Productivity in modern Australian Manufacturing

As a long term driver of living standards, productivity is crucial to all Australians. Sectors such as manufacturing and agriculture depend on productivity growth to survive, and the flow on effects of manufacturing productivity provide critical expertise to other sectors of the economy.

Australian manufacturers are grappling with increasing costs, skills gaps, labour shortages and changing conditions driven by global events – including the pandemic and the rise of new technologies. In doing so, they are embracing trends such as reshoring and adjusting their approach to personnel matters and operations to improve productivity and build resilience.

The third session in our Rethinking Manufacturing webinar series focused on productivity for modern Australian manufacturing businesses. Discussion centered on the processes and approaches industry leaders are using to unleash the human potential of their business and drive improvements they never imagined.

The key themes of our discussion are summarised below, together with relevant findings from our Manufacturing Resilience Review.

Dealing with labour shortages, skills gaps, upskilling and employee development

Australian manufacturers, like many in other industries, are asking big questions in response to widespread skilled labour shortages and the resulting impact on productivity: How do we ensure adequate skill sets? Can we retrain our existing workforce to increase efficiencies, and if not - where will qualified labour come from?

A poll of our webinar audience showed the scale of the issue, with 95 per cent of attendees reporting trouble attracting and retaining skilled labour. A lack of the specific abilities needed for manufacturing is a persistent problem, but the mindset of sector business leaders is changing and more diverse approaches to solving recruitment and skills issues are increasingly common.

In some cases, the abilities most needed to boost productivity are soft skills — teamwork, customer care and communication, for example. In addition to general soft skills and adherence to industry best practices, manufacturers are counting on improved abilities around scheduling, project management and stakeholder management.

Building resilience into the workforce requires a combination of leveraging existing internal capabilities and external recruitment - increasingly from other industries. Both of these solutions entail the prioritisation of upskilling and training – which should be tailored to suit the individual learner. Some employees who have been in the manufacturing industry for years will require a different learning experience than new recruits from university, for example. Customised, diverse ways of learning – including micro credentials and flexible access options – are key.

There are several traits that determine whether a company will be able to keep employees with key skills for a long time. Identifying and developing existing talent within the business, the presence of a suitable company culture and effective use of technology – among other factors - also impact retention.

Evolving processes to suit a changing environment

The progression toward a new wave of manufacturing technologies, or Industry 4.0, is providing an opportunity for some organisations and challenges for others.

Amid the difficult market conditions during pandemic shutdowns, businesses adopted smart technologies such as automation and artificial intelligence to add purposeful agility to the value chain. However, not every company is ready to embrace such technology. Our manufacturing team recently explored the digital skills shortage in this article – including how governments and industry bodies are supporting manufacturing businesses to reskill and upskill their workforces in these specialised, crucial skillsets.

In the face of rising costs and limited resources, many companies have embraced lean methods, (a production system that focuses on reducing waste, creating customer value and seeking continuous process improvement), to unleash their full potential, rebuild their culture and deliver customer value. Some businesses are well on their way to this kind of reinvention, while others are lagging.

Any successful process change requires buy-in and a shared mindset from the whole team – it can’t just be driven by business leaders. Executed well, these process improvements can transform productivity and culture, realise the human potential of the business, and increase the sense of ownership and investment among employees. 

Key manufacturing productivity levers

There isn’t one, completely effective strategy to lock in productivity. Rather, there are numerous long- and short-term productivity levers available to manufacturers. Each business will find its own ideal mix of which levers to pull, and when.

These fall into four broad categories, as follows:

  • Labour rate arbitrage (offshoring): May provide a one-off improvement in efficiency, but risks a decline in capability
  • Process improvement: Typically incremental changes to increase consistency, reduce waste and improve quality
  • Scale efficiencies: Increased volumes to justify investment in new technologies and spread overhead costs across a broader product base
  • Whole ecosystem: Creating an environment for more effective cooperation, collaboration and learning, sharing of scarce resources and excellence through the entire business and/or supply chain.

While many businesses have tried to boost their productivity through offshoring, recent times have shown this method doesn’t necessarily strengthen the company or build long-term resilience. These benefits are more likely to come through strategic adjustments and continuous process improvements.

