Manufacturing services can spur growth and profits for SMEs in Quebec

Small and medium-sized manufacturing firms that add services to their product offerings can enjoy higher profit margins, more stable revenues and greater competitive advantage, according to a new report by The Conference Board of Canada and McGill University. The report, SME Manufacturers in Quebec: Adding Services to Boost Competitiveness and the Bottom Line, outlines the benefits that Quebec’s high-value manufacturing firms can gain from providing services to their clients.

“Small and medium-sized product manufacturers risk leaving value behind by not including services, especially to their large corporate clients, in their commercial offerings,” said Michael Bloom, vice-president, organizational effectiveness and learning, with the Conference Board. “Service offerings that complement products make SMEs valuable partners, especially when they can deliver them ‘in-house’ to their clients, eliminating the need to outsource. By developing in-house expertise to deliver services, SMEs can build stable and long-term revenues.”

“Canada’s manufacturing value-added has been declining over the past decade. SMEs, representing half of Canada’s manufacturing employment, can improve this picture by adding new services to their product portfolios, thereby greatly increasing value added,” said Vince Thomson, Werner Graupe Professor of Manufacturing Automation, McGill University.

According to the report, product manufacturers should integrate services into their core product offerings for several reasons:

• Services have higher profit margins than products.

• Services provide a more stable source of revenue, because they are more resistant to economic cycles that affect investment and equipment purchases.

• Services enable substantial revenue to be generated from an installed base of products with a long life cycle.

• Services add value and strengthen the supplier-customer relationship.

The report is based on a review of domestic and international literature and the results of case studies, as well as an online survey of Quebec-based manufacturing SMEs, with 113 respondents.

Ninety-five percent of SMEs offering services gain revenue from their offerings. Of these, one-quarter obtain between 21 and 60 percent of their revenue from their service offering; a further 67 percent get between one and 20 percent of revenue from selling services. As an added benefit, offering services helps SMEs to sell more of their manufactured products, and yields customer feedback that helps improve product offerings.

Adding services to a product offering comes with challenges. Forty-five percent of respondents identified the need for them to employ highly skilled personnel as a major challenge in making their service offering. Other substantial challenges lay in accessing client needs (12 percent) and identifying what specific services to provide (12 percent). The key factors that helped SMEs deliver services to their clients were in-house expertise and knowledge of their products, knowledge of foreign languages and regulations, knowledge of clients’ needs, and the ability to provide timely solutions.

Another approach that Quebec SMEs can adopt to compete globally is to integrate with the production networks of multinational corporations. A second report – also the result of collaboration between the Conference Board and McGill – describes the opportunities for Quebec’s small and medium-enterprises (SMEs) to become suppliers to multinational corporations (MNCs) by integrating themselves into MNC production networks. The report, Integrating Quebec SMEs Into Production Networks: A Spur to Competitiveness, identifies several factors behind successful networks, including:

• the presence of world-class MNCs to provide access to large markets and knowledge;

• close lateral relations among SMEs to share information about markets and technology;

• forums for communication between and among MNCs and SMEs;

• forums for collaboration between and among industry and academic institutions;

• SMEs willing to foster innovation by hiring highly trained people; and

• government co-operation to ensure, for example, appropriate transportation, communications and financial infrastructure.

Both reports were prepared with the financial support of Canada Economic Development for Quebec Regions.

Links to publications:

SME Manufacturers in Quebec

Integrating Quebec SMEs into Production Networks