June 14, 2007 by Paul Hogendoorn
The Canadian manufacturing sector is facing significant challenges within our borders and beyond. The challenges it faces from beyond are easy to identify because they are constantly brought to our attention–the declining U.S. dollar and increasing competition from low-cost regions. The challenges from within Canada are not as obvious and do not get brought to our attention nearly as much.
In fact, we ignore or do not notice the two equally significant internal challenges–the economists who tell us that manufacturing in North America is becoming obsolete and less important to our society, and the leaders of our own companies who assign supply chain management to purchasing managers who are only measured by the savings they achieve in material costs. We constantly take note of the two challenges completely outside of our control, but pay little attention to the two we have some control over. This has to change.
I recently read a report that stated that despite the loss of manufacturing jobs in Canada, the average wage was not declining. This is due to the fact that the manufacturing jobs lost are matched by new jobs created in the service sector, the construction industry, and the oil and gas sector. The generally low wages of the service sector are offset by the higher wages paid by the construction industry and the very high wages of the oil and gas industry. Even though we should be thankful for these newly created jobs for our society, we shouldn’t be content to lose our manufacturing jobs.
The average service sector job is a lot lower paying than the average manufacturing sector job. In addition, a manufacturing company creates wealth and imports it into its community. At best, a service sector job circulates the wealth and, at worst, it exports it from the community. The oil and gas industry creates and imports wealth into the community, but just like the construction industry, it is very susceptible to “boom and bust” or “feast or famine” cycles. The manufacturing sector, on the other hand, has a track record of offering a significant segment of the working population an above-average paying job for their entire working life. Economists who simply “do the numbers” and conclude that our society is not harmed by the loss of manufacturing jobs because the overall employment numbers and wages are not in decline miss those two key points. If we think that we can build our country’s economic wealth solely on our natural resources, we need only to look at other oil-rich areas (i.e. the Middle East and Venezuela) to know that possessing an abundance of natural resources is no guarantee of success. Alternatively, we could look at the wealthiest areas in recent history (i.e. Japan, the United States and Western Europe) and conclude that industry is a far better creator of economic wealth than natural resources, especially for the average wage earner.
The other culprits behind our internal challenges are the purchasing agents in many of our own manufacturing companies, and the management that has empowered them and rewards them solely on achieving cost reductions for their purchased materials. Although many of the companies state that their focus is first on quality, then delivery, then cost, the final say is frequently in the hands of the purchasing department whose primary mandate is to reduce costs. To them, quality, though understandably important, is a production or engineering concern. If it’s really important, it’s a quality assurance concern.
One situation that I recently heard about involved a purchasing agent who selected a low-cost region (LCR) supplier to save seven per cent on a component that was very critical to the proper operation of the end product, but constituted less than 10 per cent of the overall parts cost. In other words, switching to an LCR supplier represented about a 0.7 per cent cost reduction. The company then experienced many failures with that component and had to send them all to a third party for rework at a cost roughly three times more than the initial savings. That cost, plus the warranty cost of exchanges in the field and the company’s damaged reputation in the marketplace, should have caused some serious attention to be directed towards the purchasing department. Instead, the warranty and rework expenses were allocated to engineering because they inspected and approved the initial samples, while purchasing still received credit for “lowering costs.” Purchasing agents that pursue “low cost at all costs,” and the company management that rewards them for doing so, are unintentionally contributing to the demise of our manufacturing industries.
While it may make sense to move some industries and manufacturing facilities to other areas of the world, it is not the right strategy for all products, industries, companies or components. Is the product or component critical to the operation of the finished product? Is ongoing engineering or product support by the supplier an advantage? Is quality truly the number one concern? How about on-time delivery and delivery flexibility? In these situations, giving the final say to the people who are only measured on their cost savings achievements not only hurts that particular company in the short term, it hurts it in the long term and contributes to the weakening of our manufacturing sector.
Remember, only two of the challenges that confront our manufacturing industry are outside of our control. Our attitudes, however, are within it. We can help turn things around. All we need is a bit of an attitude adjustment.
Paul Hogendoorn is president of OES, Inc. and past chair of the London Region Manufacturing Council. He can be reached at firstname.lastname@example.org. For more information about the LRMC, visit www.manufacturinglondon.com.