It has become commonplace for manufacturers these past few years to throw up their hands and say that they just can’t find a way to compete. But while we may lament those many factory shutterings, we would do well to wonder what at least some of those manufacturers could have done to forestall the inevitable, or even to reverse their fortune. For example, did they consider investing in new products and processes, or take some of the other perhaps lifesaving steps suggested in this article?
With stagnant demand domestically and abroad, a strong Canadian dollar making imports cheaper and exports dearer, and with plant closings and large-scale lay-offs seemingly daily fare, what can Canadian manufacturers do to survive and even prosper in a global economy? Here are five ideas. While they are addressed towards manufacturing, many of them are apply equally to services.
1. Exploit competitive advantages and avoid disadvantages
Long-forgotten competitive advantages may reside in a firm’s history of flexible small-lot production originally nurtured by Canada’s tariff barriers prior to trade liberalization in the 1970s and 80s. These long-dismantled barriers encouraged foreign (mostly American and British) manufacturers to build their products in Canada. As a result, the typical Canadian plant had about one-tenth the capacity of its American or European counterparts. Nevertheless, a smaller scale operation may provide the basis for the lower break-even volumes necessary when targeting the niche markets that are least attractive to larger, less-agile competitors. The market niche may be defined by one or more dimensions, including delivery lead times, minimum order quantities, as well as product options, variants, and customization. To compete in this end of the market, a move towards a make-to-order approach is warranted, so that extensive product variety can be quickly produced and shipped without risky inventory build-up.
Not every presumed liability (such as small size) can be turned into an asset. A particularly deleterious liability for some Canadian manufacturers is a bloated production cost structure. Paying large premiums for people or material, or incurring higher overhead costs for performance that is equivalent or inferior to the competition, is clearly a major competitive disadvantage. The key word here is equivalent. Hopefully, Canadian labour rates will never be as low as they are in countries such as China or Mexico. So it is crucial that employees have the training, flexibility, equipment and tools to add much more value than their lower-paid counterparts elsewhere in the world. In addition, overhead activities that move, inspect and store materials need to be viewed as waste, and eliminated whenever feasible. This requires that the reasons for these activities be continually questioned, with the long-term goal of eliminating the reasons. This could mean moving equipment, improving process capabilities and switching from batch to flow manufacturing. Similarly, local suppliers whose own costs can be even more problematic than their customers’ need to adopt the same approach. They also need to provide the types of added value mentioned above, namely short delivery times, minimum order quantities and the widest product variety. Otherwise, Canadian plants and their suppliers will continue to be down-sized, relocated, or closed.
Visioneering Corp of Toronto provides an excellent example of exploiting competitive advantages that may not seem to exist at first glance. Visioneering is engaged in the extremely competitive florescent lighting business. At one time the firm manufactured standard four- and eight-foot commodity-type fixtures. The onset of super-low priced products from China and elsewhere caused a re-thinking of the business. Management recognized that these competitors relied on mass production coupled with container-sized shipments and large local inventory holdings. It became clear that the competitors’ strategy would only work for the most common products. As a result, the strategy focused on building non-commodity products whose shipping cost advantage relative to Asian imports more than offset its labour cost disadvantage. This involved both a marketing strategy and an operations strategy. On the market side, the firm targeted bulkier products that cost more to ship from abroad. On the operations side the firm replaced mass production with small-batch, flow production, facilitated by investments in state-of-the-art high-precision, programmable equipment. The resulting soft automation reduced labour intensity, dramatically shortened change-over times and improved quality relative to the equipment used by the firm’s competitors. Products that could not be produced on automated equipment were avoided. The reconfigured plant is able to produce small or large orders within days of order receipt, whereas the Asian competitors require weeks or months. The automation also allowed the firm to develop a profitable, custom-product line. A side benefit of the quick, low-cost changeovers allows customers to order exact requirements. If a few additional pieces are required at the last minute, Visioneering is able to respond quickly. Customers seeking to reduce their environmental impact also appreciate the smaller carbon footprint of shipments from Canada instead of from abroad.
Products whose markets exhibit strong demand seasonality and require annual design changes offer particularly attractive market conditions for nimble manufacturers. Distant producers may not have the time to adapt their production to current demand unless their products can be economically delivered by air transport. Lengthy supply chains may force them to forecast demand weeks, or even months, in advance. The long lead times inevitably result in large forecast errors. Depending on the relationship between the costs of stocking out and being left with obsolete inventory, the offshore competitor will be forced to either carry large safety stocks or focus only on the “standard” items that are least exposed to forecast error. The first approach will increase costs while the second will reduce volume. Both reduce the contribution and attractiveness of the entire Canadian market for distant competitors. The effect can be magnified by the local producer’s adoption of a rapid product innovation strategy.
