Gearing Up
[ Last Updated 12 December 2005 ]
Firm Capability Team
Stephen Knuckey
Jason Leung-Wai
Margaret Meskill
August 1999
ISBN 0-478-23412-0
Available as Gearing Up [877 kB PDF].
There are three main messages emerging from this study. First, a positive message: manufacturers are heeding calls to adopt best practice in the face of increasing international competition. In some cases, change has been comprehensive and New Zealand firms are operating with capabilities recognised as characteristic of world class firms. What is really encouraging is that even those firms that are perhaps lagging on the general game have developed competencies in the essential practices of quality and customer focus.
Second, words of warning: best practice is a moving target and it is very easy to rest on already hard won efforts when times are favourable. When the situation deteriorates, however, complacent firms can be left behind.
Finally, an area of opportunity: to adopt best practice comprehensively and maintain a momentum forward, it is crucial that businesses have an underlying culture geared towards improvement. This, embodied by leadership and employee practices, is the area that will likely require further attention, while accelerating the laudable efforts in other areas, if manufacturers seriously wish to continue to compete and profit in the new millennium.
Background
This best practices research or Gearing Up study follows on from the 1994 Leading the Way study carried out jointly in Australia and New Zealand by the Australian Manufacturing Council and the New Zealand Manufacturing Advisory Group. The purpose of the 1994 study was to examine the distribution of best practice within the Australian and New Zealand manufacturing industries and to measure the impact of these practices on overall business performance. The 1994 study confirmed for the first time in New Zealand that adoption of best practice by manufacturers is associated with quantifiably superior business performance. It concluded that Australian and New Zealand manufacturers had come a long way in a short time, with many dramatically improving their international competitiveness.
Objectives
The prime objectives of Gearing Up were to:
- determine the state of organisational capability and best practice in the New Zealand manufacturing sector
- examine the relationships between business practice, business performance and business profile.
The research will help to inform judgements about the underlying strength of New Zealand manufacturing businesses and their ability to achieve sustainable competitive advantage.
Methodology
After extensive consultation with Statistics New Zealand, which included feasibility and pilot studies, a questionnaire was distributed in January 1997 to over 1400 medium and large manufacturing firms throughout New Zealand. The overall response rate, 84%, was well above the expected 70% and vastly superior to the 1994 study's response rate in Australia and New Zealand of 32% and 38% respectively.
The survey was supplemented by visits to 31 firms representing a range of sectors, locations, sizes and levels of performance. The visits were used to validate the survey data and provide a more detailed view of firms' progress towards best practice. Observations during the visits were, in the vast majority of cases, consistent with survey responses.
A Model of Best Practice
The study is shaped by the definition of best practice as defined in the Leading the Way (1994) survey. The definition was used to construct a model of Best Manufacturing Practice (BMP) comprising three elements: strategising, practices and outcomes. The central ideas behind the model are that best practice is holistic in that all elements must be in place and linked together, and cooperation between management and employees in all aspects of the business is crucial to achieve sustainable outcomes.
The progress of a site towards best practice can be shown by plotting its position on a set of axes representing the BMP model - strategising/practice scores against outcome scores. This also enables the identification of two comparative groups: Leaders, or those sites that score in the top 20% of the sample; and Laggers, those sites scoring in the bottom 20%.
New Zealand Manufacturers: Their Practices and Performance
The results illustrate that manufacturers have taken some important steps forward since the 1994 Leading the Way study (in broad terms, as the two studies are not directly comparable). In particular, manufacturers have generally moved away from the inward-looking culture that characterised practices in the early 1990s and recognise the benefits of working closely with suppliers, and, in particular, customers. However, many manufacturers still appear to lack a strategic approach to organisational development and further advances in competitive advantage are likely to require increased attention to:
- employee practices, and viewing human resource management as an important source of competitive advantage
- taking a holistic approach to technological development and aligning technology with planning and human resource practices
- benchmarking outside of the `home' industry and New Zealand.
These are not areas of criticism but should be regarded as opportunities for further efforts. Manufacturers have come a long way in a short time operating in one of the most open and competitive environments in the world. The majority of New Zealand manufacturers have a base of good practices in place and demonstrate some elements of best practice, which bodes well for the industry's future.
Although only a minority of firms apply best practice techniques comprehensively, this can be expected in the relatively short period since deregulation and liberalisation and is consistent with findings from overseas research which suggests that it takes 8-12 years for a lagging firm to evolve into a best practice firm. Undoubtedly it will take even longer for an industry to develop a culture of best practice so that even new and emerging firms are geared towards organisational learning and improvement.