The push to bring new mindsets into manufacturing has become more ambitious and progressive in recent years. Further, following major changes in priorities such as decarbonisation, skills from other industries, (e.g. the fossil fuels sector), may flow into manufacturing more freely than in the past. As long as employees have the right mindset when they enter manufacturing from other sectors, there is ample opportunity to bring them up to speed on the industry's practices through reskilling.

By stepping back to take a high-level look at their business, manufacturers can identify which issues are most pressing for their individual circumstances and determine the mix of long-term and short-term levers they need to pull.

The role of government in supporting manufacturing

Given its importance to the economy, there is a clear need for a specific and strategic approach to government support for the manufacturing sector - including policies that meet manufacturers' needs and enable a more permeable workforce between sectors.

The most effective way to ensure this happens is for government and industry to work together - aligned to shared strategic priorities - to determine practical solutions that factor in the nuances of the sector.

Taxation policy also has a key role to play in setting the tone for manufacturers. The ideal approach would be one that gives strong, unambiguous incentives to re-shore and hire more people, not deter growth.

A key priority in the years ahead should be ensuring that government grants are more visible and easier to apply for. Current grant application processes are often too complex and obscure for individual business owners to navigate, and many potentially worthy recipients are missing out on support as a result.

We look forward to hearing further details about the National Reconstruction Fund (NRF), which was first announced in the October 2022 Federal Budget. The fund appears to be a replacement for the previous government’s Modern Manufacturing Strategy and will deliver funds via loans, guarantees and equity – rather than a traditional grant system. While the establishment of the NRF Corporation was announced in the 2023 Federal Budget and the NRF Board named on 9 August 2023, no further information has been provided as to how or when funding will be provided to Australian businesses. We’ll be keeping an eye on developments, with a particular interest in how manufacturers might benefit from the fund.  

Data's role in optimising productivity

One of the defining traits of the modern business is a rich underlying foundation of data. Companies that make effective use of analytics in decision making will be able to build their productivity in unique ways, provided they can avoid the potential pitfalls of data use.

It's important to view trend lines and measure progress, but metrics shouldn’t distract you from the bigger picture – it can be easy to get lost in a sea of data that tells you nothing. Simple, straightforward reports and dashboards often provide the best, most actionable view of big data. Leadership can get a clear picture and take action on those signals, without getting bogged down.

Overcoming present and future productivity challenges

In the face of relentless competition and rising cost pressures, manufacturers will need to draw on a combination of methods to achieve sustainable productivity growth. Recruitment, training, technology adoption, process improvements, strategy and process improvements all have their place – but are most effective when used in conjunction with one another, rather than taking an ‘either / or’ approach. Success – and survival - may ultimately depend on the mindset of manufacturing business leaders, their openness to new methods or processes, and whether they are able to unlock the potential of their existing workforce.

For a deeper look into this session and the rest of the Rethinking Manufacturing series, watch the recordings. Reach out to your local BDO adviser to learn how your manufacturing business can prepare for a more productive future.

Manufacturing Resilience Review Insights

Our Manufacturing Resilience Review is designed to help manufacturers assess the impact of key risks facing their business and benchmark against others in the industry.

Almost every risk area which emerged from the results may directly or indirectly impact productivity, but those of particular concern include:

Inability to attract and retain top talent

Defined in the review as “the shortage of talent or failure of a business or market to retain or attract top talent within an industry and/or region and/or skills/capabilities to manage and oversee operations,” respondents deemed this the most likely of all risks and one of the highest in terms of impact. With skills shortages looking like the new normal rather than a short-term issue, manufacturers will need to be creative in the use of automation, AI and machine learning in addition to their recruitment, development and retention efforts.

Cost-down pressures

Deemed a fairly likely but lower impact risk, cost-down pressures can result in cost control and cost reduction measures, both of which have the intention of increasing profitability and are closely tied to productivity. Risks of too much cost cutting include those associated with laying off staff, such as severance pay and rehiring costs, lowering morale and overworking remaining employees.

Access to working capital

Rated as lower risk in terms of both likelihood and impact, this refers to the potential impact of an inability to secure funding (via debt financing, family offices, private equity, public markets, or government grants) leading to failure to fund or undertake necessary and/or committed future capital expenditures.