Origin of Study and Research Questions

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Origin of Study and Research Questions

Collaborative Industry Canada – Canadian Manufacturers & Exporters and McMaster University initiative to better understand evolving business strategies used by Canadian manufacturers to improve their competitiveness

Study is based on the manufacturing component of Survey Innovation and Business Strategy (SIBS) results (survey reached 4,400 manufacturers and 80% responded)

Insights drawn from interviews with Canadian Manufacturers & Exporters (CME), senior operations and supply chain executives of leading firms, and academia

Research Questions:

Is the manufacturing sector a leader in innovation in Canada?

What are drivers behind the selection of production locations of manufacturers?

Is there spill over investment in other value-added business activities from investment in production facilities?

What is Canada’s comparative advantage in attracting manufacturing investment?

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Emerging Trends in Advanced Manufacturing

Manufacturers are designing their operations to deliver a suite of capabilities for their customers and compete in fundamentally different markets against competitors from both low-cost countries and developed economies

New investment in manufacturing facilities in Canada is driven by the need to increase agility, expand mass customization capabilities, optimize prototyping and new product introductions (NPI), and capitalize market niches

To avoid supply chain interruptions and raise their level of responsiveness and dependability, manufacturers are considering multiple locations for critical operations

Organizational, process, marketing and product innovation are critical for Canadian manufacturers to compete and participate in global value chains

Successful advanced manufacturing strategies are linked to corporate leadership, innovative culture and highly skilled workforce at the operational, tactical and managerial level

Source: The Boston Consulting Group and Wharton School of Business. Rethinking Operations for a Two-Speed World, 2011McKinsey & Company. Reducing risk in your manufacturing footprint, 2009The Economist. Moving back to America - The dwindling allure of building factories offshore, May 12, 2011

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Manufacturers are utilizing a mix of strategies within a global production framework to estimate the trade-offs between opportunities

3-Tier Global production footprint framework

LocationVelocity /

AgilityLogistics network

Industrial engineering capabilities

Production cost

Distribution costs

Canada / U.S.

High High High High Low

China Low Medium-low Medium-low Low High

Mexico Medium Medium Medium-low Medium Medium

Source: The Boston Consulting Group and Wharton School of Business. Rethinking Operations for a Two-Speed World, 2011 The Economist. Moving back to America - The dwindling allure of building factories offshore, May 12, 2011 State of Advanced Manufacturing industry and academic research committee, 2011

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The majority of Canadian manufacturers face competition from multinational enterprises in their main market

Even 64% of small manufacturers are competing against multinational enterprises in their main market

In addition to reducing price (65% of firms), manufacturers responded to increased competition by adopting a new process (39%), changing marketing expenditure (39%) and introducing a new product or service (37%)

Source: Industry Canada, Foreign Affairs and International Trade Canada and Statistics Canada. Survey of Innovation and Business Strategy 2009, 2010

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Canadian manufacturers are directly and indirectly integrating into the global market


The majority of motor vehicle parts, primary metal, and aerospace manufacturers produce intermediate goods that are incorporated into their Canadian customers’ exported products

Across many industries, manufacturers producing intermediate goods often position themselves near their large customers to create a localized supply chain (clusters)

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Investment in production facilities in Canada, by industry (2007-2009)

0% 10% 20% 30% 40% 50% 60%

Chemical

Primary metal

Machinery

Manufacturing

Motor vehicle parts

Fabricated metal

Industrial electronics

Aerospace

Pharmaceutical

Motor vehicle

% of manufacturing firms

Opened new facility or expanded capacityObtained capacity by merger or acquisitionClosed an existing facility or decreased capacity

Manufacturing average

Overall, more than 2x as many manufacturing firms increased production capabilities (25%) between 2007 and 2009 than reduced capabilities (11%)


Across most manufacturing industries, more firms increased production capabilities between 2007 and 2009 than reduced capabilities