Leaders and Laggers
Although Leaders outperform Laggers on every element of the Best Practices Model, some elements appear to be more influential than others in distinguishing these groups of firms, especially leadership and planning, innovation and technology, and employee practices.
Practices
Leadership and Planning
Leadership and planning practices are those that guide and influence stakeholders to achieve the organisation's goals. Excellent leadership and planning practices involve developing a vision of the future and appropriate business strategies, and working to ensure that employees, customers, suppliers and the community share the values and vision of the firm's executives.
There is a lot of scope for manufacturers to improve their leadership and planning practices. The majority of firms do plan for the future, but the extent of consultation with stakeholders, especially employees, is limited. Even Leaders, who plan for both short and long-term goals, do not typically consult with employees when setting goals.
On a positive note, many manufacturers appear to appreciate the goodwill and flow-on benefits that can be derived from socially responsible behaviour, and are involved with sponsorship and environmental management. Much of this seems to be undertaken on an ad hoc basis, however, and most firms do not actively manage the relationship between themselves and their community and environment.
Employee Practices
This element of best practice refers to the way in which human resources are managed and developed. World-class manufacturers recognise that their performance depends not only on their ability to attract and retain the best and brightest people, but also on empowering their staff to reach their full potential and providing employees with the incentives to strive to attain the firm's objectives.
Similar to the results of Leading the Way (1994), employee practices are underdeveloped and the majority of manufacturers do not actively manage their workforce for competitive advantage. For example, only 35% of the firms align their employee practices with their strategic direction through a human resource development policy. Further, most firms, including Leaders, do not use productivity-based incentive schemes or formal training and performance review systems at most levels of the organisation.
There are, however, signs of a growing commitment to develop effective employee practices. Most manufacturers assess employee satisfaction regularly and recognise the benefits of job rotation and multi-skilled employees.
Customer Focus
In order to compete in today's dynamic business environment, firms must develop processes that provide them with a comprehensive understanding of the current and future requirements of customers. Customer feedback is also an important driver of innovation.
Results illustrate that manufacturers have accepted this concept and customer focus appears to be the most highly developed practice throughout the entire manufacturing industry - even for Lagging firms. Unlike the Leading the Way (1994) results, manufacturers today appear to actively use and seek customer input for developing processes and products. The majority of firms measure customer satisfaction at least annually and have formal procedures for dealing with customer complaints.
Operations and Quality
Operations and quality practices are those used to design, operate and control the production system. Quality has become a clear pre-requisite for business in the 1990s and beyond. Best practice firms continue to define quality as a top priority but also compete on operational flexibility and timeliness.
Results indicate that manufacturers are committed to good quality and operational practices - a result consistent with the 1994 study and a likely reflection of the emphasis on these elements in New Zealand through quality awards and training programs, and the encouragement of industry associations. The vast majority of manufacturers actively encourage employees to identify problems and ways to improve processes. Further, the majority of sites have adopted techniques to improve the flexibility of the production process (such as automation, just-in-time, warehousing and materials management) and have documented manufacturing operating procedures. Despite this, there is still scope for a more comprehensive approach to operations and quality within most firms. Many manufacturers could reflect on the benefits that can be derived from entrusting greater responsibility for quality to front-line production employees.
Unlike the 1994 study, where Leaders had far superior quality practices to Laggers, the differences between Leaders and Laggers from this survey were not always pronounced. A higher proportion of Leaders than Laggers document their operating procedures, use disaster recovery procedures, adopt ISO9000 and encourage the internal customer concept. However, both Leaders and Laggers encourage employees to identify problems and use flexible production techniques such as machine set-up-time reduction, production planning and control, and preventative maintenance.
Supplier Practices
Developing and maintaining close relationships with suppliers is a valuable way of building competitive advantage through gains in quality, cost and timeliness. Close supplier relationships can also provide a valuable source of information on market developments and new technologies.
There are healthy signs that manufacturing sites appreciate the benefits of close supplier relationships. This is a positive improvement from the 1994 study, which found that few firms devoted serious effort to developing reciprocal relationships with suppliers. The majority of firms, Leaders in particular, work closely with suppliers on product and process development, and have systems in place for measuring the quality of inputs and contacting suppliers if problems arise. This may, in part, reflect the emergence and uptake of electronic commerce.
