Innovation and Insight: Key Issues facing Manufacturers
Highly profitable, successful companies have often been studied in an attempt to learn how they did it. What alchemy enabled them to weave straw into gold? What magic was employed in achieving sustained market leadership, business excellence, and superior results?
Arcus recently interviewed 200 Canadian manufacturers to identify trends in manufacturing for a Fortune 1000 client. The biggest challenge facing Canadian manufacturers today isn’t the rising Canadian dollar. It is managing complexity and increasing flexibility of operations in context of a growing skills shortage and pricing pressures from cheaper imports.
David Dodge, Governor of the Bank of Canada shares our concern about lagging Canadian productivity- “Over the past several years, the Bank has estimated trend labour input to be growing at an annual rate of about 1 1/4 per cent, although the actual growth has been a bit higher over roughly the past 4 years. Canada lags behind the US in productivity (82.60% vs. US). The annual growth of trend labour productivity is 1 3/4 per cent, although over the past 4 years, average productivity growth has come in lower. If there is a slowdown in trend labour input and the trend rate of productivity growth remains unchanged, the growth rate of potential output will also slow down. In other words, the economy will not be able to grow as quickly without sparking inflationary pressures.”
Almost 80 per cent of Canadian organizations believe they will face the consequences of an aging workforce within the next five years, but few are taking steps now to address impending retirement-induced labour shortages, according to a Conference Board survey. The average duration of lost workdays for a worker 19 to 29 years old is 10.4 days. For a worker aged 50 to 59, it is 47.7 days. Because of the labour force’s changing age profile, we can expect that the growth of trend labour input will start to drop significantly below this current estimate. Indeed, demographic and economic models suggest that annual growth of trend labour input will fall to about 1 per cent in 2010, and that it will continue to fall to about 0.6 per cent in 2015. Labour costs are increasing. Hourly wage rates in manufacturing have been rising on average by about 3% per year since 2000 – the result of cost of living increases keeping up with consumer price inflation and productivity growth.
With electricity comprising 10% to 25% of the operating costs for most manufacturers, and as high as 50% for at least one CME member, the rising price of electricity has major implications for the competitiveness of manufacturers. A reliable and competitively priced supply of electricity is also in jeopardy – in Ontario, but also in other provinces where generating capacity has failed to keep up with growing energy demand. Canada’s electricity needs will not only require new investments in generating capacity, but the correct price signals and political will to ensure that investments when they are made can reliably meet both short- and long-term energy needs at costs that are commercially attractive.
LOW PERFORMANCE RATING:
Canadian manufacturers perform on average about half as well as the best of the G7. Our excellence gap is, therefore, 50% of G7 best practice. Canada, in fact, turns in one of the lowest performance ratings of any of the world’s major industrial economies when all benchmarks are taken into account. Our major trading partner, the United States leads the world, in terms of the competitiveness indicators used in the analysis, standing at the head of the G7 in only one out of ten performance benchmarks, but with an average rating of 75% of the G7 best – an excellence gap of 25%. Japan ranks first in five benchmarks of competitive performance, but comes in second overall with an average score of 71%, while the European economies range from 45% up to 70%.
Please contact Merril Mascarenhas, Managing Partner by phone (416) 710-2727 or email.