Adding Manufacturing Services Grows Profits for Quebec SMEs

May 4, 2012

Small and medium-sized manufacturing firms that add services to their product offerings can enjoy higher profit margins, more stable revenues, and greater competitive advantage, according to a new report by The Conference Board of Canada and McGill University.

A second report - also the result of this collaboration - describes the opportunities for Quebec’s small and medium-sized enterprises (SMEs) to become suppliers to multinational corporations by integrating themselves into their production networks.

“Small and medium-sized product manufacturers risk leaving value behind by not including services, especially to their large corporate clients, in their commercial offerings,” said Michael Bloom, vice president, organizational effectiveness and learning for The Conference Board. “Service offerings that complement products make SMEs valuable partners, especially when they can deliver them 'in-house' to their clients, eliminating the need to outsource. By developing in-house expertise to deliver services, SMEs can build stable and long-term revenues.”

The report, “SME Manufacturers in Quebec: Adding Services to Boost Competitiveness and the Bottom Line,” was based on a review of domestic and international literature and the results of case studies, as well as an online survey of Quebec-based manufacturing SMEs, with 113 respondents.

“Canada's manufacturing value-added has been declining over the past decade. SMEs, representing half of Canada's manufacturing employment, can improve this picture by adding new services to their product portfolios, thereby greatly increasing value added,” said Vince Thomson, Werner Graupe professor of manufacturing automation at McGill.

Product manufacturers should integrate services into their core product offerings for several reasons:

• Services have higher profit margins than products.
• Services provide a more stable source of revenue, because they are more resistant to economic cycles that affect investment and equipment purchases.
• Services enable substantial revenue to be generated from an installed base of products with a long life cycle.
• Services add value and strengthen the supplier-customer relationship.

According to the study, 95 percent of SMEs offering services gain revenue from their offerings. Of these, one-quarter obtain between 21 and 60 percent of their revenue from their service offering; a further 67 percent get between 1 and 20 percent of revenue from selling services. As an added benefit, offering services helps SMEs to sell more of their manufactured products, and yields customer feedback that helps improve product offerings.

Adding services to a product offering comes with challenges, however. Forty-five percent of respondents identified the need for them to employ highly skilled personnel as a major challenge in making their service offering. Other substantial challenges lie in accessing client needs (12 percent) and identifying what specific services to provide (12 percent).

The key factors that helped SMEs deliver services to their clients were in-house expertise and knowledge of their products, knowledge of foreign languages and regulations, knowledge of clients’ needs, and the ability to provide timely solutions.

Another approach that Quebec SMEs can adopt to compete globally is to integrate with the production networks of multinational corporations. The report “Integrating Quebec SMEs Into Production Networks: A Spur to Competitiveness” identifies several factors behind successful networks:

• The presence of world-class multinationals to provide access to large markets and knowledge.
• Close lateral relations among SMEs to share information about markets and technology.
• Forums for communication between and among multinationals and SMEs.
• Forums for collaboration between and among industry and academic institutions.
• SMEs willing to foster innovation by hiring highly trained people. 
• Government cooperation to ensure, for example, appropriate transportation, communications, and financial infrastructure.

www.e-library.ca