Canada/United States Manufacturing Perspective

Executive Summary

Lean manufacturing principles have revolutionized the way leading firms deliver products to their customers and manage their global supplier relationships. As competition becomes more global, innovation is moving from a firm-to-firm level to a supply chain versus supply chain perspective. In order to compete against low cost countries (such as China), Canadian firms must develop supply chain agility in a Just-In-Time (JIT) and mass customisation mode.

Logistics and supply chain management (SCM) are key components of any Lean manufacturing initiative. The two most preferred key performance indicators (KPI) measured by North American (NA) Lean manufacturers are logistics and SCM JIT related (on-time delivery and inventory turns) while traditional Lean floor plant measures, such as production cycle time and site utilisation, are far behind1.

The measurement of logistics and SCM KPI is essential to the agile supply chain concept. It is estimated that 37 percent of NA firms that have put in place logistics and SCM KPI corporate wide measurement achieved a decrease of 15 percent or more in shipment delays compared to only 7 percent of firms that did not measure them consistently24.

While inventory turns is the main KPI for evaluating Lean supply chain agility, logistics cost KPI allow firms to evaluate the efficiency of their logistics and SCM operations in their global Lean initiatives. The combination of supply chain agility and efficient SCM practices is key to the long term competitiveness and prosperity of Canadian firms in a GSC context.

Inventory Turns

In terms of Lean supply chain agility KPI, there was a negative impact on industry performance following September 11, 2001. In the Canadian Finished Goods sub sector, the average inventory turns were down 10.75 percent in 2001 compared to 2000.

Canada’s 2005 Manufacturing raw material inventory turns ratio was still below the United States level of 1992, although it increased 20.77 percent during the 1992-2005 period. Canada has a productivity gap of 35 percent in that specific KPI.

For the same period, the Manufacturing finished goods inventory turns ratio increased 23.91 percent in Canada. Both countries started at about the same level in 1992, and the U.S. is currently only about 4.3 percent behind Canada in terms of finished goods inventory turns.

The best inventory turns ratio is by far that of the Motor Vehicle Manufacturing sub class (finished) with a ratio of 299.36. Manufacturers in this class keep in average a little more than a day’s worth of finished goods. The same sub sector leads also in the raw materials field. This seems to be a typical example of the JIT / Lean logistics principles where a manufacturer tries to produce exactly what is needed, no more or no less.

In regards to productivity growth, the fact that the retail and wholesale inventory turns were levelled or growing for the 1992-2005 period means that in the whole supply chain the inventory was not solely transferred from manufacturers to wholesaler or from wholesalers to retailers; there was a real productivity growth in inventory management by the Manufacturing sector in Canada and in the U.S. for that specific period.7

Logistics Costs

A comparison of the manufacturing sector for Canada and the U.S. shows that costs related to logistics outsourcing are higher in the U.S. than in Canada. Nevertheless, Canada has an internal logistics cost in manufacturing higher than that of the U.S.

Canada’s inventory carrying costs are 11 percent higher for manufacturing. Total logistic costs for manufacturing in Canada are 2.5 percent higher than the U.S.18.

The fact that the Canadian Manufacturing sector has similar logistics cost than the U.S. does not imply that both countries’ sectors are competing at the same level. The increase in supply chain flexibility KPI, such as inventory turns, could be more expensive in terms of logistics operational costs. On the other hand, it can dramatically reduce total supply chain costs as well as increase sales and profit margins of manufacturers.

Technology

In order for manufacturers to achieve the benefits of their respective Lean logistics and SCM business drivers, the adoption of logistics and SCM technology across supply chains is a key component for developing efficient collaboration networks.

Only 16.4 percent of Canadian manufacturers invested in logistics innovation processes between 2002 and 2004.

On the other hand, 77 percent of Manufacturing Canadian sectors that have invested more into logistics technology than their industry average have achieved a superior Lean logistics agility productivity growth compared to the manufacturing average5.

Although the logistics and SCM technology investment level has been low for the manufacturing sector in Canada, the sector is starting to respond to the increased complexity of logistics and SCM by dramatically increasing its investment in value added distribution centers and freight terminal infrastructure. Canadian Manufacturing annual investments in warehousing and freight terminals has increased by more than 217 percent from 2001 to 20036.

In order to benefit from the productivity of logistics and SCM, individual firms must develop their own personal roadmap. It would consist of documenting the long-term perspective into specific action items linked to deliverables, performance indicators objectives, return on investment and a project time frame.