Australian Manufacturing: Productivity, Automation, & Integration

Productivity Improvements: Your Key to Managing the Inflation Dragon

The RBA kept interest rates on hold last month. The March quarter showed investment in capex by business had increased by 2.4% to $36.1 billion – well above the 0.7% consensus. This is good news. Australia’s cost base is expensive in global terms, our energy costs continue to rise, our labour costs are already more expensive than most countries and the reality of moving traditional manufacturing back to Australia is a fantasy only politicians really believe in. If manufacturing in Australia is to thrive, it needs to change.

There are several ways executives can improve the productivity of their manufacturing business:

1. Renovate or build new manufacturing facilities thereby ensuring any logistical or process bottlenecks are designed out of the factory;
2. Buy and install machinery that will automate activities on the existing factory floor; or
3. Do both: build a new factory and fit it out with automated equipment. 

An increase in spending on automation seems to have been happening for a little while now. Spending on plant and equipment jumped 3.7% to $17.1 billion in the March quarter. Citi’s chief economist said:

“It appears that businesses are catching up on a lack of previous investment from the pandemic and bottlenecks.”

While those shocks lead to an increased investment in inventory, the bottlenecks are slowly improving, and attention can now move to more strategic matters. This means productivity improvements.

Another productivity improvement tactic is to implement new software technology such as a new ERP system. Many legacy ERPs, while functionally rich, are often clunky and rarely have the ease of connectivity many of the new technology platforms bring. This has been a common go-to tactic in recent times. Speak to any of the ERP software vendors and they will tell you that business is good. An even smarter tactic is to ensure you have connectivity between those automated machines and your new ERP system, you know that thing called Industry 4.0, utilising Industry Internet of Things (IIoT).

I have clients undertaking each of those tactics right now. One is building a new factory and installing automated equipment and a new MES (Manufacturing Execution System) and they will be closely following this investment with a new ERP system.

I have another who is continuing their strategy of having the best equipment on their factory floor by currently commissioning new automated equipment. This activity is occurring in parallel while we select a new ERP system to provide back office efficiencies. In their case, the advantages will be in the time and effort it takes to provide clients with a quote, bring finance and operations onto the one system, and provide improved intercompany trading.

I have another client who recently commissioned a new line in their operations. This was a very significant investment, in the order of the revenue for many mid-sized businesses, and they are reaping the benefits almost immediately. Now we need to find an ERP system to support that investment because their back office is extraordinarily manual. Once the right ERP has been implemented, this business will be transformed and unrecognisable.

The executives running these businesses understand the value of investing in assets that improve productivity. However, in a few of the cases mentioned above, it is my view that the company would have been in a stronger position if the technology platform underpinning the investment in factories and machinery had been in place beforehand. A key learning from my 25 years in this business is the fact you need to invest in these capabilities before you really need them. You need to be thinking about this at least two years in advance of when you might need it.

The inflation battle is not over. In fact, inflation can be of assistance here. I have vivid memories from when I was a boy, when my dad had made what seemed like a very risky investment at the time with inflation starting its run in the 1970s. Looking back the inflation experienced at the time helped him pay off that investment in inflated dollars much quicker than he had expected.

The business community is at a pivotal point. Don’t waste the opportunity. If you want to better understand what is possible for your business, reach out for a confidential discussion.

© David Ogilvie