Productivity (or the lack of it) – who gets the credit (or the blame), front line employees or management/ownership?

Lately there has been a lot of discussion about productivity, or rather Canada’s disappointing record of productivity increases over time.  There also seems to be a certain amount of confusion about the drivers of productivity and who should be benefiting, or be blamed.  If employees are the root cause of productivity changes, then a portion of productivity increases (or decreases) should be reflected in average wages.  If productivity is lagging, does that mean that employees are lazy, unmotivated or just inefficient?

The fact of the matter is that front line staff has very little impact on productivity and, therefore, wages should have no direct link to changes in productivity.  The largest drivers of productivity increases are capital investments that reduce the amount of labour content in production and gains brought about by the efficient organization of production, particularly extending run lengths and minimizing time lost due to changeovers.

I’m reminded of an example of a sudden productivity increase that had absolutely nothing to do with the actions of front line workers but since, in this case, pay was partly linked to output, there was trouble brewing when this aspect was not fully thought through.  The business was a manufacturer of corrugated boxes for the beer industry and the process included stamping sheets of corrugated cardboard with a die which would cut out the shape of a single box with each stamp.  Workers’ pay was partly linked to the number of boxes produced.  One night the die broke and the emergency solution was to bring in another die from another plant to replace the broken one.  This was a straightforward change except for the fact that the replacement die had two heads and so was capable of cutting out twice as many boxes with each stamp, effectively doubling output.  Seeing that their incentive pay was about to double, workers were jubilant, at least until management insisted that the production gains were on account of the change in the method of production not the action of the workers.  A wildcat strike ensued.

Productivity improvements come from long-term strategic investments and/or fundamental changes in strategy that result in efficient production.  Tactical actions such as working harder or faster or doing overtime aren’t going to help the big picture.  Fundamental strategic changes can only stem from the decisions of senior management or business owners.  Therefore, changes that stem from these types of strategic decisions and implementations can’t be credited to front line staff and neither can blame for the lack of productivity improvements that result from a lack of strategic action.

A Brief Discussion of Two Major Productivity Drivers

1.  Capital Investment

By definition, investments in new equipment or software that result in more production output per labour hour necessarily improve productivity.

2.  Extending Run Lengths/Minimizing Frequent Changeovers

Short run lengths have been the bane of Canadian manufacturing for decades.  Due to Canada’s small market size, the tendency of manufacturers who mainly serve the local market is to meet the demand for a variety of SKU’s (colours, sizes, model versions) even though the volume demand for individual SKU’s is relatively small.  This tendency necessarily leads to a series of short runs and changeovers which destroy productivity.

An obvious answer to this problem is to expand the market through export, thereby increasing the demand at the SKU level and enabling longer runs between changeovers.  This is encouraged and supported at the national level through the efforts of Export Development Canada (EDC).  Within large organizations, it is encouraged through dedicating specific plants for the production of specific SKU’s for a wider, even global, market.  It is also achieved through mergers and acquisitions leading to industry consolidations.

Canada vs. the U.S.

Although Canada is less productive than the U.S., it has been catching up somewhat in recent years with Canada’s increases in productivity outpacing the U.S. since 2010 (U.S. +2.3%, Canada +5.0%).  There is still some distance to go to match the U.S., but this recent improvement is somewhat reassuring.  Part of the reason for this productivity improvement was due to the need to do something about the uncompetitive situation Canada was in on account of the high Canadian dollar averaging US$1.01 in 2011 vs. US$0.88 in 2009.  While the low Canadian dollar up until 2011 had allowed business to survive without being productive, the increase in Canada’s currency to over US$1.00 shocked business into action and improvement in productivity was critically necessary for survival.  With the decline in the Canadian dollar once again, beginning in late 2014, Canadian businesses are now benefitting from both a competitive currency and the rewards of increased productivity earned through necessity a few years earlier.

Conclusion

Hiring excellent front line staff is an important element for the continued smooth operation of any organization.  However, this alone will not improve productivity and will not lead to breakthrough changes that transform an organization.  Only by hiring management that is capable of visionary strategic capital investments and/or fundamental changes in the way that business gets done, will any business improve its level of productivity and advance against its competitors.

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