Residential and commercial heating, ventilation, air-conditioning (HVAC) and air-purification equipment, as well as commercial refrigeration equipment.

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Cement and concrete: Cement, ready-mix concrete and concrete products such as blocks, pipes, bricks, walls and girders.

Wood products: Dimensional lumber; veneers, plywood, engineered wood members, or reconstituted wood products; wood window units and interior and exterior doors, garage doors, wood flooring and other millwork, wood containers, pallets, prefabricated wood buildings, manufactured homes, cabinets and countertops.

Switch, connector and other wiring devices: Current-carrying electrical wiring devices, including bus bars, switches, connectors and electrical receptacles (outlets) and plugs.

Paint and coatings: Paints, varnishes, lacquers, enamels and other coatings.

Lighting equipment: Electric light bulbs and tubes, as well as lighting fixtures, lamp shades and other components and parts.

While these markets encompass both discrete and process manufacturers, the challenges resulting from the dynamics of today’s construction market impact them equally.

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2. BUSINESS CHALLENGES AND OPPORTUNITIESIn concert with COVID-19, five major trends are influencing the construction industry at this moment:

> Tapering industry growth

> Increase in demand due to natural disasters

> The impact of recent tariffs

> Prefabricated construction gaining traction

> Adoption of technology and innovation

TAPERING INDUSTRY GROWTH

AIA’s Consensus Construction Forecast predicts nonresidential construction will see the biggest growth, with 2.4% expected in 2020.4

Leading into 2020 and compared to 2018, manufacturers’ outlook for the future has dropped significantly, from a 93.5% positive outlook in Q1 of 20185 to 68% in Q3 of 2019, according to the National Association of Manufacturers’ Outlook Survey.6 For the seventh straight quarter, manufacturers cited “the inability to attract and retain a quality workforce” as a top business concern.

In August 2019, the U.S. manufacturing PMI (purchasing managers index) dropped below the neutral 50.0 threshold for the first time in a decade.7 The survey revealed that both new orders and export sales for manufacturers dropped drastically for the first time in ten years, due in part to ongoing tariff changes and general uncertainty of the future.

While growth momentum was tapering as we entered 2020, the introduction of COVID-19 has been and will continue to be a major catalyst for uncertainty and instability going forward. From crisis management to workforce to operations and supply chain to financial reporting to tax and trade, there’s no shortage of immediate issues facing building products manufacturers. And all of these issues will certainly harm industry growth.

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DEMAND UP DUE TO NATURAL DISASTERS

From major hurricanes in Texas, Florida and Puerto Rico to heat and cold waves, blizzards, floods, tornados and wildfires, 2017 was the costliest year ever for weather-related disasters, putting damage estimates at over $300 billion, and the trend continues.8 When nature deals her most brutal blows, one of the key challenges is rebuilding.

The result is a sharp spike in demand for materials and labor immediately following a disaster that can last for weeks, months and years — which creates a potential bounty for building products manufacturers. One of the key challenges becomes managing material costs, which tend to rise with extreme demand spikes, particularly in the short term.9 Another critical concern is having enough experienced workers to handle the magnitude of the rebuilding efforts. This is compounded by the fact that the construction industry overall is experiencing a shortfall of skilled labor.

To keep up with this increased demand for labor, companies are being required to plan and execute work more effectively. This is ultimately driving the need for more sophisticated information systems in the construction industry.

A related trend for construction-related manufacturers to consider is resiliency. When rebuilding after disasters, it’s not just about putting up replacement structures. It’s about resiliency too. In fact, due in large part to the most recent influx of natural disasters, more owners are likely to demand resilient site and structure features as they undertake rebuilding.

The United States government is fueling the demand for resiliency by placing more emphasis on the importance of keeping critical infrastructure up and running during disasters. In November 2017, the U.S. Green Building Council (USGBC) announced it is adopting construction-standard RELi, which gives building projects points for resilient features like adaptive design that can tolerate extreme weather conditions. The industry is likely to see more resiliency-based projects take shape, similar to the rebuilding of earthquake-resistant skyscrapers in California.9

COVID-19’s Impact

Demand and natural disasters don’t stop because of a health crisis. Although social distancing and various shutdowns have impacted operations, projects are continuing, albeit slowly. Policies and protocols vary from state to state and project to project and will likely continue to evolve as the world progresses through the COVID-19 pandemic.

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THE IMPACT OF TARIFFS

The ever-changing landscape of tariffs has had various impacts on raw materials and finished goods, the effects of which are creeping into the housing market and impacting construction as a whole in the United States.