Innovation and Technology
In today's rapidly changing business environment, successful companies need to keep abreast of new technology and constantly innovate in order to fulfil the demands of their customers and maintain their competitive position. Innovation and technology practices are not merely confined to the adoption and development of new equipment, processes and products, but often rely on other business practices, especially employee practices and the plans and strategies of the firm. The nature of this integration affects the impact and success of new technology and innovation.
As with the 1994 study, results indicate that many manufacturers do not take a strategic approach to technological development. The majority of firms do not appear to manage innovation and technology in an integrated way by aligning the development of new processes and technologies with strategic and human resource practices. For example, less than 50% of manufacturers have innovation and technology policies and only a minority of firms consult, train and organise all their employees when acquiring technology. Even amongst Leaders, only around half believe that their technology policy supports their business goals.
Manufacturers do show, however, promising signs of inclusive technology practices at the shop-floor level, especially in terms of using process innovation teams and providing production employees with opportunities to innovate in their day-to-day work.
Information and Benchmarking
Information and benchmarking refers to those practices related to searching for, gathering and using information to identify risks and opportunities, measuring performance and progress against goals, comparing the performance of the firm against other organisations, and searching for and introducing best practice into the organisation. The 1994 Leading the Way study found that benchmarking was the single practice that clearly separated high and low performing firms.
There are positive indicators of improving information practices across the manufacturing sector. Most manufacturers have at least one staff member who undertakes environmental scanning to identify risks and opportunities. In addition, close to half of all manufacturers put a great deal of weight on quality and operational measures when measuring performance, as well as the traditional financial and cost measures.
However, there does not appear to have been a great deal of advancement in benchmarking practices since Leading the Way.1 Only around 50% of manufacturers systematically compare their performance against other companies. Similar to the 1994 survey, those firms that do compare their performance, even Leaders, are more likely to make comparisons with domestic firms and companies in the same industry than with firms overseas or in different sectors. Given that over half the sites surveyed are exporters, there is obviously a great deal of scope for manufacturers to benchmark against overseas firms. Further, although not surprisingly, the majority of both Leaders and Laggers confine benchmarking, if they do it at all, to quantifiable measures.
Outcomes
Outcomes refer to operational outcomes that are directly affected by an organisation's practices.
The overall outcomes' results reflect the results for practices. Strong outcomes were reported on customer and quality related indicators, with scope for improved innovation and employee results. The results do suggest, however, that firms may need to have a stock or threshold of combined practices in place before reaping the rewards of high outcomes. This re-emphasises the need for a comprehensive approach to best practice.
- Despite facing difficult trading conditions, manufacturers as a whole achieved good results on customer service and timeliness. High proportions reported a great deal of, or a moderate, improvement to (i) delivery on time to customers over the three years before the survey, and (ii) delivering products in full, on time, to specification, 95% of the time or more.
- Similarly, reflecting the strong quality culture among New Zealand manufacturers, firms also report excellent quality outcomes with high proportions stating (i) they have made moderate or a great deal of improvement to the quality of their products over the three years prior to the survey, and (ii) that their cost of quality is less than 5% of total sales.
- Innovation outcomes are rather mediocre but encouraging with just over 50% of manufacturers reporting at least moderate improvements to products or services over the three years prior to the study, and relatively low numbers indicating changes to manufacturing technology over the period. The lack of integration of innovation and technology practices with planning processes is reflected in the industry's research and development (R&D) levels. R&D was quite low across the manufacturing sector with just less than half of sites spending less than 1% of total sales on R&D. Very few manufacturers spend more than 5% of their total sales on R&D.
- Manufacturers have generally focused on developing operations flexibility, with almost 75% stating they had made improvements to the flexibility of their production processes by at least a moderate amount over the three years prior to the survey. Many reported that automation, machine set-up time reduction, production planning and control, warehousing and materials management, and preventative maintenance had positive effects on their operations over this period.
- Employee flexibility outcomes were mixed, with 80% of firms stating that all or many employees could do more than one job, but few firms spend 5% or more of their pre-tax payroll on education and training.
- Most manufacturers believed that their operational outcomes (such as labour, material and overhead costs) are either better than or on a par with competitors. However, given that only half of the firms systematically compare their performance with other groups, these results may be exaggerated.