The residential air conditioning products of Daikin Industries1 faced such a market. Their Shiga Factory, located 30 kilometres from Osaka, Japan, faced intense competition from products manufactured in China by strong competitors such as Matsushita (Panasonic and National), Mitsubishi, Sharp, Sanyo and Fujitsu General. The company countered the low-cost strategies of some of their rivals by offering the most product variety in the industry. The trouble was that most of the total volume needed to be produced ahead of the peak summer selling season. If Japan experienced a cold summer, the large inventories of unsold product would have to be sold at discount prices before the next year began, in order to make way for the fresh designs of the new model year. The good news in all of this was that the extra manufacturing and transportation lead times of their low-cost China-based competitors made it impossible to offer anywhere near the same variety. Daikin capped off its niche strategy by reconfiguring its plant and supply chain to dramatically reduce its batch sizes and lead times. This allowed them to build an inventory of the “standard” products throughout their supply chain in advance of the peak selling season, thus reserving manufacturing capacity during the season for the lower-volume, but highly profitable niche products for which they were known. The net result was that Daikin went from being an unprofitable operation at risk of closure to a profitable operation with the top-selling residential air conditioner in Japan.
Daikin’s strategy would be even more effective for similarly challenged Canadian plants, due mainly to the longer lead times of competitors’ supply chains in low labour-cost countries in Asia or south of the United States. So the goal becomes to develop the local market’s appetite for products with unparalleled variety in terms of options and features, and to deliver them within days of being ordered. More variety demanded by the local market means less “standard” product will be demanded from those distant suppliers who rely primarily on low labour costs.
2. Invest in new product and process designs
Although some niche strategies like quick-order response and acceptance of small order quantities can be achieved without product changes, a firm’s competitive advantage can be markedly enhanced by combining these strategies with having a leading position in product variety. From a production perspective such initiatives draw on the same lean operations capabilities required for rapid deliveries of small order quantities. However, the initiatives also demand additional product and process design capabilities.
For several decades too many graduates of engineering schools have been diverted from product and process design by being placed into marketing and sales, thus losing their potential contribution to product and process innovation. This long-standing brain-drain needs to be arrested by making engineering careers more prestigious and better paying. Introduce new engineers to the sales floor and shop floor at the earliest opportunity so that they learn first-hand the limitations generated by products whose designs fail to meet customer expectations and by processes whose capabilities fail to consistently conform to design specifications. Then challenge them to reinvent both the products and the processes that do meet those specifications.
Do not leave process innovation to the industrial engineers. While such skills are very valuable, it should also be noted that Toyota employs very few industrial engineers. When asked “why” they will point to every employee. Each one is trained to look critically at their processes and suggest improvements. Any manufacturer can do the same. Encourage suggestions for improvements from everyone in the firm. These can include everything from safety and ergonomics to quality and maintainability, to product and equipment performance. A useful reminder in this regard comes from the Japanese saying, “Time is the shadow of motion”. Eliminate the need for movement by people, machines, and products, and time and cost will melt away. Such improvements can come in big steps, but they can also usefully be made by taking baby steps. Cherish them all. Small steps are the heart of continuous improvement.
3. Don’t try to shrink to greatness
As a client once said, “It’s tough to shrink to greatness.” Many manufacturers have tried, but cutting costs through work force and volume reductions fuels destructive spirals in which employees and suppliers find it increasingly difficult to imagine their long-term future with the firm. Such views are contagious. While surviving employees and suppliers may be relieved that they still have work; they cannot be blamed for being apprehensive that they will be the next ones to go. Fearing this, the best employees and suppliers actively seek out and move on to more promising opportunities.
Increased competitiveness requires more than pruning under-utilized assets. Performance improvement cannot be left solely or even mainly to operations. The above problems can be avoided if revenues are increased and unit costs are reduced by spreading fixed costs over the larger volumes which can be achieved by expanding product portfolios. Manufacturers need to make continuing serious efforts to develop new markets and expand their range of products beyond minor upgrades to the current line. Adding products expands the work available to the organization’s existing human and physical resources, thus reducing their unit costs and increasing their productivity. On the other hand, pruning under-utilized assets in areas such as tooling, engineering and maintenance can seriously impair the organization’s capabilities to develop new products and processes.
