Inside business: British factories forge ahead

How good are Britain's factories? Sterling's rise has thrown the performance of British manufacturing businesses into sharp relief especially against Germany, a major trade competitor. A year ago, a pound was worth 2.3 marks; today it is worth almost three - a rise of 30 per cent, hitting manufacturers hard. In contrast to the burgeoning service sector, currently growing at a year-on-year rate of 4.5 per cent, manufacturing output is flat with export orders at a five-year low.

So how much further can the pound rise before exports slump as manufacturers give up the struggle to compete? Economists talk airily of a narrowing productivity gap, and of Britain's lower labour costs, but hard evidence of how UK manufacturing businesses compare with their foreign rivals has been rare.

Until now. Building on the success of the annual Management Today Best Factory awards, which are conducted in conjunction with Cranfield School of Management, a group of German academics from the Export-Akademie of Baden-Wurttemberg this year joined forces with us at Cranfield to put German factories through exactly the same assessment procedures.

These cover every aspect of manufacturing: inventory profile; cost structure; employee profile and performance; product innovation; and management information control systems. To provide an even better insight, the distorting effects of discrepancies in industrial make-up and factory size between the two countries' factories was eliminated by choosing "matched pairs" from the respective samples: factories that operated in the same industrial sectors, and were of more or less the same size. While economists use one or two simple measures to assess relative manufacturing performance, the use of such a highly detailed questionnaire on a matched pair basis in two countries has for the first time made possible a detailed comparison across a wide range of performance characteristics.

The differences that emerge are startling - and spell good news for British exporters. While the overall performance characteristics are broadly similar - which comes as no surprise, since economists reckon that the gap between Britain and Germany has been steadily closing since the early 1980s - UK factories in fact score slightly better on almost every characteristic. British factories have learned important lessons from the Japanese and switched between products more quickly, lost less of their overall capacity on machine set-ups, have a lower level of customer complaints and achieve better scrap or yield loss rates.

In some areas, UK factories scored significantly better: clear differences emerged in the number of stockturns, employees' absenteeism levels and the ex-stock availability of goods on the shelves. In the UK, stock in the matched plants turned over three times as fast as in comparable plants in Germany. With 5.89 per cent absenteeism, German employees are almost twice as likely not to turn up for work as their British counterparts. And when it comes to dispatching orders from the warehouse, German factories' average ex-stock availability levels of 82 per cent are well behind the equivalent UK level of 94 per cent.

But the picture isn't totally one-sided. German factories are significantly slicker when it comes to product innovation, bringing new products to market in just over 14 months, compared with the almost 18 months achieved by British factories. Moreover, German factories' "current innovation rate" - the rate of new product introduction over the previous five years - is around 1.5 percentage points higher than in the UK. Worryingly, their future innovation rate, which anticipates the extent of new product introduction over the next five years, widens the gap to almost twice this, at 2.78 per cent.

But how reliable and representative are these figures? Although the Management Today/Cranfield School of Management Best Factory awards have been running since 1992, German factories only commenced their own version of the award in 1996, and on a "pilot" basis for the first year, in order to iron out any teething problems. Just 40 German companies participated, which inevitably restricted the number of matched pairs that could be constructed.

A more complete picture will emerge next year when a full-scale German evaluation goes ahead. In the meantime, factory managers, economists and the Chancellor alike will all be hoping that this year's welcome news of Britain's growing industrial resurgence is not countered by more results from companies such as ICI, which has already blamed a pounds 150m fall in profits on the high value of the pound.

Research Fellow Marek Szwejckewski and Dr Keith Goffin assisted in the research and the preparation of this article. Further details are available from Cranfield School of Management, Cranfield University, Cranfield, Bedford MK43 OAL.