Why are middle market manufacturing companies becoming more complex?

Operating a middle market manufacturing company in the United States has become increasingly difficult over the past decade. With the cost of capital remaining higher than in recent periods, manufacturing businesses must be ever more intentional about the operational levers they pull to drive additional enterprise value. Leadership teams must strike a balance between meeting the needs of the current business and making strategic capital investments to spur future growth.

Planning and forecasting are paramount but have become more difficult in the manufacturing sector, as owners and operators navigate more globalized supply chains and an evolving economic outlook due to tariff and trade uncertainties, rising costs and a constrained labor supply.

As a result of those converging factors, the manufacturing sector has continued to contract. The Institute for Supply Management’s Manufacturing Purchasing Manager’s Index was 49.1 in September, representing the seventh consecutive month that the index fell below 50 (the indicator for contraction). Middle market sentiment has fallen to its lowest point since 2020, according to the Q3 2025 RSM US Middle Market Business Index survey. In addition to rising costs, continued uncertainties around future trade policies hinder many executives from making large capital investments at this time.

Still, manufacturers can take several actions to adapt to this complicated environment, such as investing in technologies—like digital twins—to make planning and forecasting more accurate; and in other advanced technologies—such as artificial intelligence and automation—to improve operational efficiency.

Here’s a closer look at the key factors driving business complexity for manufacturers:

1. High cost of capital: The cost of capital remains high, driven by elevated interest rates and inflation. The federal funds rate—which remained well below 1% for much of the period between 2008 and 2021—has exceeded 4% since 2023. This places greater focus on the decisions of company leaders, specifically those managing strategic investments. For a company to increase its enterprise value, the returns on such investments need to exceed the cost of capital. Thus, capital investments have become riskier.

2. Globalization of supply chains: Driven by historically low interest rates from 2008 through 2021, middle market businesses made investments that increased their global presence. While this drove enterprise value growth, it also brought about more complex supply chains as trade policy and the regulatory environment shifted. As a result, leadership teams now need to have a precise and nuanced understanding of the complexities of their global supply chains to meet customer demands and gain a competitive edge.

3. Constrained labor supply: The battle to hire and retain manufacturing talent continues—especially talent with the skill sets needed to adopt and integrate new technologies and automation into their everyday job responsibilities. Employers are currently dealing with a job market slowdown, fueled in part by the administration’s immigration and trade policies. The manufacturing industry experienced a decrease in net monthly payroll for August 2025, down 78,000 jobs, or 0.6%, since August 2024, according to the U.S. Bureau of Labor Statistics.

4. Technological competition: While advanced technologies are a key solution in adapting for success in this environment (more on that below), the race to implement AI and automation also adds a new layer of complexity for many businesses. Challenges include implementing these technologies strategically and intentionally, ensuring teams understand how to implement them, and, of course, managing the upfront costs of new technologies in an environment of high capital costs.

How can manufacturers stay competitive in an increasingly complex environment?

As manufacturing companies grow more complex, effective planning and forecasting are essential to remain agile and competitive. Investments in advanced technologies, including the following, are central to this effort:

• Digital twin models: Using virtual replicas of physical processes powered by real-time data, manufacturers can simulate operations to anticipate performance, uncover inefficiencies and make more informed capital investment decisions.
• AI and automation: Strategic investments—especially in AI, automation and smart manufacturing—are essential for manufacturing companies looking to reduce costs and increase efficiencies. According to the RSM Middle Market AI Survey 2025: U.S. and Canada, over three-quarters (76%) of respondents said they have a budget for making investments in AI. Of those respondents, a combined 88% expected their AI budget to increase in the coming fiscal year (31% expected a substantial increase, and 57% expected somewhat of an increase). The uncertainties in the economy make it more difficult to execute on these investments.
• Smart manufacturing technologies such as Internet of Things devices: Using internet-connected devices and sensors in the manufacturing process, companies are able to better collect and exchange data. As a result, decision makers gain real-time data to make more informed decisions.

Although interest rates were cut in September and October, the cost of capital remains elevated. Businesses must assess which levers to pull—whether refining pricing and product strategies to drive sales, enhancing production efficiency and optimizing supply chains to reduce costs, or investing in new facilities, AI, and automation—to maximize enterprise value.