Despite the disruption brought about by the pandemic, we already know some aspects of our future. Regardless of when and how we reboot our economy, it will no longer be in our national interest to rely on China for the manufacture of products critical to our lives and livelihoods.
[Listen to audio version, read by David Hodes]
This fact presents us with a fundamental choice—do we erect high tariff barriers to protect our industry against lower-cost providers? Or is there a case to be made for a competitive, growth-oriented manufacturing sector? Some think that manufacturing in Australia is a thing of the past. According to the Australian Bureau of Statistics, in the year to end June 2016, manufacturing represented 6.1 per cent of Australia’s GDP and 7.4 per cent of employment at some 886,800 direct and 331,000 indirect jobs. In the 2015-2016 financial year, manufacturing generated $100bn in export income, second only to mining’s $117bn.
In isolation, I have sometimes found my mind drifting to a dark vision. We have spent an unprecedented amount of our children’s money on keeping our economy afloat. What hospitals and schools will not get built as a result? How will we defend ourselves against the rise of an expansionist totalitarian regime? How will we fund the interest payments on all that debt and how will we ever pay it back? The Reserve Bank has been working overtime to manufacture a fistful of money, but it’s our work that’ll be required to pay it back in the form of higher taxes and lower levels of government services. In my darkest moments, I wonder if, through the provision of our equivalent of the universal basic income, we will ultimately lose the will to get up and have a go at competing.
We have some fundamental decisions to make before thinking about our post-pandemic future. Are we going to take on personal responsibility, or will we surrender our liberty to a collective? Are we for a free enterprise system or will we succumb to the siren song of high tariff barriers to insulate our industries from the competition? Will we have the will to rein in the administrative state, or will we allow our burgeoning bureaucracy to perpetuate itself into eternity? Do we want to be free, democratic and subject to just laws? Or shackled by either real tyrannies or those made from low expectations?
As we all sit in our homes and maintain social distance, it is apposite to remember the words of Robert Menzies in his famous Forgotten People speech of May 1942—in the middle of the Second World War:
‘My home is where my wife and children are. The instinct to be with them is the great instinct of civilised man; the instinct to give them a chance in life—to make them not leaners but lifters—is a noble instinct.’
Whether it was Menzies, Hawke and Keating, or Howard and Costello, Australians have always been at their best when the orientation is toward aspiration. We are the people of the ‘fair go’ and ‘having a go’. It has served us well in the past and will do so again in the future. We routinely box above our weight and are keen competitors in all fields of human endeavour. Indeed, as I write, Australia is not in the top twenty in the world in both absolute and relative terms for confirmed cases and deaths. It’s not luck.
The Advanced Manufacturing Growth Centre (AMGC) developed the sector competitiveness plan after members of the AMGC team met with small and large manufacturers from around the country. Their goal was to understand not only these manufacturers’ unique sources of competitiveness and their aspirations for growth but also their challenges. They consulted with other members of Australia’s manufacturing ecosystem, including international customers, entrepreneurs, academics, researchers and representatives at all levels of government. In their study, they summarised the three sources of competitiveness thus:
Shift Market Focus
The managing director of the AMGC made the point in bold, on a single page of the 166-page report:
“It is essential that any analysis of competitiveness looks beyond product cost.”
The report offered this vignette, which neatly illustrates how an already competitive export sector in Australian manufacturing could do better:
‘In the medical devices industry, management and professional wages are 38% lower in Australia than in the United States (US). However, this often doesn’t flow through to lower overall labour costs because Australia’s high-skill workers have a more limited mix of skills (e.g. only 17% of Australian aerospace workers have bachelor’s degrees compared with 44% in the US). Second, Australia has an opportunity to lift its competitiveness in capital efficiency and overheads. It can do this by improving management quality in areas where Australia lags significantly behind other nations, and by collaborating more to overcome the challenges of scale.’
