Volume 2, Issue 4 - Spring 2018

Industry 4.0: Are Prairie manufacturers ready?

By Pierre Cléroux. 

The outlook for Prairie manufacturers has brightened considerably over the last year. Buoyant economic conditions in North America and rising oil prices have led to a job recovery in the sector amid higher sales and exports.

That’s welcome news after a couple of dark years that saw 35,000 manufacturing jobs disappear in the region. Half those jobs were recovered in 2017 as sales and exports surged 12 per cent and 11 per cent, respectively, in the first 11 months of the year.

We expect the good times to continue this year. After the Canadian economy posted robust 3.1 per cent GDP growth in 2017, our forecast is for the economy to ease to a still healthy 2.2 per cent this year. On the Prairies, the oil price recovery, strong U.S. economy, and relatively low Canadian dollar are forecast to produce 2.5 per cent GDP growth in Alberta, 2.1 per cent in Saskatchewan, and two per cent in Manitoba.

Each year, we ask Canadian entrepreneurs about their investment intentions for the coming 12 months. For our 2018 study, we surveyed more than 4,000 business owners and found that higher-than-expected economic growth last year is fueling strong business confidence.

Entrepreneurs plan to increase investments

Our survey indicates Canadian entrepreneurs plan to increase investments by three per cent in 2018 to $140.5 billion. Most of the increase will be on business acquisitions. This makes sense because the baby-boom generation of entrepreneurs is heading to retirement, leading to what we expect will be a surge in business transitions in coming years.

Entrepreneurs also plan to increase spending on intangible assets (intellectual property, research and development, information technology, and employee training) by a total of $2.1 billion this year. This increase, however, will be offset by a decline of $6.5 billion in spending on tangible assets (machinery and equipment, vehicles, and non-residential construction). This decline in spending on hard assets is not surprising because it follows a year of exceptional growth.

BDC’s mission is to provide entrepreneurs with the financing and advice they need to build strong, productive, and profitable businesses. Manufacturers form our largest client group, and we’re vitally interested in how economic conditions affect their businesses. We believe conditions for investing in manufacturing businesses are excellent, given the healthy growth outlook both in Canada and globally, combined with low interest rates and plentiful business credit.

A great time to adopt digital technologies

Specifically, we believe this is a great time for manufacturers to harness the power of digital technologies that have collectively come to be known as Industry 4.0.

What is Industry 4.0? It’s the fourth industrial revolution, after those sparked by the steam engine, the assembly line, and electronic automation and globalization. A core Industry 4.0 application is the use of wireless sensors at every step of the production process to monitor and control machinery and equipment in real time. These sensors allow you to track production, control quality, and reduce downtime. Equipment can even tell you when it needs maintenance or is about to break down.

What’s more, advanced analytic software makes it possible to mine data to gain insights to improve production, asset utilization, and employee performance. Elsewhere, the use of 3D printers allows companies to achieve faster prototyping, reducing the cost of engineering and accelerating time to market.

Smart factories produce dramatic productivity gains

The result, according to a recent BDC study on Industry 4.0, is an agile smart factory that produces dramatic gains.

As part of our study, we conducted a survey of close to 1,000 entrepreneurs to understand how Canadian small- and mid-sized manufacturers are incorporating digital technologies into their operations and what benefits they are reaping.

We saw that companies who embrace digital technologies enjoy impressive rewards. Sixty per cent boosted their productivity, 50 per cent reduced operating costs, and 42 per cent improved overall product quality.

We also found that Saskatchewan and Manitoba lead most other provinces in adoption, with 44 per cent of businesses implementing digital technologies. Alberta, meanwhile, is close to the back of the pack with 35 per cent of businesses participating.

While representing a promising start, these numbers suggest Prairie manufacturers, like those in other regions, are still in the early stages of digital adoption. We believe it’s important to pick up the pace to remain competitive. Indeed, many manufacturers in the U.S. and Europe are intensively using Industry 4.0 technologies to successfully compete against low-cost countries in Asia.

An example of a successful technology adoption

One example of a BDC client who has embraced technology is Ray Turner, CEO of Lenmak Exterior Innovations, an Edmonton maker of building cladding and roofing.

One of Turner’s most important digital projects has been to automate product pricing. Customers can now use a fillable template to upload a list of components from a building design directly to Lenmak’s website and receive a fully priced quote. The system allows customers to try different products to see what the impact is on overall pricing.

Once the order is confirmed, Lenmak’s enterprise resource planning system automatically converts the information — dimensions, colours, and other features — into files that guide CNC machines.

“It’s efficient, it’s fast, and it eliminates the risk of error,” Turner says. “You wouldn’t believe how technology can help you step up your game.”

Advice on adopting digital technologies

BDC’s Industry 4.0 study identified a series of steps entrepreneurs can take to successfully introduce digital technologies into their business:

Focus on customer needs: The goal of your digital projects should be to deliver more value to your customers. So, your choice of technology should be driven by what is most important to them. For instance, Lenmak’s automated product pricing makes it very convenient for customers to choose the product and pricing they want, while, at the same time, delivering productivity gains to the company.

Be strategic: Evaluate your current digital maturity and identify where you need to be to bring more value to customers in coming years. Then make a plan to get there.

Empower your employees: Involve employees in your technology projects from the beginning. They have deep knowledge about your company and can provide invaluable expertise as you adopt new technology. An open discussion about the new technology will reduce resistance and get the staff excited about the new direction the company is taking.

Walk before you run: If you’re at an early stage in adopting technology, start with small pilot projects. For example, you could go paperless in your business office or connect your equipment to capture key performance indicators. Once you have some success, build on it.

Get outside advice: Even though technology has become ever more user-friendly, choosing and implementing technology can still be a complex undertaking, especially for a busy entrepreneur. Using the services of an experienced, objective expert can make a huge difference in your success.

Superior Cabinets, a Saskatoon designer and manufacturer of custom kitchens, is another BDC client that has successfully followed a game plan to create a smart factory.

A key decision was to introduce software that allows Superior staff to design a kitchen with customers in its stores in Saskatchewan and Alberta and send the order directly to the factory in a smooth, paperless process. CEO Scott Hodson estimates this and other initiatives have produced productivity gains of 50 per cent, with waste being reduced to just two per cent of sales, down from seven per cent.

Hodson says: “If you’re dependent on manual, traditional ways of doing business things, you can’t scale your business.”

We believe now is the right time for Prairies manufacturers to incorporate digital technologies into their operations. Industry 4.0 projects can be complex and involve considerable investments. But our research shows the scale of the benefits are such that they clearly justify the investment required. Digital technologies allow you to ramp up production, increase productivity, and deliver a better customer experience. These are the keys to building more competitive, resilient, and profitable company.

Pierre Cléroux is the vice president of research and chief economist for the Business Development Bank of Canada (BDC).