1. R&D Innovation and Australia’s Manufacturing Future
Dr John Blakemore
Principal
Blakemore Consulting International
Sydney

2. Australian Manufacturing Has a Problem

3. Problem Manufactured imports greater than manufactured exports
Net contraction in real terms, of the production of value added goods
Despite record terms of trade we trade in deficit with CAD = approx 6%GDP
Solution is Innovation of process and product and increase in Business R&D

4. R&D $ & Productivity
Source: OECD Main Science and Technology Indicators,
Source: OECD Productivity Database, 17 December 2004
GERD is defined as total expenditure by all sectors — business enterprise, government, private non-profit,
higher education — on R&D that is performed within the boundaries of the country

5. Australia Exports & Employment Excellent Correlation

6. CSIRO Exp vs Comparative Adv

8. Process Innovation versus Product Development
There is no point in adding a new product to a bad system
Process innovation and product innovation must be integrated together to achieve the flexibility needed
Products need to be modular and design and customer friendly

9. Where Do You Start? The World is your Market
Processes must be world class
Concentrate effort in areas in which we have a competitive advantage
Join the global supply chains
Integrate processes and systems, pull
by customer, then spread out both ways.
5. Recognize that it is all about QCD
6. Use internal digital data on shorter periods
7. Hook up digitally with customers & suppliers
8. Reduce or Eliminate forecasting as much as possible

10. Parameters 1
The resources boom and a weak US$ has led to an elevation of the $A and squeezed manufactured exports…Dutch/Spanish Disease in the future?
Labour costs often blamed (incorrect?)
Serious infrastructure constraints
Servicing costs on foreign debt high
Interest rates high by global standards and will go up higher when Net Financial Debt seen as a problem (60% GDP, CAD = 6% GDP)
Italy highest on record in 1924 at 7.1% of GDP, then, in 1925 what happened?

11. Parameters 2
R&D and Innovation are the key drivers of manufacturing growth and sustainability
Australia’s private R&D investment is very low by world standards
Australia concentrates its innovation and R&D in the middle of the supply chain. This effort is more valuable closer to the customer.

12. Innovation and Performance
We need to be flexible and fast like Australia 2 in the America’s Cup in 1983 when we came from behind 3 to 1 and had to win the next 3 races in a row Even though we lost the next 3 starts we won the cup.
The secret was the Ben Lexcen’s innovation.
We need a winged keel!!!

13. Manufacturing or Service?
There is no such thing as a pure
manufacturing company
All companies are service driven
What is your position in the supply
chain?

14. Solutions Two plans needed
1. Short term objectives to immediately build a planning system to release working capital by reducing the planning cycle and making to order ( Process and System Innovation)
2. Long term strategies to utilize all national resources to link process and product innovation systems and R&D and maximize performance by reducing planning cycles and maximizing value added in the whole of the supply chain (Process, System Product Dev).

15. Key Business Financial Ratios To Aid Process & Product Innovation
EBITA
ROWC = Return on Working Capital (Dr=Cr)
Days Inventory
Value Added Percent of Sales and Product
WC as % Sales
Cash Flow (Current Ratio)
(Labour + oncosts) as % Sales $
Quality (Waste), Cost (COS), Delivery (OTD)
R&D as % Sales (Process vs Product)
Intangible Assets?
RONA (How do you value assets?)

16. Key Operational Ratios
On Time Deliveries % (CROTD, Actual)
Changes to plan
Planning lead Time
Lead Time ( Time to produce from RM)
Value Added Time (Run Time/ 168 )
Measures (Setup,Run,BD,PMT,Idle,CU),
Manned Time (% Available)
% Major Ops with adequate backup personnel

17. Current Accounting Procedures are Inadequate and Mislead
Spread overheads over all processes. ( but Admin Overheads?)
Isolate what is in the overheads and allocate them correctly to products and processes
Use the appropriate line entries in the P&L to focus on the cost of non value added processes
Do not be misled by the fact that inventory is seen as an asset on the Balance Sheet… it is a waste.

18. P&L and Improved Flow

19. Some Operational Measures can be Misleading
% up time may be high because run or batch sizes are too large and this creates excess inventory of some and out of stock for others
Solution is to measure and reduce continuously the Economic Production Run (EPR) and reduce setups, idle time, cleanups, colour changes, breakdowns,
Preventative maintenance needs to be optimised

20. Machine Measures Typical
Ops 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
No Machines 23 24 51 20
No Shifts per Wk 18
2.5
Setup %
3.6
7.9
0.4 -
3.1
4.5
Run Time % (7d)* 33
26.6
45.3
40.9
Run Time % (5d)**
38.5
31.1
21.4
21.2
58.3
72.4
55.7
96.5
63.4
57.3
59.3
49.2
50.7
82.2
7.2
Down time %(7d)* 67
73.4 82
52.1
56.5
Down time %(5d)**
61.5
68.9
78.6
52.7
24.5
15.6
42.1
23.4
32.9
39.1
39.3
50.8
32.6
6.2
25.2
Cleanup %
4.8
0.8
3.4
2.1
2.2
7.5
2.4
Idle % h
5.1
5.7
4.7
0.5
Prevent Maint %
R&D %
5.6
1.3
0.1
Rework %
0.3

21. My R&D and Innovation Grant Observations
800 R&D Innovation Applications (6yrs)
50% received grants, 5% successful
IP mostly exploited Overseas
(e.g. Shi Zhengrong and Suntech)
Tasmanian windfarm technology to China
Small no. people rich
Little National Benefit
Favours Product over Process Innovation
Commercial Ready needs Improvement!