Before proceeding, it is worth pausing for a moment to consider what the AMGC defines as manufacturing. The illustration below shows that when considering the end-to-end lifecycle of manufactured products and their associated services, the pure production component has reduced significantly since the 1970s. High value-added comes with the intangibles of preproduction R&D and Design and the postproduction activities of Sales and Services. The tangible activities of logistics, production and distribution are far more likely to be commoditised and thus demand a focus on low cost and highly efficient execution.
The roots of Theory of Constraints (TOC) lie in Systems Thinking and stem from the seminal book The Goal, first published in 1984. It was a response from its inventor, Eli Goldratt, to the crisis in American industry and its lack of competitiveness against the rising Japanese behemoth. There was a deep irony in the fact that rising manufacturing giants such as Toyota had drunk deeply from the well of American legend W Edwards Deming’s total quality management and used his system of profound knowledge to devastating effect. Thirty-six years on from the publication of The Goal and an entire body of knowledge has been developed to take advantage of the theory’s fundamental insight: a system’s constraint governs the rate at which value is created.
TOC sits in the realm of the hard sciences, with its falsifiable hypothesis promoting the idea that no system can produce infinite output for a finite input. Since its invention, many leaders in the field of manufacturing have contributed to the TOC Body of Knowledge. Thus, TOC has a robust set of methods for strategy formation, project, production and distribution management, and an innovative approach to management accounting. The empirical evidence demonstrates an abundance of proof as to its validity as a significant contribution to the struggle to continuously improve production.
“A system’s constraint governs the rate at which value is created”
Thus, I believe it behoves all those in the manufacturing sector in Australia to learn about its methods and tools systematically and on a grand scale. By way of precedent, in 1995, a team commissioned by Paul Keating’s minister for Employment, Education and Training, Simon Crean, reported on a three-year round of consultations, research, study missions and analysis. The report was boldly titled Enterprising Nation – Renewing Australia’s Managers to Meet the Challenges of the Asia Pacific Century.
Without the fundamental insights of TOC, I wonder how a second wave of renewing Australia’s managers in manufacturing will ‘…improv[e] management quality in areas where Australia lags significantly behind other nations, and by collaborating more to overcome the challenges of scale’. At every step in the value chain described in the illustration above, there is a robust and, for all intents and purposes, an infinitely scalable solution to the problem of competing based on a differentiated product and service offering rather than product cost alone.
In a study conducted at Victoria University in Wellington, Balderstone and Mabin wrote in 1998 their Review of Goldratt’s Theory of Constraints (TOC) – lessons from the International Literature which summarised the results thus:
Balderstone and Mabin wrote this paper in 1997. However, still, we have not grasped the truth of their conclusions to anything approaching the degree required to ensure a unique competitive advantage for the future of advanced manufacturing in Australia and the contribution it will make to sustaining our prosperity.
Of interest when reviewing this report is the fact that the authors note a trend which is true to this day: ‘TOC is still perceived by many, unfamiliar with the approach, as an operations management technique instead of a systems management philosophy’. I have written previously on the topic ‘If TOC is so bloody great, why isn’t everyone doing it?’ Perhaps, at last, the time has come, when necessity births invention, to consider the contribution to be made to Advanced Manufacturing by:
These are the associated methods and tools for a coherent and unified operating philosophy for any enterprise—regardless of its size or complexity. We can map these proven solutions to all the stages in the manufacturing lifecycle: R&D, Design, Logistics, Production, Distribution, Sales and Service. Every person operating within the entirety of the value chain can learn how to speak in a common language, measure performance in a way that delivers what is best for the whole and focus together on the task of continuously improving the competitive advantage of our vital manufacturing sector.
If we are not for ourselves, who will be? If we are only for ourselves, what are we? And if not now, when?
The change from standard thinking to Theory of Constraints (TOC) is both profound and exhilarating. To make it both fun and memorable, we use a business simulation we call The Right Stuff Workshop.
We’d love to run it with you. To learn more:
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