“Improve productivity” is one of the oldest goals in manufacturing. We’re told with higher levels of productivity come lower unit costs and all will be good. Market share improves, jobs are secured and even the standard of living can increase.
It’s such an important metric that it is measured by government agencies around the world such as the Bureau of Labor Statistics and the United Nation’s International Labor Organization.
And yet while the U.S has continued to relentlessly improve productivity, its manufacturing industry has only shrunk over the past 20 years. When I visited China recently many companies spoke of offshoring their labor intensive operations to even lower labor cost countries, repeating what occurred in the U.S.
Many employees today look at productivity efforts as just another program to reduce headcount. It’s no wonder when I speak to people about continuous improvement efforts, only the ones who are in crisis want to act immediately. They are going to lose their jobs anyway.
Productivity is simply the output divided by the input. In this case, the input is labor. For some reason even though companies have four choices in how they can improve levels of productivity, they will often favor the three that eliminate employees or reduce their standard of living. They are focused on the denominator – labor.
- Outsource or Offshore the work to someone who earns lower wages
- Automate the process and eliminate the labor
- Directly reduce wages
But companies have a fourth way they can improve productivity:
- Increase throughput using the same labor
The one method that actually maintains jobs and standard of living. Unfortunately the fourth option is the one that is least used (I base that statement on the employment levels in manufacturing over the past decade).
What’s confounding about this choice of action when it comes to productivity is that it results in undermining of what CEO’s say is the largest factor in their ability to compete: Workforce talent and innovation.
In a survey conducted by the U.S. Council on Competitiveness (click here to download the paper) 406 CEO’s around the world say that innovation is the number one most important driver of competitiveness, followed by their company’s ability to access and control labor and material costs. Below is a stack ranked list of the driver of competitiveness taken from the paper.
This is the part that I have trouble understanding. Out of the four options that companies have to increase productivity, why would they focus their efforts on the three that inhibit innovation? If a company is looking for new and better ideas, does outsourcing and automating the generators of those ideas out of the company improve or detract from competitiveness?
I’m not suggesting no one automates or outsources anything. Certainly the automation of highly repetitive or inherently unsafe processes is a good thing. What I’m suggesting is that management take a look at their mix of productivity projects and increase their efforts to increase throughput using the same labor by an extra 10 percent.
I’ve documented companies in my book and on this site who have done so and the results are incredible. When employees see that management is working to achieve corporate goals while still keeping the workforce intact, the ideas begin to flow from everyone. That flow of ideas means companies can achieve what is most important to their CEO’s: A talented workforce that has the ability to think and execute on innovation.
The next time you are challenged with increasing productivity or lowering labor costs. Take a minute to focus on the numerator of productivity: throughput. Throughput can be increased by making more product to sell or it can be from bringing back in materials and services that have been previously outsourced. The good news is when you begin thinking like that, you are not alone. Your entire company wants to help you be successful.