22. Industry Statement May 2007
Recognizes the need to act now
3 Major initiatives
1. Productivity Centres
2. Global Opportunities Program
3. R&D concession improvements.
Claims Manufacturing has grown by 1.2% pa for the last 10 years, (inflation?)
Recognises that large overseas owned enterprises are not contributing significantly to private R&D
Initiatives for these to use Overseas Intellectual Property in Australian R&D. Is this surprising?

23. Judging Commercial Ready
Management Capability (P&L, Fin Ratios, Balance Sheet, Organization)
Commercial Potential (Market, Export Potential, Plan)
Technical Strength (Innovation, Proof of Concept, Plan, Integration of R&D with functions, milestones)
Need for Funding (Proof can fund 50% )
National Benefit (Australian employment potential, export potential)
All 5 of equal weight, (6 points each), must score min 17 to be supported

24. Reasons for Failure of R&D
Poor Understanding of the:
connection between Process & Product Innovation
use of correct resources (inc Partnerships, Pana/Leica)
ways to release working capital to max Technology
needs of the market (needs versus wants)
scientific method (observation and measurement)
need to articulate the concept and plan
way to raise funds to support the application
best way to use capital
measurement of risk
need to tap the wisdom of the worker

25. Innovation Process versus Product
There is no point in adding a new product to a bad system.
Honda, Canon, Kawai, Toyota, Panasonic, all link Process and Product Innovation

26. It is all about People, Training, Culture, Leadership and Commitment
How do we Implement Creative Manufacturing, the immediate need and the Step Beyond Lean
It is all about
People, Training,
Culture,
Leadership and Commitment

27. Kyosei Kyosei = Living and Working Together for the common good
Kaizen = Continuous Improvement
Genchi genbutsu = place of understanding
Obeya = big room
Sensai = teacher
Poka-yoke = mistake-proofing
Jidoka = stop machines (Toyoda Loom)
Miyamoto Musashi “The Book of Five Rings” the Samurai warrior after Shogun liberation

28. Rule 1 Make to Order (MTO)
Demand = Production
Pull by Customer
Apply Continuous flow rules (26)
Continuously reduce batch sizes by reducing the Economic Production Run (One piece Flow?)
Plan by replacement short Lead t
Reduce forecasting as much as possible

29. Rule 2 Maximum Flexibility Machine and Labour
Match Manufacturing Capability with Demand
Tirelessly improve flexibility by reducing EPR’s
Continuously reduce lead time
Focus on the financial parameters to prioritise
Aim for continuous flow
Maximise the use of Appropriate Technology (Six Sigma)
A process can be treated like a machine (Adam Smith)

30. Rule 3 Innovate
Drive Product Innovation with
Process Innovation

31. Rule 4 Use Digital Data Effectively
Recognise that Digital Data can be obtained at the POS and sent to any point in the supply chain

32. Rule 5 Design for Flexibility
Reduce Complexity
Modularize
Introduce Complexity late in SC
Universal design (Toyota)
Backup suppliers (standardise)

33. Rule 6 Reduce Waste in All Forms
Planning waste
Expenses waste
Resources waste

34. Some Values of Key Parameters
Days Inventory = 8 Days (Canon Panasonic) actual 38 Days but 30 Days on Water
Value add % = Never stop Improving (Samurai Warrior, Toyota < 10%)
Planning Cycle = 7 days to one day
R&D as % Sales = > 5%
Process Control at 6 Sigma
On Time Deliveries (CRLT) = 100%

35. Australian Example 1 Profit in $300M T/O (Ref Blakemore Consulting Reports )

36. Australian Example 2 (2X Productivity (Ref Blakemore Consulting Reports)
Defectives

37. Conclusion
Build a flexible system that can respond to changing markets quickly and optimize the supply chain.
Remove wasteful inventory by matching lead time and cycle time and continuously increasing value added time
Use the capital released from wasteful inventory to innovate flexible systems and processes that can respond faster to new products.
Continuously innovate new products and processes
Use a consistent strategy based on the systems of Honda, Toyota and Canon
Use all resources and be aware of the tools and knowledge available and foster partnerships with the best.

38. Innovation, R&D and Australia’s Manufacturing Future We need to be Creative, Innovative, Fast & Flexible (Like Australia )
John Blakemore

39. The End