The challenges for manufacturing SMEs:
Currency, especially for exporters, as the cost of our goods are at a premium due to the strength of the NZ dollar with the US currency having moved from the US$ 60 cent to over 80, the cost of goods has appreciated by over 30 per cent. SMEs have the challenge of passing on this cost or absorbing some or all of it which adversely affects margins and therefore their ability to re-invest in the business both in terms of capital and people. For those SMEs who import goods and then export, they get an offsetting affect and those who import and sell locally are on the positive side of the ledger
The reality is SMEs can't materially affect currency. The best strategy is to ensure that they have developed a strategic competitive advantage in the markets in which they operate. This is about how to best meet consumer needs better than their competitors. Some of this is about identifying the right niches, marketing/branding and aligning their manufacturing to deliver this value. This may be highly flexible short run or low cost. Developing rapid, innovation, clear market position and aligning manufacturing capability is a significant challenge for many SMEs who typically lack skills and resource to achieve this consistently
The reality here is NZ is near the bottom of the OECD in terms of productivity. This is not a function of our work ethic, we actually have amongst the highest hours per week, or our base capability, as we have a well-educated and capable workforce comparatively. The issue is that the amount we produce per man hour puts us at the bottom of the table.
We have been slow to adopt best practice relative to other countries. This is especially true of SMEs who have been unaware or unable to embark on a performance culture change journey as many other countries have. The adoptions of lean manufacturing, in the US and UK has been in full swing for 15 years and of course Toyota is over 60 years in the journey. Unfortunately this puts us at a competitive disadvantage. It is imperative that manufacturers accept the reality that the manufacturing world has significantly changed and understand and adopt the new philosophies to achieve the performance outcomes they will need in the future. There are an increasing number of success stories in this regard in NZ but we need many more.
Why manufacturing here is still worthwhile
There are significant advantages in manufacturing where you develop products as there is an intrinsic link between production and innovation, which enable rapid prototyping and development, outsourced models slow or disable this process.
It gives you control of final quality and security of IP and many companies have learnt this to their cost.
We can in many instances genuinely compete and be competitive and there are some areas where we can't and shouldn't operate - think the car assembly industry.
It's a great place to live and we need to maintain a strong, vibrant manufacturing base to provide the quality of life that we want for us and our kids. The more growing, successful companies we can build the more jobs the more collective wealth and quality of life we will enjoy. The Icehouse has some numbers on the number of businesses we need to generate by 2030 to meet the Government's projections for GDP growth. It's a significant number, we have lots to do.
Being both a retailer and manufacturer
This can be an effective strategy, it establishes a strong brand which should generate a premium and if you are an efficient manufacturer you can improve the margins through the value chain. It also gives you the opportunity to demand shape, to move excess stock, manage inventories and drive profitability. Apple is an excellent example of this, and deliberately manages demand to optimise price and margin on goods which depreciate rapidly. The technical term is a demand driven value network.
In some ways it's easier to keep your story true, but there are some good examples of retailers who have outsourced to local manufacturers too.
It is easy to maintain but very difficult to establish the business processes and systems and even more importantly the culture required to sustain these processes. This is about understanding the value you deliver and determining what you should retain and what you should outsource. If you understand clearly the value proposition and your capability then this is a clear process.
Unfortunately many companies have outsourced based on price rather than total cost and a clear understanding of the value equation.By Gill South Email Gill