Australian Manufacturing: Endangered or Just Vulnerable?

The International Union for Conservation of Nature (IUCN) recognises the conservation status of threatened species under three sub-categories: Critically Endangered, Endangered, and Vulnerable. 

If we apply these subcategories to the Australian manufacturing “species,” it was critically endangered for a brief period of time during the global financial crisis (GFC) around 2009-10. However, based on the Australian Industry Group’s (AiGroup’s) Performance of Manufacturing Index (PMI) chart below, it appears that it is no longer critically endangered. 

So, what is the current status of Australian manufacturing—is it endangered or vulnerable?  Can this sector survive in the long run?

Australian Performance Manufacturing Index¹

The challenges

Many reports triumphantly claim how the Australian Manufacturing sector has bounced back since the GFC. This is also evident from the PMI graph above, but this is only one aspect.  The Australian manufacturing sector has faced strong competition over the last few years with imports from lower-cost countries, appreciation of the Australian dollar and increasing input costs. 

Ask any business owner in the sector about the input costs and they will say in unison that labour cost is the single most critical component. We know that labour rates are high in Australia, but how high? 

Australian manufacturing labour costs are much higher compared to other economies, as per a report published by the Reserve Bank of Australia (RBA).² Based on this RBA report, we can see that Australian labour costs increased by around 80% in Australian dollar terms over 1997-2012. This could only be offset through labour productivity to maintain competitiveness against cheaper imports.

Manufacturing Labour Costs (US$, US=100)²

Now let’s look at the changes in productivity levels within the Australian manufacturing sector. Based on a report published by The Guardian, we can see that the Multifactor Productivity (MFP) for the manufacturing sector has declined by 3.7% in recent years.  

MFP is a measure of economic performance that compares the amount of goods and services produced (output) to the amount of combined inputs including capital) used to produce those goods and services.  This drop in MFP is not good for the survival of any sector.

Australian Multifactor Productivity from 2013-14 to 2016-17 by sector³

So, how do we rank against other countries when it comes to manufacturing productivity?  A benchmark study conducted by AusTrade⁴ shows that Australian manufacturing productivity is poor when compared with global competitors. 

In the graph below, a score of 110 means Australia is 10% more productive than the average productivity of global competitors in the industry.  Given that manufacturing has scored only 75, this means Australia is 25% less productive than the average global manufacturing competitor’s productivity. 

Productivity of Australian Industry Sectors Compared With Global Competitors

Unfortunately, these critical factors do not paint a healthy picture for the Australian manufacturing sector, despite the promising bounce back in the last few years.  Over the last 10-15 years, Aussie labour costs have increased by around 80%, MFP levels have declined by 3.7% and Australian manufacturing productivity levels are about 25% less efficient compared to global competitors. 

Can the Australian manufacturing sector survive under these conditions moving forward?

The solution

Businesses always operate under challenging conditions.  It has always been a survival of the fittest game. 

Operational Excellence (OpEx) methodologies such as TQM (Total Quality Management), Lean, TPM and Six Sigma have been used to improve productivity since the 1970s. 

While there have been many discussions about the use of Industry 4.0 Technologies⁵ to improve productivity, for many businesses this requires further investment.  Unfortunately, this approach impact MFP negatively, as total input value is taken into consideration for MFP, including capital costs.

Furthermore, a McKinsey study interviewing over 300 companies in Germany found that only 48% thought that they were ready to embrace Industry 4.0.⁶ They also found that between the second & third industrial revolutions, most had replaced their industrial equipment by 80-90%.  So, it is unlikely that we will see major investments again during this era.

Whilst technology has its place, we do not need to throw the baby out with the bathwater – OpEx methodologies are still relevant to identify and address root causes of low productivity areas.  However, when it comes to deploying Opex methodologies, most have a view about it, some have tried it, but only a few will speak about it with conviction. 

Whilst OpEx concepts may come across as simple and intuitive, it is a journey that requires careful navigation to make the most of it.  Shown below is my OpEx 3.0 maturity model that will help you achieve that with relative ease.

The OpEx 3.0 Maturity Model

There are three levels that most businesses go through to deploy OpEx methodologies successfully—situational, systemic and strategic.  It is vitally important that you understand the pitfalls and challenges within each maturity stage, to advance to the next stage as effectively and efficiently as possible.

Let’s explore these stages one by one..

OpEx 3.0 Maturity Model

The Situational Level

A workplace at this maturity level will have a few key people who can rattle off all the lean tools off the top of their head.  Don’t be surprised if they speak in past-tense such as “we have implemented lean.” 

