PRODUCTIVITY SPECTATOR: A burning manufacturing platform

There’s a short window of time for Australia's beleaguered manufacturing sector to start producing value-added products before China and India close the gap.

Productivity Spectator

Yesterday’s steep drop in commercial lending provides yet another strong indication that business is entering into contraction mode. For the manufacturing sector, the high dollar continues to hurt and everyone from Paul Howe at the Australian Workers Union to the Australian Industry Group, is hoping to find a strategy to prevent its decline.

The "burning platform"

Famously used by Stephen Elop at Nokia as an attempt to rally staff around the changes needed to deal with the iPhone challenge, a "burning platform" has now entered business lexicon as a cry for a bold change – "better probable death than certain death".

For decades we've known that Australian manufacturing has no chance of competing in low-margin, highly labour-intensive goods. If the labour cost differential wasn't enough, the dollar impact certainly is.

Australia's 'burning platform' is the time it will take developing nations like China and India to become high value-add producers. On this timeframe, I'm taking advice from Dr Simon Poole, one of Australia's most successful manufacturers. Poole has started and sold a number of companies that produce optical technology. Right now he's the business development manager of Finisar Australia, a company that is exporting $100 million worth of telecommunications equipment every year across the world – much of it to Asia. He's in a highly competitive business that has to cut prices by 15 per cent every year. Poole, a very cheery fellow, is an outright pessimist when it comes to business. After a fascinating chat on how he gets every single person in the organisation to focus on cutting costs, Poole confided that he figured he was safe from being wiped out for five years. Five years! Essentially, Poole sees his company in a constant battle for survival, so he's always looking out for the next threat.

I asked him when China and India would get to the point that they would start matching us on quality. Dr Poole believes we still have 10-15 years to achieve that. He says that while there are extremely talented people from China working for him (in both Shanghai and Sydney), they don't have the experience yet to deliver the kinds of products that we do well.

This last week however, all the fretting about the state of the Australian manufacturing sector was how to put out the fire on the 'burning platform'.

Incoming AIG chief, Innes Willox, is calling for less red tape; the Council of Australian Governments (COAG) says we need to reduce 'green tape'. Paul Howe at the AWU is calling for the RBA to intervene.

Unfortunately the days of "simple metal bashing", as Dr Poole calls it are long gone. The power is now in the hands of the consumer, whether that is at the retail or wholesale end. My mother's partner, a builder in his late 60s, is already buying products online from China for his jobs. Just two years ago, all of his products came from his long-established connections amongst local manufacturers.

So we have 10-15 years to work on shifting Australian manufacturing to the highest value-added products we can. For any capital-intensive business, that's hardly any time at all. Dick Warburton, head of Manufacturing Australia (Link Video) says we've done this before. During the 1980s, manufacturers, government and unions all worked together to identify areas of Australian advantage. If we don’t, then he reckons 400,000 jobs are at risk. (KGB: Dick Warburton, Feb 9)

Where to start?

Clearly business is not borrowing to invest in new machinery or inventory. They are waiting to see how economic conditions shake out. That means every company should be looking at how to reduce their costs.

The AIG and COAG are talking about red tape but while waiting for government action, companies should be investigating their own internal red tape.

After an earlier article about Atlassian and how it is constantly measuring employee engagement (The free iPad app that will terrify middle managers, March 2012), I was contacted by Jason McPherson of Cultureamp. They sell employee sentiment software called Murmur that polls random workers at regular intervals to check how they are responding to management decisions.

Cultureamp sells this software to Australian companies as well as some very well-known technology firms in the US. He says American firms are using the software differently to Australian firms. These highly successful, growing companies use it to track the efficiency of their processes. Human resources is much more tightly aligned with operations in the US than Australia, he says, with a stronger emphasis on performance of people. They are asking their employees very specific questions, listing work practices one by one and testing them over time. For instance, these companies are checking whether the engineers are effectively communicating design specs to the marketing team or if the salesforce communication tools are capturing customers wants or needs. This bottom up approach allows senior management to focus on overall strategy, rather than trying to second-guess which spot-fire to put out first. They also measure worker engagement in parallel, to ensure that employees are motivated to identify such bottlenecks.

This process optimisation can be extremely important to improving productivity, according to Neil Plumridge, lead partner of Ernst & Young Oceania. He identified $108 billion in lost wages alone from wasteful business practices. In a survey of thousands workers across the enterprise sector, the top five reasons for wasted time and effort were;

– Processes and systems not supporting roles
– Fixing an error or completing a task of another person or function
– Duplication of roles and responsibilities
– Meaningless production, i.e. wasted effort
– Waiting time between activities, e.g. shifts, machine break down

American firms are using software to track, measure and address these problems. According to McPherson at Cultureamp, they see productivity as a source of competitive advantage.

That's how Poole at Finisar sees it too. He told me he has a "personal vendetta" against silos in his company. No-one is able to hide from the cost cutting axe. Everyone understands that unless they work together, "they’ll be consigned to the scrap bin of history”.

We can't do much about the Australian dollar, or about the eventual rise of developing countries as value-added manufacturers, but we must make sure we use every tool available to prepare ourselves while we still have time. The companies bold enough to leap off the burning platform can become world leaders in this global market.

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