It’s time for manufacturers to get nimble

A recently released manufacturing survey reveals agility is not just beneficial for our physical health, but for companies as well. Alan Johnson reports.

A survey of mid-size manufacturers (MSMs) in Australia by Grant Thornton, one of the world’s leading independent assurance, tax and advisory firms, paints a pretty sobering view of Australia’s manufacturing industry, with declines in sales revenue, gross margins and profits over the past couple of years.

However Mark Philips, Australia’s Head of Manufacturing with Grant Thornton, remains optimistic of the industry’s future saying there are many successful manufacturing companies in Australia as they adapt to the changing environment.

“We have found the successful companies in the survey are those that are nimble and able to move efficiently. They have created very complex overhead models, and have been in the planning process for quite a long time,” Philips told Manufacturers’ Monthly.

Apart from the food and beverage industry, Philips said many companies are changing from long run manufacturing of products to more of a ‘unit of one’ production.

“We are moving to lower volumes, but with higher margins,” he said.

Philips said if companies want to change their direction and diversify on another pathway, they need to be aware it takes a few years to get there.

“You can’t wake up tomorrow morning and do things differently. You have to transition out of your existing work, reposition your facilities and equipment, and retrain your staff. There are a lot of things to be done before you get there,” he said.

This lack of workplace flexibility really frustrates Philips, and is highlighted in the survey by employee costs outpacing revenue growth.

“We have great protection mechanisms for our workforce in Australia, with long service leave, redundancy provisions, and generous leave provisions, but the problem is we can’t move quickly enough when it comes to right sizing a workforce.

“Businesses are forced to hang on to their surplus workforces longer than they otherwise would because of the cost associated with adjusting their workforce.

“This is unlike the US, for example, where they have very different work laws and are able to reduce their workforce quite easily.

“They are a lot more nimble, even though they are larger organisations. Unfortunately in Australia, you will always see a lag if revenue drops with workforce costs.

“We don’t have the flexibility in the workforce that is needed.”

Philips would like to see the Government help businesses fund workforce flexibility. Not handouts as such, but to help the funding of workforce flexibility.

He said this also relates to manufacturers being too slow to adjust their purchasing/production volumes to market demand, and being nimble.

“If a company has a higher labour force than needed, and can’t adjust it, what does the manufacturer do? Rather than having them sit idle, he builds up inventory. That’s the reason for the lag,” he said.

Philips points out that one the positive changes in recent times, especially for those who sell in $US, has been the fall of the A$ and the rise of the US$ which has offset some of the negatives of manufacturing here.

From a personal perspective, Philips is seeing his own small manufacturing/engineering company gradually pick up following the decline of the Aussie dollar.

“Our competitive advantage is asking prospective customers if they are purchasing components in US dollars. And if they are, in nearly every case, we can now supply in a more competitive price, because of where the Aussie dollar is today,” he said.

“Manufacturing’s negative trend is reversing. I’m not sure if it will happen next year or the year after, but I believe the manufacturing sector will stabilise and then start to grow.”

Philips, who counts many automotive component manufacturers amongst his clients, admitted the auto industry is going through a significant shift.

“However, we are pleasantly surprised to see most of them reorganising and repositioning their businesses to remain within the Australian marketplace, as opposed to those looking to exit the industry,” he said.

He said they are all at different stages of transition. Some companies are looking to retain their entire workforce and move into other areas where they can compete, while others are retaining their innovation skills and keeping some of the capability to produce.

“From an automotive perspective it has been quite surprising, I was expecting more companies closing up here and moving their operations offshore, but that has not been as predominate as we thought it would be,” he said.

Philips said that while the overall trend of the survey was a decline in revenue, there were pockets within the sample that were more successful than others.

“The $25m up to $100m turnover businesses are the ones that have actually grown their revenue over that period. They are the ones that have been able to be nimble and have done what they do well and are focusing on areas that have sufficient scale to be able to generate some economies of scale in the process,” he said.

“As we see the shift in the dollar we are seeing more and more companies bring production back home. The larger guys are not nimble enough so their ability to shift is a lot more difficult.”

Innovation

Philips is a keen supporter of the Government’s focus on innovation, but points out that innovation is transportable all around the world.

“Instead we would like to see the Government encouraging production of that innovation here in Australia,” he said.

“We would like to see the Government go one step further and incentivising businesses to convert that innovation into product.

“We might fund the five or so people in the lab coats, but we don’t capture that innovation for the longer term and fund the 200 or so jobs that will turn that innovation into a finished product.”

Philips points to a UK system called Patent Box, which offers tax relief to manufacturers who convert innovation into new product.

While not critical of the government funding R&D, Philips pointed out that the funding only produces the R&D.

“You don’t get the multiplier of the R&D being converted into a product in the Australian marketplace,” he said.

He pointed out that, under the Patent Box system, manufacturers receive tax deductions on income that is generated from R&D.

“They only forgo the revenue by actually producing the product in the UK,” he said.

“If you look at the amount of IP we generate here, then you look at the level of product from that IP which is manufactured here, then I think we are missing out on a huge opportunity. This way, the Government is getting revenue it wasn’t going to get otherwise”.

The future

Philips is optimistic more manufacturing will return to Australia.

But he said one area that is often overlooked is the cost of freight, which is increasing and is a very hard cost to minimise.

“I think overtime, the rising cost of freight will influence the rise of manufacturing here in Australia as capital takes over the more labour intensive jobs,” he said.

“I’d like to think in 12 months’ time manufacturing will be in positive territory, because we are certainly seeing the benefits coming through of a weaker Aussie dollar.”

Unfortunately, Philips said, there will be a lot of gloom and doom around later this year with Ford finally stopping production, and Holden and Toyota the following year.

“These closures can have a big impact on confidence, but I think by 2018 the trend is very much reversed.”

He advises manufacturers to go back to the old principals and do their homework.

“Many manufacturers don’t know their businesses well enough. They don’t do enough work around understanding the cost of inputs when producing products.

“We are trying to get more of our clients to focus back on the old fashioned activity based costings, so they understand what it costs to produce and to talk to customers a lot more.”

Philips said that does not mean taking out the middle man, but to understand what their customers are looking for. Quite often it’s not just the physical product.

“At my own little company, for example, we have found it’s not the product they want to pay for, but more the service we provide. Our fast turnaround service is far more valuable to them than the pricing of the components,” he concluded.