Of the large* manufacturers that closed an existing production facility or reduced capacity, 29% also opened a new production facility or expanded production capacity in Canada

Overall, manufacturers were nearly four times more likely to increase production capabilities in Canada between 2007 and 2009 than abroad

*Small (20-99 employees), medium (100-249 employees) and large (at least 250 employees)

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Many large manufacturers expand other strategic activities when expanding their production capabilities in Canada

Marketing & sales

21%

Provision of services

28%

Engineering16%

Logistics32%

R&D27%

New ProductionCapacity

Activities coinciding with an expansion of production capabilities

(% of large firms introducing other activities, 2007-2009)

Source: Industry Canada, Customized tabulation from the Survey of Innovation and Business Strategy 2009, 2010

Production activity is an anchor for investments in other value-added business activities such as R&D, logistics, and provision of services.

Location decisions for these investments often rely on proximity of supply chain partners, availability of highly qualified personnel, regulatory frameworks and collaboration opportunities with universities.

Large* manufacturers with headquarters in Canada and those with headquarters abroad increased production capabilities in Canada at a comparable rate (34% and 28% respectively).

*Small (20-99 employees), medium (100-249 employees) and large (at

least 250 employees)

9Source: Industry Canada, Foreign Affairs and International Trade Canada and Statistics Canada. Survey of Innovation and Business Strategy 2009, 2010

Over 2x as many manufacturers increased R&D capabilities in Canada between 2007 and 2009 than reduced capabilities

Investment in R&D facilities in Canada, by industry (2007-2009)

0% 5% 10% 15% 20% 25%

Motor vehicle parts

Primary metal

Manufacturing

Machinery

Fabricated metal


Aerospace

Chemical

Pharmaceutical

Motor vehicle


Opened new facility or expanded capacityObtained capacity by merger or acquisitionClosed an existing facility or contracted capacity


Firms of all sizes are investing in new R&D facilities in Canada

Organic R&D capacity expansion is a trend in most Canadian manufacturing industries from 2007 to 2009

Large manufacturers with head offices in Canada are more likely to invest in R&D facilities in Canada compared to manufacturers with foreign headquarters

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An emerging business model consists of outsourcing the production function to focus on other value propositions activities such as R&D, logistics and commercialisation


Overall, the majority of outsourcing* of production and R&D is within Canada

Outsourcing of production is often focused on non-core product groupsin areas where contract manufacturers have specific capabilities

Large manufacturers are twice as likely to outsource some production abroad than small manufacturers (21% and 10% respectively)

*Outsourcing of production consists of the contract manufacturer fulfilling the fabrication of a good based on the hiring firm’s design specifications

Outsourcing of production and R&D, by industry

0% 5% 10% 15% 20% 25% 30% 35% 40%

Chemical

Primary metal

Manufacturing

Fabricated metal

Motor vehicle parts


Machinery

Pharmaceutical

Aerospace


R&D - outside Canada R&D - in Canada

Production - outside Canada Production - in Canada


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The manufacturing sector outpaces all other industries in Canada* in the introduction of process, organizational, product and marketing innovation

2/3 of manufacturers that introduced process innovations between 2007 and 2009 were able to reduce the average cost of their products (average cost reduction was 11%).

In general, large manufacturers (50%) are more likely to utilize advanced production technologies than medium (43%) or small manufacturers (34%).

Introduction of the four types of innovation by Canadian firms (2007-2009)

0% 10% 20% 30% 40% 50% 60% 70%

Marketing innovation

Product innovation

Organizationalinnovation

Process innovation

% of firms

ManufacturingAll other industries*

Source: Industry Canada, Customized tabulation from the Survey of Innovation and Business Strategy 2009, 2010

*All other industries includes: Agriculture, forestry, fishing and hunting; Mining, quarrying, and oil and gas extraction; Utilities; Construction; Wholesale Trade; Retail trade; Transportation and warehousing; Information and cultural industries ; Finance and insurance; Real estate and rental and leasing; Professional, scientific, and technical services; Management of companies and enterprises; and Administrative and support, waste management and remediation services (20+ employees).