Although the root of these tariffs is the U.S. government’s desire to restore U.S. jobs, construction job openings ballooned from 315,000 in August 2018 to 434,000 in April 2019, then dropped slightly in August 2019 to 379,000.10 The lack of skilled or willing labor still plagues the construction industry.

However, as of Q2 in 2019, tariffs on Chinese goods were equivalent to a $2.5 billion tax on housing, according to the National Association of Home Builders.11 In California, the tariffs have added $20,000 to $30,000 to the cost of an average-size new home, which is affecting the overall market, slowing construction because housing has become unaffordable.

Altogether, the U.S. government’s tariffs (including retaliatory tariffs from other countries) will increase nationwide consumer costs by $105 billion annually. This number takes into account tariffs between Canada and Mexico that were rescinded in order to encourage the border countries to sign a new trade agreement. The US-Mexico-Canada trade agreement (USMCA) is set to enter into force on July 1, 2020. Although, ramifications of COVID-19 driven instability threaten the agreement and ongoing relations.

As the current administration considers future tariffs on raw materials and finished products, the building products manufacturing industry will need to move quickly to keep up with pricing changes and shifting demands.

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PREFABRICATED CONSTRUCTION GAINING TRACTION

As the industry continues to grapple with widespread labor shortages, many are turning to offsite construction as a possible solution.

Prefab has come a long way from the boxy days of mobile classrooms and modular homes. Today’s offsite construction industry offers attractive alternatives for general contractors, particularly those feeling the acute pinch of the labor shortage.

More builders are beginning to realize that manufacturing in a controlled environment has distinct advantages, namely shorter project schedules, which reduce the amount of labor needed to complete a construction project.

Other factors are also fueling the interest in offsite fabrication. For projects that span several labor markets, it’s more efficient for an owner to partner with one or two modular factories than to deal with finding enough workers who are also likely paid differing rates, adding another layer of complexity to the job.12

Education about offsite methods and design possibilities is helping the industry too. Owners are realizing that they don’t necessarily need to trade style for functionality. Plus, it helps when industry giants lead the way. Hotel chain Marriott International recently announced that it plans to use modular construction on 13% its building projects in 2018, which translates into 50 hotels that will contain prefabricated bathrooms or guest rooms.13

More general contractors, realizing the advantages and limitations of prefab construction are taking a best of both worlds approach and using both modular and conventional on projects. With the increased use of building information modeling (BIM), collaboration is more coordinated and happening sooner and more frequently on projects, which helps pave the way for offsite construction to happen.

Prefab construction offers a new market for building products manufacturers to tap into, with varying needs and requirements that will need to be addressed appropriately. This could mean slight alterations to current product offerings or adjusting shipping schedules.

It is important to recognize that the health risks and contagiousness of COVID-19 have both led to increased challenges and concerns for product manufacturing as well as on-site construction. Between following social distancing best practices and full-on production shutdowns in some cases, every industry that relies on an interactive and connected workforce has felt the physical, emotional, and economic weight of the pandemic. While prefabricated construction will continue to gain traction for the myriad of reasons listed here, the complete process has had to grapple with the virus’s reach.

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ADOPTION OF TECHNOLOGY AND INNOVATION

While the construction industry has traditionally been slow to embrace technology, the impact of advanced automation and other innovations are currently being felt in some places.

Nowhere is this more pronounced than in the increased use of drones on construction sites. Drones can rapidly access hundreds of acres, capturing aerial images and other usable data. The drone’s impact on the industry may lie in the wealth of information they can provide.11

Robotics are infiltrating the industry, with more construction companies introducing the technology as a replacement for human labor. Machines are now able to tackle jobs that have been traditionally dangerous to workers.12 Humanoid robots are working in pit mines and tying rebar to create bridges.

Robotic exoskeletons are gaining traction too, as experts estimate that this technology will become a $1.8 billion market by 2025.12

These wearable suits can augment worker strength and ultimately reduce the wear and tear that highly physical work has on the body.

Autonomous vehicles have made their way to job sites. With the introduction of Caterpillar’s mining trucks in 2017, self-driving trucks are becoming a reality.12

The reality of 3-D printing was felt in 2017 as well, with key milestones like the first 3-D printed building and bridge. Many believe that 3-D printing has potential to highly impact the building industry, from shortening projecttimeframes to lowering the cost for materials and labor.13

What do these overall technical advances mean for the industry? On the job site and in manufacturing plants, these changes will likely affect labor supply and demand though it’s not clear yet what the true changes will be. Some predict that automation will replace human workers, which could be a positive benefit given the constant labor shortage. In addition to automating dangerous jobs, technology may replace jobs that are repetitious and mundane and open up other jobs on the construction site. One of the challenges lies in having enough skilled workers trained in using the various technology being adopted.