The implementation approach appears haphazard with many tools. The problem-solving whiteboards will require solvent to clean out the actions written down from the last session. Leadership team walks the floor to observe waste and perhaps reprimands the ones at fault. 

The improvement journey begun will certainly feel like a burden on the organisation to maintain with very little to demonstrate in terms of gains. 

The employees may feel like a system is getting established, but sustaining is not even in the vocabulary.  The customers certainly appreciate the efforts, but until you master this level, you do not even earn the right to play from their view.

TIP:  Contain implementation to a small critical area.  Win the hearts and minds of the employees in this area by asking them, “Why can’t we get 100% every day”?  Categorise problems into themes and introduce solutions to address them.

The Systemic Level

You have mastered how to improve one critical area and are now aiming at conquering the entire site.  The main challenge now is constrained resources—you only have a few who understand the process. You might have to take several steps back as you learn how to juggle multiple balls. 

As you get better within this level, the site will have a clear vision for the next few years and the activities launched are directly linked to it.  This is the transitioning point to OpEx as opposed to deploying lean.  It feels like a harmonised choir, but you do hear a flat note every now and then, which is quite alright. 

You certainly cannot take the foot off the accelerator, and, if a few key individuals leave the organisation, the sustainability will be challenged.  Employees feel that the processes are effective, and, when you master this level, you earn the right to win from the customer’s point of view.

Tip: Get the leadership team to really understand the full process, from vision to strategies to execution.  The OpEx journey should be transitioning from being managed by a few individuals to the entire leadership team.  It should start to feel like, “This is the way thing are done around here.”

The Strategic Level

You are now looking at end-to-end Supply Chain.  The entire supply chain is re-inventing itself based on the tools, processes and concepts mastered in the previous level. 

Sustainability is certainly not an issue, even if key individuals leave the organisation.  Team members continually work on improving the efficiency of effective processes.  Customers recognise know you as an industry leader—you have certainly earned the right to lead. 

TIP: Innovation is the key at this level, as continuous improvement is well embedded.  Your processes now must focus on how to get closer to the customer’s needs and wants. Process improvement is now at end-to-end supply chain model.

Conclusion

Manufacturing is an important sector to the Australian economy.  Unfortunately, many indicators and news articles sadly remind us that it has definitely passed its heyday. 

The GFC and the shutdown of the car industry nearly pushed this “species” to Critically Endangered status.  However, Australian manufacturing is showing resilience and survival skills. 

It is time to realise that poor productivity is still threatening the survival of Australian manufacturing. Our aim should be to use the OpEx concepts to eliminate this threat altogether.

Next steps: 

1. For a limited time you could order a complimentary copy of Ishan’s book titled, “People + Processes = Hidden Growth Opportunities”, where he shares his multi-national corporate OpEx experience, with companies such as Kellogg’s and Anortt’s. http://hiddengrowthopportunitiesbook.com.au/SixDegrees     
2. If you would like to explore how take Operational Excellence in your organisation to the next level, you could reach out to Ishan on ishan@capabilityunlimited.com

About Ishan Galapathy

Ishan is an Operational Excellence Expert, Speak and Author.  He is passionate about helping businesses to unlock hidden capacity for business growth. Ishan has a distinct advantage to deliver transformational change with his experience in multi-national companies, working with teams in six different countries, for nearly two decades.

References:

1. David Scutt, “Australia's manufacturing sector has never been stronger”, https://www.businessinsider.com.au/australia-manufacturing-sector-pmi-record-high-2018-4, Busines Insider, Apr 2018, Web
2. Sean Langcake, “Conditions In The Manufacturing Sector,” https://www.rba.gov.au/publications/bulletin/2016/jun/4.html, RBA. June 2018. Web
3. Greg Jericho, “Productivity Growth Is Complex, But Must Lead To Better Living Standards, https://www.theguardian.com/business/grogonomics/2018/jan/25/productivity-growth-is-complex-but-must-lead-to-better-living-standards , The Guardian. January 2018. Web.
4. Australian Trade And Investment Commission, “Why Australia–Benchmark Report 2017,” https://www.austrade.gov.au/local-sites/singapore/news/why-australia-benchmark-report-2017, AusTrade, Web.
5. Cline, Greg.  “Industry 4.0 And Industrial IoT in Manufacturing: A Sneak Peek.” http://www.aberdeenessentials.com . Aberdeen Essentials. March 2017.  Web. 
6. Cornelius Baur and Dominik Wee, “ Manufacturing’s Next Act,” http://www.mckinsey.com/business-functions/operations/our-insights/manufacturings-next-act, , McKinsey Munich.  June 2015.  Web.