How Manufacturers Are Turning Volatility Into Value

For manufacturers, cost savings are a never-ending focus, even in the best of times. But today, the global manufacturing sector is facing a new reckoning. Geopolitical disruption, energy volatility and labor shortages are pushing margins to their limit, while the pressure to digitize and decarbonize continues to intensify. In such a unique environment, cost management isn’t just about survival, but about building the foundation for a competitive edge in the years ahead. The companies that will thrive are those prioritizing cost management, supply chain resilience, automation and AI to turn today’s challenges into a long-term advantage.

The pressure on manufacturers’ margins has rarely been higher. According to Bloomberg Intelligence, “solid backlogs have primarily driven revenue, with new demand remaining muted,” suggesting that while manufacturers are working through existing orders, the pipeline of fresh business is running dry. This sense of caution is reflected in the ISM Manufacturing PMI, a key gauge of industry health, which has remained largely in contraction territory since early 2023.

At the same time, tariffs are dominating discussions in the industrial sector. A Bloomberg Media Studios analysis found that tariff discussions on company earnings calls are at an all-time high worldwide, signaling growing concern about economic uncertainty, rising costs, and, consequently, the need for price actions to offset the pressure.

“Everybody's trying to figure out how to cope with tariffs right now, especially when they seem to change every day,” says Willy Shih, a professor at Harvard Business School whose research focuses on supply chains. With tariffs impacting not only China, but also Southeast and South Asia, manufacturers must confront sourcing their inputs elsewhere.

Daniel Küpper, Managing Director & Senior Partner at BCG, points out that tariffs are already driving significant changes across industries, with some impacted far more than others. In particular, the firm is seeing higher sensitivities in wood, paper and furniture production; at a tariff rate of 10%, half of trade in those products could be discontinued.

Tariffs are a critical barometer that manufacturers will increasingly need to account for in the future, Küpper says. “If you create a super-lean, hyperefficient factory of the future, it will still not be sufficient to overcompensate the impact from tariffs for most industries,” he says.

Mentions of most other cost topics on earnings calls have remained consistent, with one exception: Mentions of material costs are rising as companies look for rapid ways to shore up profits. 

“Material costs are always the first cost buckets that companies would address,” notes Küpper. “It's relatively simple. You don't need to deal with laying off your own people.”

In addition to addressing material costs, companies are still pursuing traditional cost management methods, but some—such as offshoring for labor arbitrage—are losing their effectiveness. Offshoring production may offer some savings, but those gains are increasingly eroded by hidden costs, such as transportation and supply chain disruptions. Labor cost arbitrage, meanwhile, is becoming less effective as emerging-market wages rise and tariffs create larger barriers to trade. 

Some pandemic-era strategies, such as freezing investments, are becoming counterproductive. Manufacturers should set aside their expectations for short-term paybacks, Küpper says, and focus on investing in the factories of the future.

According to Bloomberg analysts, one of the biggest trends since late 2023 is the strategic use of the 80/20 rule. Instead of blanket cuts, companies are scrutinizing their product portfolios, identifying top performers, and cutting low-margin or low-volume “tail” products. This targeted approach allows manufacturers to focus resources where they have the greatest impact.

The tactic is gaining traction across companies of all sizes, and it reflects a shift away from across-the-board reductions to smarter, more focused cost-saving measures. Reducing complexity in product engineering and manufacturing is also a trend, Küpper says, but earlier vigilance is key. 

“Cutting back entire products, or at least variants, can play an important role,” he says. “The impact is highest when considering if all variants of the product are needed before actually engineering and developing the product.” At that stage, costs are already defined, creating higher barriers to reducing them down the line.

Küpper’s essential advice aligns with a step many manufacturers are already eying: reengineering supply chains for resilience, even if it means accepting higher upfront costs.

The US relies on substantial imports from Mexico, China and Canada—but since 2022, an increasing number of US-based manufacturers have been moving production closer to home, reshoring hundreds of thousands of jobs and more than doubling their construction spend in the US, according to the Federal Reserve Bank of St. Louis. Shortening supply lines helps avoid overseas disruptions and reduces transportation costs, and also provides more control over quality and timing, while mitigating costs associated with tariffs.

Dual sourcing is also on the rise, as companies seek to avoid single points of failure for critical components. These strategies signal a new willingness to prioritize long-term stability over short-term gains. “We need to double down on local manufacturing sites, and we really need to start investing again into these sites,” Küpper says. “There is no future for just closing sites and shifting them to low-cost countries.”

Manufacturers that are reshoring their facilities must take a strategic and evolved approach to account for higher costs. Protective measures like IP and automation can help. Shih says that companies should ask themselves, “How am I going to harness these new technologies that allow me to reduce my minimum efficient scale and reduce my capital costs?”

Facing a future of persistent cost pressure, manufacturers are turning to AI and standardization to unlock new efficiencies. AI has emerged as one of the most talked-about solutions on earnings calls in 2025. Predictive maintenance, digital twins and AI-powered forecasting are helping companies reduce downtime, optimize production and better manage inventory.

AI can come with hidden tech costs as the complexity of its usage grows, requiring that manufacturers stay vigilant when scaling their technology, as cloud computing costs and data storage fees may rise.

The most forward-thinking manufacturers are reallocating savings from these initiatives into investments in their future—from modernizing infrastructure and accelerating adoption of automation to upskilling the workforce.

These enterprises are building the foundation of a more resilient and competitive manufacturing industry. With the right strategies in place, manufacturers can turn a challenging economic moment into an opportunity for transformation.

“It will not be sufficient to just do what we have already done in the last 30 years,” Küpper says.