Economists believe that productivity is the most important long-run variable in economic growth. However, productivity is procyclical: high when the overall state of the economy is high, and low when the economy is low. Consider your own company. When you have a good month with high revenues, productivity is high, and when you have a bad month, productivity is low. Your labor management has not necessarily changed much between the two months.
I’ve read recently in the Wall Street Journal and Bloomberg Business Week that economic productivity in the United States since 2010 has only risen .6% per year and only .9% since 2000. During that period there has been tremendous attention to Lean and an increase in applied technology in business. So why hasn’t productivity increased more?
Has productivity improved at your company over the last few years? Measured as output per unit of input, productivity can tell you a lot about the performance of materials, labor, and even overhead and technology. I know one company that measured the output of manufacturing engineers (MEs) by the improvement trends in materials and labor cost as a percent of sales. After all, MEs are responsible for designing processes that reduce the materials and labor needed to produce a dollar of revenue.
How Can You Improve Productivity?
There are three areas you can focus on to improve productivity in your organization:
Partnerships inside and outside your organization can have a high impact on productivity. They help create strategic (not just tactical) improvements, often called point improvements. I helped one company reduce their warehouse costs by over $6 million, but when we measured the overall impact on the organization, we found almost $25 million in savings by changing the way materials flowed. Their suppliers and customers played key roles in the change.
In another company, the client partnered with their customers to run the company’s warehouses and improved labor productivity by 60 to 75% while increasing customer service levels.
Another idea is to partner with change agents. These are people that can bring in new ideas and see the forest for the trees, such as consultants, advisory boards and boards of directors.
Focus management resources on strategic innovations. The true purpose of senior managers and executives is to produce results, not just generate activity. Executive results should be in the form of innovative strategy embodied in a clear vision for the future. Change should be proactive and balanced across the organization.
One company I know decided not to reduce costs by eliminating an upper level of management when they realized that those managers drove strategic innovation in the company.
Measure results in a balanced way. For example, in service organizations, measuring and focusing only on productivity could hurt customer service, which causes revenue to decline and eventually hurts profitability and cash flow. Some of the recent changes in airlines are a good example of this. Cost cutting by itself – especially in service companies – can have unintended consequences.
It’s still possible to hold people accountable for results and let them know what the score is. Each work area or team should have a small basket of measures to evaluate their performance on a daily, weekly and monthly basis. Those outcomes should be tied to the manager’s performance, which is then tied to the executive’s performance. Measures should look forward as well as back, so you don’t fall into the trap of managing through the rearview mirror. Tie the measures to strategic initiatives and cash flow and make sure people know how they can move the needle. Empowered teams can and will contribute to the company’s overall productivity.
From the Flight Deck
In what ways are your improvement efforts actually improving productivity? Do you see results across the organization, or only at the point of improvement? How do your productivity improvement efforts increase customer satisfaction? What kind of results do you get when you leverage your partnerships?
Visit my web site for articles and other resources, or give me a call and we can look at what needs to be done to move the needle in your organization.
© 2015 – Rick Pay – All Rights Reserved.