Sources of Assistance
Sites were asked to identify which agencies had been valuable sources of external advice or assistance. As with Leading the Way (1994), the most commonly used sources of assistance are associated companies or networks of firms. Government provided assistance is generally used by only a small proportion of manufacturers (with the exception of Trade New Zealand by exporters). The results suggest that there may be more innovative ways of delivering enterprise assistance and scope for developing the relationship between business groups and government agencies that deliver assistance. The new focus for the business development programme, in terms of contracting services from local enterprise assistance deliverers, private providers, and industry associations, is a step in this direction.
Best Practice and Business Results
This is the essence of best practice for manufacturers - when it comes down to it, the overall objective of any firm is to make a profit. The results reaffirm those from the 1994 study that showed best practice works: Leading firms have achieved better financial and business results than Lagging firms on a range of indicators including sales growth, exports, profitability and value added.
Strategy
Strategy is an important interface between the operations and capability of the firm and its environment. It appears that manufacturers' priorities in the years preceding the survey centred on improved product quality and delivery on time rather than flexibility and innovation. This will partly explain the focus on the development of quality and operations, customer focus and supplier relations practices in the years prior to the survey.
Government Policy
A range of government policies impact on firm capability and performance including macroeconomic, microeconomic, social, and enterprise assistance policy. The main areas of policy that manufacturers visited considered particularly impacted on them were education and training (many firms reported skills shortages); tariff policy (firms in affected industries were concerned with timing of tariff reductions and were moving to diversify products and markets); regulatory policy (many firms were concerned about compliance costs, especially with GST, ACC and Statistics New Zealand surveys); and employment and industrial relations policy (in terms of costs related to personal grievances and dismissal). Generally manufacturers interviewed were seeking clearer signals and direction on policy from Government which would help them to plan more effectively.
Differences by Size of Firm
Large firms, on average, have better practices than medium firms, especially in relation to leadership and planning, operations and quality, and employee practices. This may relate to the greater strategic and management demands placed on large firms, and that they generally have more resources and can more afford to develop best practices. It may also reflect the preference for more informal processes in smaller firms.
Differences by Base of Ownership
Firms that are part of a larger organisational group, on average, have better practices than single location firms. This may relate to the transfer of good practices and product/market knowledge between the linked sites and the need to have more formalised processes in multi-site enterprises. Parent companies can also provide incentives for change by encouraging best practice throughout the group. As indicated by the firm visits, however, the effect can depend on the extent of delegation of responsibility given to the local firm.
Differences by Export Status
Exporters, on average, have better practices than non-exporters - especially in terms of leadership and planning, operations and quality, and employee practices. This may relate to the demands placed on exporters in competing directly with the world's best firms, and that more efficient firms tend to become exporters.
Differences between Sectors
Analysis suggests that the non-metallic mineral product, food/beverage and tobacco, and wood and paper manufacturing sectors have, on average, more highly developed practices than other sectors. The meat product, and textile and clothing manufacturing sectors have relatively poor practices. This may relate to differences in industry protection over time between sectors and the development of different competitive strategies across sectors. It is likely to also relate to differences in ownership structure (in that better performing sectors have a higher proportion of multi-site firms), and may relate to differences in scale and exporting status between firms in different sectors.
Drivers of and Barriers to Best Practice
Leadership appears to be the key driver of best practice in the manufacturing sector.
Common to all Leaders visited was a driving figure or structure that created a vision for the future and secured the commitment and trust of staff in moving towards this vision.
Similarly, the main barriers to best practice in most Lagging and Middler companies were that the managing directors were risk averse and, depending on the size of the company, either too involved in the day-to-day running of the company to set a direction for the future, or distanced from their operational functions. These factors meant that improvement initiatives were often ad hoc or not aligned with the values and efforts of employees.
Conclusion
New Zealand manufacturers have come a good way towards best practice in a number of areas but most have not yet taken the important although difficult step towards a coordinated and strategic approach to business improvement. Across the industry, there has obviously been a great commitment to enhancing customer focus and quality of output. The fact that even Lagging firms have well-developed practices in these areas is evidence of this commitment. These results are positive and provide the industry with a sound base to compete in the increasingly open and competitive environment they face in the years ahead.
But the study does point to some broader issues that would benefit from consideration. There is still scope for manufacturers to devote time and resources to the "softer" practices of leadership and employee development, to take a strategic approach to innovation, and to develop a culture geared towards continuous improvement.
Manufacturers can look to learn from the experience of those that have successfully developed these practices to move forward. Industry and Government should consider those policy areas, particularly education and training, which affect their development.
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