CHAPTER 4 Case Study of Smiths •••.•
4.1 Background-Smiths Manufacturing Pty Ltd
4.1.6 Benchmarking Report on Smiths
Smiths is currently affiliated to the Durban Automotive Cluster Benchmarking Initiative, involved in studying best practices companies with the aim of improving the firm's performance. The benchmarking exercise, according to Bames and Deghaye (2005 :2), is generally kept exclusive to the members of the South African Automotive Benchmarking Club (SAABC).
4.1.6.1 Financial Performance
Smiths' recent financial performance has been quite impressive especially in terms of the areas of turnover growth, profitability and return on investments according to Bames &
Deghaye (2004:12). However they also go on to add that the capital expenditure had stagnated over the past few years. Accordingly they observe that the turnover performance at Smiths HE has been very good, increasing by 124.5% from 2000 with 104.5% growth from 2001 to 2003 being particularly striking.
As a whole, the Smiths' turnover levels increased by 60.1% between 2000 and 2003.
Smiths' profit levels, they say, have been impressive where the profit for the HE before
income tax deductions was 10.5% and Smiths CC was 12.1% as shown in the following figure. Comparatively, they state that the international averages were only in the region of 6.3% and interestingly the local club member averages were around 5.9%.
Figure 4.3: Profitability of Smiths and Comparative Firms
. Proiitabil it'!'
I!ISm~hs.CC
~M~aIFortllinWF ab rF11
O.lhfer~·rF11
irfSrnithslolE I FiunEE
,... __ ... _+--... +-:-~;-~;-_~:-::-""I'""-~ !DCIQbA\grF=~1
Source: Barnes, 1., and Deghaye, C. 2004:30. An assessment of Smiths Manufacturing's operational Competitiveness. Benchmarking and Manufacturing Analyst. South Africa.
4.1.6.2 Operational Competitiveness
The inventory holding has improved for the heat exchangers division from being 53 days in 2001 to 35 in 2003. A similar trend is noticeable in the raw material inventory holding from 42 days in 2001 to 28 days in 2003. This generally denotes an overall improvement for the firm. Bennett and O'Kane, (2006:12-22) note that to survive in today's severe global market competition, enterprises need to constantly improve quality and reduce cost. The investment in product research and development is viewed as a strategic weapon capable of accomplishing this objective and thus ensuring market share (Wei et aI., 2000:225-33).
4.1.6.3 Cost of Sales
Smiths' cost of sales breakdown differs markedly from the comparable averages, with materials constituting a significant proportion of cost of sales and by contrast materials compromise only 54% of cost of sales at the club firms (Barnes & Deghaye, 2004:14).
They add that the nature of the business is such that the firm is dependant on significant
portion of imported materials which accounts for the higher averages. They have also noted that the labour and overheads reflect a much smaller proportion of the cost of sales than the comparable benchmarking club averages. This is illustrated in the figure 4.4 below.
It is also of noteworthiness that all al\llllinium used for processing OEM products is imported which seems to be serving as an impediment. At the same time Smiths has developed local suppliers to cater for the after market products.
Figure 4.4: Cost of Sales Breakdown Comparison Cost of Sales
Firms
C1Materials '. ,l;abo'l:I(
IIQvertl'e~citosts·
Source: Barnes, j., and Deghaye, C. 2004:30. An assessment of Smiths Manufacturing's operational Competitiveness.
Benchmarking and Manufacturing Analyst. South Africa.
4.1.6.4 Employee / Human Resource Development
Comparatively low levels of literacy & numeracy are evident at Smiths HE - at only 82%
for both there is certainly scope for improvement. Firm CE & the international average perform very well, with numeracy & literacy levels ranging between 96.5% & 100% as per table below (Bames and Deghaye, 2005:75).
Figure 4.5: Literacy and Numeracy Levels Comparison
~-;:;;;:thS
HE Fir InS .. 82.000/0 Numeracy 182.000/0 LiteracyWirrrlCE 1100.000/0 100.000/0
;Heat T ran sf er 93.75% 195.180/0
Club 80.280/0 86.63%
Inter. avg. 96.980/0 98.080/0
Source: Barnes, J., and Deghaye, C. 2005:75. An assessment of Smiths heat exchange's value chain competitiveness. Benchmarking and Manufacturing Analyst. South Africa.
To strengthen their position in this regard, Smiths has undertaken to employ Adult Based Education Training (ABET) to train unskilled employees. According to Naidoo (2006), Smiths emphasizes multiskilling its staff force to improve the skills of its workforce.
Smiths HE's levels of training expenditure as a % of remuneration & the allocation of formal off-line training suggests that the firm is taking skills development seriously he adds. (Barnes and Deghaye, 2005:78) state that this was recognised by labour who noted the firm's training, as well as the management team's apparent commitment to upskilling Smiths HE's policy of multi-skilling was also noted by both labour & management as positive for the firm overall. Smiths HE's skills development focus is impressive & well ahead of most other SAABC members - although it lags that of Firm CE, which is investing significantly in its people. This is apparently being driven by that firm's capital investments & growth (Bames and Deghaye, 2005 :78). The efficient use of human resources has seen the integration of quality control and maintenance into the assembly process. This has meant the removal of a number of separate job functions and the introduction of flexible working. Esterhuizen (2006) exuberantly asserts that their investment was not in fixed capital but in the training of workers and the increased control over and involvement with the suppliers. Efficiency gains have enabled a reduction in the time to produce a car from 37 hours in 1990 to around 24 hours today (Nelissen, 2002).
This implies that the productivity of the staff forces needs to be on a constant improvement path.