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?
2
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, 2011
McKinsey & Company. Reducing risk in your manufacturing footprint, 2009
The Economist. Moving back to America - The dwindling allure of building factories offshore, May 12, 2011
3
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
Location
Velocity /
Agility
Logistics
network
Industrial
engineering
capabilities
Production
cost
Distribution
costs
Canada /
U.S.
High
High
High
High
Low
China
Low
Medium-low
Medium-low
Low
High
Medium
Medium
Medium-low
Medium
Medium
Mexico
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
4
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
Candian manufacturers facing competition in main market from multinational
enterprises
Motor vehicle
Pharmaceutical
Chemical
Motor vehicle parts

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%)
Industrial electronics
Machinery
Manufacturing
Manufacturingaverage
average
Aerospace
Primary metal
Fabricated metal
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
% of manufacturing firms
Source: Industry Canada, Foreign Affairs and International Trade Canada and 5
Statistics Canada. Survey of Innovation and Business Strategy 2009, 2010
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
Indirect exporting by Canadian manufacturers
Motor vehicle parts
Primary metal
Aerospace
Industrial electronics
Fabricated metal

Across many industries,
manufacturers producing
intermediate goods often
position themselves near
their large customers to
create a localized supply
chain (clusters)
Machinery
Manufacturing
Manufacturing average
average
Chemical
Pharmaceutical
0%
10%
20%
30%
40%
50%
% of manufacturing firms
60%
70%
Sells product to another Canadian firm that uses it as an input into production for export
Sells product to another Canadian firm that exports product "as is"
Source: Industry Canada, Foreign Affairs and International Trade Canada and 6
Statistics Canada. Survey of Innovation and Business Strategy 2009, 2010
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
Investment in production facilities in Canada, by industry (2007-2009)
Motor vehicle
Pharmaceutical
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
Aerospace
Industrial electronics
Fabricated metal
Motor vehicle parts
Manufacturing
Manufacturing
average
Machinery

Overall, manufacturers were
nearly four times more likely to
increase production capabilities
in Canada between 2007 and
2009 than abroad
Primary metal
Chemical
0%
10%
20%
30%
40%
50%
60%
% of manufacturing firms
Opened new facility or expanded capacity
Obtained capacity by merger or acquisition
Closed an existing facility or decreased capacity
Source: Industry Canada, Foreign Affairs and International Trade Canada and
Statistics Canada. Survey of Innovation and Business Strategy 2009, 2010
7
Many large manufacturers expand other strategic activities when
expanding their production capabilities in Canada



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).
Activities coinciding with an expansion of
production capabilities
(% of large firms introducing other activities, 2007-2009)
R&D
27%
Marketing
& sales
21%
Provision
of services
28%
Logistics
32%
New
Production
Capacity
Engineering
16%
Source: Industry Canada, Customized tabulation from the Survey of
Innovation and Business Strategy 2009, 2010
8
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)
Firms of all sizes are investing
in new R&D facilities in Canada
Motor vehicle

Organic R&D capacity
expansion is a trend in most
Canadian manufacturing
industries from 2007 to 2009
Pharmaceutical
Chemical
Aerospace
Industrial electronics
Fabricated metal

Large manufacturers with head
offices in Canada are more
likely to invest in R&D facilities
in Canada compared to
manufacturers with foreign
headquarters
Machinery
Manufacturing
average
Manufacturing
Primary metal
Motor vehicle parts
0%
5%
10%
15%
20%
25%
% of manufacturing firms
Opened new facility or expanded capacity
Obtained capacity by merger or acquisition
Closed an existing facility or contracted capacity
Source: Industry Canada, Foreign Affairs and International Trade Canada and
Statistics Canada. Survey of Innovation and Business Strategy 2009, 2010
9
An emerging business model consists of outsourcing the production function to focus on
other value propositions activities such as R&D, logistics and commercialisation


Outsourcing of production and R&D, by industry
Overall, the majority of
outsourcing* of production
and R&D is within Canada
Aerospace
Pharmaceutical
Machinery
Outsourcing of production is
often focused on non-core
product groups
in areas where contract
manufacturers have specific
capabilities
Industrial electronics
Motor vehicle parts
Fabricated metal
Manufacturing
Manufacturing
average
Primary metal

Large manufacturers are twice
as likely to outsource some
production abroad than small
manufacturers (21% and 10%
respectively)
Chemical
0%
5%
10%
15%
20%
25%
30%
35%
40%
% of manufacturing firms
R&D - outside Canada
Production - outside Canada
R&D - in Canada
Production - in Canada
Source: Industry Canada, Foreign Affairs and International Trade Canada and10
Statistics Canada. Survey of Innovation and Business Strategy 2009, 2010
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)
Process innovation
Organizational
innovation
Product innovation
Marketing innovation
0%
*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).
10%
20%
30%
40%
% of firms
50%
60%
70%
Manufacturing
All other industries*
Source: Industry Canada, Customized tabulation from the Survey of Innovation and
Business Strategy 2009, 2010
11
Implementing a mix of innovation (process, product, organizational and
marketing) is a key focus across a number of manufacturing industries
Introduction of innovation in manufacturing, by industry (2007-2009)

Overall, the introduction of
the four types of innovation
by manufacturers is similar
by size of firm
Motor vehicle
Aerospace
Motor vehicle parts
Primary metal

Also, many manufacturers
are implementing
organizational innovation
by establishing
collaborative strategic
partnerships with both
customers and suppliers
Machinery
Pharmaceutical
Chemical
Fabricated metal
Manufacturing
Manufacturing
average
Industrial electronics
0%
10%
20%
30%
40%
50%
% of manufacturing firms
60%
70%
80%
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
Source: Industry Canada, Foreign Affairs and International Trade Canada and
Statistics Canada. Survey of Innovation and Business Strategy 2009, 2010
12
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
Types of process innovations introduced by Canadian manufacturers, by industry (2007-2009)
Motor vehicle
Aerospace
Motor vehicle parts
Primary metal
Machinery
Pharmaceutical

Also, manufacturers that have
adopted process innovation
focused on green supply
chain management have
successfully improved their
business and environmental
performance on many levels
Chemical
Fabricated metal
Manufacturing
Manufacturingaverage
average
Industrial electronics
0%
10%
20%
30%
40%
50%
60%
70%
80%
% of manufacturing firms
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
Source: Industry Canada, Foreign Affairs and International Trade Canada and
Statistics Canada. Survey of Innovation and Business Strategy 2009, 2010
Industry Canada, Green Supply Chain Management: Manufacturing – A
Canadian Perspective, 2009
13
North American Best-in-Class* (BiC) manufacturers distinguish themselves
by their implementation of process innovations and advanced technologies


A key focus for BiC
manufacturers is to
optimize the order-todelivery 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.
BiC - Processes and technology adoption
Ability to manufacture products
based on demand from the
next stage in supply chain
Processes
Operational data and metrics
are displayed in real-time
w here needed
Shared lean metrics betw een
supply chain and
manufacturing teams
Demand planning and
forecasting
Manufacturing execution
system
Technology
Advanced planning and
scheduling
Automated value stream
mapping
Supply chain visibility (including
event management)
0%
10%
20%
30%
40%
50%
60%
70%
% of NA manufacturers
Laggards
BiC
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.
14
Source: Aberdeen Group. Lean Manufacturing: Five Tips for Reducing Waste in the Supply Chain, 2009.
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
15