The Toronto Globe and Mail covered the BCG report on global manufacturing competitiveness, bemoaning the fact that Canadian manufacturing is lagging, especially behind its North American neighbors. The big issue, they point out, is productivity. Canadian productivity measures are just as screwed up as American measurements with the economists not knowing the difference between productivity and outsourcing, but the basic principal is valid – productivity is the key. And it is the key at the country level as well as the firm level.
Tough to do much about national productivity no matter who you are, but everyone can do a lot about productivity at their own company. Most leaders, however, get it wrong for any one of a number of reasons. The fact is that lean thinking is all about productivity, and lean companies succeed because they have much higher productivity levels than non-lean companies. If anyone disagrees with that statement, r can’t see how lean is laser-like focused on productivity, it is most likely because they have fallen into one of the common productivity measurement traps.
Trap #1 – Direct labor myopia
In many companies the term ‘productivity’ is viewed as synonymous with ‘direct labor efficiency’. That misses the point entirely. It’s a hoot to see senior folks walk past cubicles full of drones staring at computer screens and shuffling stacks of paper on their way to conference rooms full of non-value adding folks to discuss metrics that track the output of the folks who actually create value for customers. Lack of direct labor efficiency is almost always rooted in poor management processes causing parts shortages, design defects and time wasted on reporting and transactions; and direct labor people have typically been so micro-managed there is little improvement opportunity remaining. Productivity gain opportunities are greatest from eliminating non-value adding, non-direct labor waste.
Trap #2 – Headcount silliness
Head count is a hopelessly inadequate measure. It doesn’t matter whose payroll the people are on. Just because they are not on your payroll doesn’t mean their cost is not embedded in your product. Outsourcing doesn’t improve productivity, it just makes it harder to integrate the work flow.
Trap #3 – Not seeing the whole
The productivity measure that matters is the cost of all of the direct labor paid for by the end customer. Amazon, Dollar Shave Club and other on line retailers run rough shod over their brick and mortar competitors because the labor cost embedded in their products when the end customer pays for them is lower. The cost doesn’t include the folks working in the brick and mortar place or the cost of the people it took to build and maintain the brick and mortar place. The internal headcount and efficiency measures at Amazon or Dollar Shave Club are apt to be no better than any other distributor – but they don’t have to be. The headcount along their total supply chain is much lower so they vastly outperform their competition.
Trap #4 – Focus on cutting instead of growing
The best – perhaps only – way to sustain productivity gains is to move more stuff through a fixed cost structure – not from chopping heads. The fixed cost structure is pretty much that legion of paper shuffling, computer screen watching drones, along with materials handlers and quality inspectors. When you reduce non-value adding activities it frees up time for the drones to watch more stuff. Same fixed cost – higher volume – better productivity reflected in lower drone cost per unit. When the sales folks aren’t part of the plan, however, they don’t know how much more stuff to sell to increasingly utilize the continuously expanding capacity. Worse, when the accountants keep pushing their standard cost logic like so many crack dealers, the company doesn’t know how to set prices to continuously increase volume in line with continuously expanding capacity.
The Globe and Mail says, “A Canadian factory worker produces about 60 per cent as much as an American factory worker.” May well be, but any Canadian company – or any company anywhere, can set that statistic on its ear very simply. Forget about all of the nonsense about robots, outsourcing and especially quit bludgeoning direct labor people to get them to work harder; forget about wacko, hopelessly outdated accounting practices with all of its standard costs and headcount silliness; and get everyone on board with holistic lean thinking. Productivity problem solved.