Keep people working as productivity improves by selectively in-sourcing compatible work from suppliers and sub-contractors. When temporary slowdowns in demand, material shortages or equipment stoppages result in short-term capacity redundancies, treat them as opportunities—not problems. Use the freed-up resources to make the workplace safer and cleaner. Catch up and get ahead on maintenance of all kinds. Offer training, and identify and implement productivity improvements. The facility will be more productive than ever when production resumes. Seen in this way, the cost of employing the temporarily excess resources becomes an investment in future competitiveness. Of course, to gain these advantages one needs to plan for the application of the capacity redundancies in advance. But there should be no uncertainty that resource redundancies will occur—only the question of when they will occur is difficult to predict. So, be prepared.
4. Lead progress, don’t fight it
Most opposition to tightened governmental environmental or safety rules or laws at best delay and rarely stop the initiatives. Manufacturers would do well to compute the present value of the uncertain cash flow delays derived from delaying government mandates along with the legal and lobbying costs they are sure to incur. Much of the time it will pay to invest in product development—not lobbyists and lawyers. This is especially true if global competitors must satisfy even tougher regulations in their home markets. In this recurring event the competition has been and will continue to be highly motivated to capitalize globally on their home country investments. Superior environmental or safety performance merely proves the feasibility of the Canadian federal or provincial government initiatives. Furthermore, the resulting capture of early-adopters yields first-mover advantage.
The poster child for futile lobbying and wasted opportunities has to be the automotive industry. The list of safety and environmental changes that have been fought unsuccessfully over the last three decades is legendary. A partial list in the safety domain includes seat belts, air bags, side impact integrity, roof integrity, roll-over avoidance, and bumper height, among others. Environmental initiatives that have been opposed, unsuccessfully, include the elimination of lead additives, fuel economy, and emission controls. It is noteworthy that companies outside the Detroit 3 have made a living by building vehicles that address one or more of these issues. Examples in the recent past include the phenomenal success of Toyota’s gas-sipping hybrid-drive technology, the almost decade-long success of Volvo vehicles due to the improved protection offered to vehicle occupants from side impact injuries, and the success enjoyed by European-produced diesel-powered automobiles.
The Canadian automotive industry’s response (from management and labour alike) to the Ontario government’s recently proposed emission level initiatives is indicative. There were immediate claims of sales and job losses. Not mentioned was the fact that holding new vehicles sold in Ontario to higher environmental standards would position Canadian plants to supply the increasing global demand for such vehicles, and at a minimum, deflate the competitive position of imports from Europe and Asia that are virtually certain to offer similar capabilities
5. Make service a priority
Disabuse management of the notion that long lead times are inevitable. Delayed responses to backlogs are among the quickest and surest ways to encourage customers to cancel orders, seek alternate sources and encourage the entry of new competitors. Manage backlogs with the same attention as accounts receivable—if for no reason other than today’s backlogs should be tomorrow’s receivables—if they are attended to. The key is to avoid rolling over excess demand. All too often firms with backlogs produce about the same volume as they receive new orders.
The key is to create a culture that quickly identifies backlogs and does something about them. If a few hours of overtime is all that is required to eliminate the backlog and restore deliveries and customer service to what was promised, do them! If the backlogs are growing do not delay confronting them by adding the needed capacity. In particular, avoid the addictive habit of “lying” to the production schedule by asking for more production than available capacity or material can support. Base delivery promises on what can be built—not when sales want to deliver. The decision to supply demand volumes beyond existing capacity needs to be treated as strategic—not tactical.
While current competitive pressures and dampened demand may have resulted in the toughest conditions in decades, Canadian manufacturers do have options to down-sizing, out-sourcing and defeat. Start by exploiting natural competitive advantages of small size by exploiting niche markets. Plants need to be reconfigured for small-lot, flexible production where delivery is in days or hours, not weeks or months. Create engineering work places that attract and retain top talent and that generate a continuous stream of innovative product offerings and process improvements. Look towards increased volumes, not reduced expenses, when addressing cost competitiveness. Embrace new regulatory and legislative safety and environmental initiatives—don’t fight to delay them. Save your investments for better products and the processes that make them. Finally, make recurring backlogs a distant memory.
1 For more details on the challenges faced by Daikin, please see Daikin Industries, Ivey case 9B04D018.