Many predict that technology and automation will boost productivity. In fact, McKinsey Research estimates that industry productivity will be boosted by as much as 60% which translates into $1.6 trillion in value.12 Further advances in drone, laser scanning, BIM, virtual reality and augmented reality are expected to continue to close the performance gap in construction trades. As more and more companies adopt new technologies, those who don’t keep up with the times will be left in the past.

In a time where human interaction itself puts employees at risk, technology that allows for a safely distanced and protected workforce becomes a mission-critical priority.

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3. MICROSOFT DYNAMICS 365: MEETING CHALLENGES

Microsoft Dynamics 365 (Dynamics 365) can dramatically improve an organization’s ability to cope with the current environment and challenges facing the Building Materials Manufacturing Industry.

Microsoft is one of the top global vendors of ERP and business software. Dynamics 365 is the fastest growing major ERP application and rapidly gaining momentum thanks to substantial investments in functionality and technology, as well as benefits added by integrated modules for CRM, field service and business intelligence. Manufacturing companies choose Dynamics 365 for the following reasons:

> Highly functional

> Ability to handle all types of manufacturing (process, discrete, mixed mode, LEAN)

> Advanced technology and architectural platform

> Ease of use and high end-user adoption

> Global capabilities

> Ability to adapt the application to business changes over time

> Lower cost and effort to support the application on an ongoing basis

Well over 26,000 organizations use Dynamics 365 worldwide, including many Fortune companies. Dynamics 365 has a strong presence in all segments of the building materials industry.

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Let’s look at areas where Dynamics 365 can help make dramatic improvements for manufacturers:

1. CREATES A MORE EFFICIENT FLOW OF MATERIALS THROUGH THE SUPPLY CHAIN VIA PLANNING, SCHEDULING AND COLLABORATION WITH VENDORS AND CUSTOMERS.

Many organizations see a drastic, immediate benefit by combining their disparate systems into one instance of Dynamics 365, providing one common system for visibility and coordination of activities throughout their entire global supply chain. This enables Dynamics 365’s comprehensive planning functions to consider raw material, in process, and finished goods movement requirements across the enterprise to more effectively meet changing demands. Dynamics 365 combines comprehensive planning capability with flexibility and ease of use. It goes beyond other ERP systems with the incorporation of powerful new technologies such as Microsoft Azure Machine Learning used by the Demand Planning engine and the ability to engage with customers proactively utilizing IoT.

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2. HELPS CONTROL COSTS

The skyrocketing costs of certain raw materials make cost control even more important for building materials manufacturers. Dynamics 365 provides companies with a view into all types of costs and their components — from the vendor through manufacturing and rework — including warehouse, transportation, overhead and administrative costs. Business intelligence tools and dashboards help identify cost trends and issues to help companies act proactively instead of after the fact.

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3. FOSTERS INNOVATION

Microsoft has successfully taken traditional ERP systems to the next level, building newer technology innovations into Dynamics 365. A few have been mentioned already – Azure Machine Learning and IoT. Dynamics 365 incorporates familiar unstructured applications — such as Outlook, Office productivity tools and collaborative tools such as SharePoint — with structured ERP applications, which provides workers a seamless and productive workplace. Dynamics 365 is built upon, and capitalizes on, the entire Microsoft Azure cloud platform. For example, the Dynamics 365 platform can be accessed via mobile devices through a Wi-Fi or cell data connection, so that workers can stay connected in the warehouse or in the field. Microsoft’s cloud platform is one of the largest in the world in terms of infrastructure, technological capability, security and power of the various Microsoft application toolsets whether it be data, collaboration, or operations related.

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4. IMPROVES DECISION MAKING

The ability to provide “strong decision-making tools” is traditionally an unfulfilled promise from ERP vendors. Dynamics 365 goes further than ever by providing out-of-the-box business intelligence capabilities and dashboards that are useful today and can be extended as needed. In complex cases, where data needs to be accessed from multiple data sources outside Dynamics 365, Microsoft provides the world’s most common and cost-effective tools to combine all into one business intelligence system.

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5. BOOSTS CUSTOMER SATISFACTION WITH PROACTIVE AND CONNECTED FIELD SERVICE

Microsoft Dynamics 365 for Field Service is a complete, cloud-based field service management solution, including service locations, customer assets, preventative maintenance, work order management, resource management, product inventory, scheduling and dispatch, mobility, collaboration, customer billing, and analytics.

Dynamics 365 for Field Service helps you:

> Optimize your service schedule with efficient routing, resource skill matching, and reduced travel time

> Increase first-time fix rates and on-time delivery performance

> Enhance real-time communication and collaboration between customer service, dispatch, field agents, and customers.