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Implementing a mix of innovation (process, product, organizational and marketing) is a key focus across a number of manufacturing industries

Overall, the introduction of the four types of innovation by manufacturers is similar by size of firm

Also, many manufacturers are implementing organizational innovation by establishing collaborative strategic partnerships with both customers and suppliers


Introduction of innovation in manufacturing, by industry (2007-2009)

0% 10% 20% 30% 40% 50% 60% 70% 80%


Manufacturing

Fabricated metal

Chemical

Pharmaceutical

Machinery

Primary metal

Motor vehicle parts

Aerospace

Motor vehicle


Process innovation - Introduced new or significantly improved methods of production

Organizational innovation - Introduced new methods of organizing work responsibilities and decision making

Product innovation - Introduced new or significantly improved good

Marketing innovation - Introduced new media or techniques for good promotion


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Many manufacturers are expanding their adoption of process innovations beyond new manufacturing methods to include other critical operations

Improved quality and supply chain agility are among the leading outcomes of process innovation that influence the marketing activities of manufacturers

Also, manufacturers that have adopted process innovation focused on green supply chain management have successfully improved their business and environmental performance on many levels


Industry Canada, Green Supply Chain Management: Manufacturing – A Canadian Perspective, 2009

Types of process innovations introduced by Canadian manufacturers, by industry (2007-2009)

0% 10% 20% 30% 40% 50% 60% 70% 80%



Fabricated metal

Chemical

Pharmaceutical

Machinery

Primary metal

Motor vehicle parts

Aerospace

Motor vehicle


Introduced new or significantly improved methods of production

Introduced new or significantly improved supporting activities for their processes

Introduced new or significantly improved logistics, delivery or distribution methods


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North American Best-in-Class* (BiC) manufacturers distinguish themselves by their implementation of process innovations and advanced technologies

Source: Aberdeen Group. Lean Manufacturing: Five Tips for Reducing Waste in the Supply Chain, 2009.

A key focus for BiC manufacturers is to optimize the order-to-delivery process and to synchronize production execution with customer demand.

The use of technology to enable the modeling of inventory targets to optimize production schedules is key for firms aiming to increase their production flexibility.

Note: Best-in-Class are defined as the top 20% of North American manufacturers benchmarked to perfect order delivery and improvement in four performance metrics: manufacturing cycle time, customer lead times, inventory carrying costs, and inventory write off. Laggards represent the bottom 30% of firms benchmarked to the same metrics.

BiC - Processes and technology adoption

0% 10% 20% 30% 40% 50% 60% 70%

Supply chain visibility (includingevent management)

Automated value streammapping

Advanced planning andscheduling

Manufacturing executionsystem

Demand planning andforecasting

Shared lean metrics betw eensupply chain and

manufacturing teams

Operational data and metricsare displayed in real-time

w here needed

Ability to manufacture productsbased on demand from thenext stage in supply chain

% of NA manufacturers

Laggards BiC

Technology

Processes

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Key Findings

Manufacturing is a vibrant, highly innovative and technology driven industry of the Canadian economy

More than twice as many manufacturers increased production (25%) and R&D (7.9%) capabilities in Canada between 2007 and 2009 than reduced capabilities (11% and 2.1% respectively)

New investment in manufacturing facilities in Canada is driven by the need to increase agility, expand mass customization capabilities, capitalize market niches and optimize prototyping and new product introductions (NPI)

The manufacturing sector outpaces all other industries in the introduction of process, organizational, product and marketing innovations in Canada

Best-in-Class manufacturers distinguish themselves by their implementation of process innovations and advanced technologies

Production flexibility, logistics network quality and industrial engineering capabilities are key competitive advantages for Canadian manufacturing; all three rely heavily on process and organizational innovation