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Summary

From the challenges presented by rapid growth and high demand to regulatory changes and technological advances, manufacturers in the building products industry must continually evolve to meet the needs of a continuously evolving market, so they can remain profitable in an increasingly competitive market. One important way that companies can meet these challenges head-on is by ensuring they have accurate data to make the most informed decisions.

With effective tools and resources, businesses in construction-driven markets can not only look to survive any emerging trends — they can also proactively plan to thrive in the years ahead.

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Notes1 Construction Data, Association of General Contractors, https://www.agc.org/learn/construction-data, 2018.

2 “8 Construction Trends to Watch in 2018,” Construction Dive, https://www.constructiondive.com/news/8-construction-trends-to-watch-in-2018/514284/, January 8, 2018.

3 “Q1 2018 Commercial Construction Index,” USG Corporation & U.S. Chamber of Commerce, https://www.uschamber.com/sites/default/files/q1_2018_cci_2-28_final.pdf, March 6, 2018.

4 “Manufacturers’ Outlook Rosier Than Ever Thanks to Tax Reform,” The Hill, http://thehill.com/opinion/finance/382987-manufacturers-outlook-rosier-than-ever-thanks-to-tax-reform, April 13, 2018

5 “Disaster costs jumped over 60% this year to $306 billion,” CNN Money, https://www.cnn.com/2018/01/08/us/2017-costliest-disasters/index.html, December 20, 2017.

6 “Skilled-labor shortage to impact post-Harvey rebuilding effort,” Construction Dive, https://www.constructiondive.com/news/skilled-labor-shortage-to-impact-post-harvey-rebuilding-effort/504303/, September 6, 2017.

7 “Trump Administration, Despite Rising Lumber Prices, Adds More Tariffs,” Forbes, https://www.forbes.com/sites/scottbeyer/2017/06/30/trump-administration-despite-rising-prices-adds-more-lumber-tariffs/#641d753045da, June 30, 2017.

8 “Trump Administration Issues 30% Solar Panel Import Tariff,” Green Tech Media, https://www.greentechmedia.com/articles/read/breaking-trump-admin-issues-a-30-solar-tariff#gs.tjdTt30, January 22, 2018.

9 “Section 201 Cases: Imported Large Residential Washing Machines and Imported Solar Cells and Modules,” U.S. Trade Representative Fact Sheet, https://ustr.gov/sites/default/files/files/Press/fs/201%20Cases%20Fact%20Sheet.pdf , January 22, 2018.

10 “Five Trends Shaping the Future of Offsite Construction,” Construction Dive, https://www.constructiondive.com/news/5-trends-shaping-the-future-of-offsite-construction/447248/, July 24, 2017.

11 “This New Robot Can Tie Rebar on Bridges — and Cut Labor Hours in Half,”Construction Dive, https://www.constructiondive.com/news/this-new-robot-can-tie-rebar-on-bridges-and-cut-labor-hours-in-half/509801/, November 1, 2017.

12 “This Robot Miner Explores Areas Too Dangerous for Humans,” Construction Dive, https://www.constructiondive.com/news/this-robot-miner-explores-areas-too-dangerous-for-humans/511802/, November 29, 2017.

13 “World’s First 3-D Printed Concrete Bridge Opens to Public,” Construction Dive, https://www.constructiondive.com/news/worlds-first-3-d-printed-concrete-bridge-opens-to-public/508134/, October 25, 2017.

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Additional Sources“Blue-Collar Jobs Are Booming in America,” CNN Money, http://money.cnn.com/2018/01/05/investing/jobs-report-construction-manufacturing/index.html, January 5, 2018.

“Contractors pick up the pieces after Harvey and Irma,” Construction Dive, https://www.constructiondive.com/news/contractors-pick-up-the-pieces-after-harvey-and-irma/505252/, September 20, 2017.

“Labor Shortage Squeezes Builders,” The Wall Street Journal, https://www.wsj.com/articles/labor-shortage-squeezes-builders-1494075600, May 6, 2017

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About Alithya

ALITHYA GROUP INC. IS A LEADER IN STRATEGY

AND DIGITAL TRANSFORMATION IN NORTH AMERICA.

Founded in 1992, the Company counts on 2,000 professionals in Canada, the

United States and Europe. Alithya’s integrated offering is based on four pillars of

expertise: strategy services, application services, enterprise solutions and data and

analytics. Alithya deploys solutions, services, and skillsets to craft tools tailored to

its clients’ unique business needs in the Financial Services, Manufacturing, Energy,

Telecommunications, Transportation and Logistics, Professional Services, Healthcare,

and Government sectors.

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