Yesterday Zach kicked off a series of blogs on EEF’s and Infor’s newly launched Productivity Report, giving a neat overview of the key findings. Today’s task is to delve deeper into the second section of the report dealing with how manufacturers understand and measure productivity.
‘Output per hour’ doesn’t cut it
The productivity debate in the UK has been framed in terms of output per hour, the result of which are a couple of worrying charts about the UK’s productivity performance.
But ask a manufacturer what productivity means to him and how he measures it and you’ll rarely hear output per hour. That doesn’t mean however that manufacturers understand productivity in a fundamentally different way to economists.
Getting more with less
Manufacturers view productivity in a similar – although broader – way to policymakers and economists. The basic principle of productivity is “getting more with less”; this is fundamental to every manufacturers’ business model. All manufacturers interviewed told us that improving productivity is the sector’s bread and butter; manufacturers continuously look to improve the efficiency of production as well as the overall effectiveness of their business.
In this broader view of productivity, output per hour is identified by manufacturers as an inadequate indicator of firm-level productivity. Manufacturers view productivity not as a single metric but as the process of “continuous improvement” in their business.
The measurement arsenal
Given this broader view of productivity it would make little sense if manufacturers had a single metric – like output per hour – to gauge the productivity of their business. Manufacturers use a wide range of metrics to determine firm productivity spanning from the aggregate level to slicing and dicing these metrics all the way down to individual business units.
However, there is no one metric that in isolation will tell you how productive your manufacturing firm is. This is why aggregated measures like output per hour are useful from a macroeconomic perspective but not necessarily meaningful from a manufacturer’s point of view.
This is best reflected in the productivity differentials across manufacturing sub-sectors. Productivity in manufacturing will vary depending on the characteristics of each manufacturing company as well as the underlying market conditions. Productivity differentials will exist according to the following factors:
Type of product and sector: The type of product manufactured and by extension the sector a company supplies to will to a large degree dictate productivity levels. Different products entail different methods of production which infer different potentials for productivity levels and growth.
Location of site: Location is also a significant determinant of productivity levels. This mostly relates to differentials in the costs of production across sites and countries, with input costs an important factor weighing on firm-level productivity.
The business and investment cycle: Underlying market conditions will have a bearing on productivity levels. Market downturns will usually result in a negative productivity hit while step-change investments involving a future pay-back can have a similar effect. By contrast, a pick-up in demand or the acquisition of new kit can provide a welcome productivity boost.
This means that comparing productivity across manufacturing companies based on output per hour would be of little if any value; very much like comparing apples with oranges. This can be seen in Official Statistics where there is significant variation in the productivity levels between manufacturing sub-sectors.
The focus on productivity has paid off
Manufacturers measure productivity in a variety of ways and constantly monitor these metrics as part of the continuous improvement process. This allows manufacturers to have a detailed understanding of their productivity performance. But regardless of which specific metric they use, manufacturers paint a better productivity picture than what Official Statistics indicate. Our survey illustrates that the majority of manufacturers have seen productivity grow at a healthy pace over the last few years.
Manufacturers are keeping up the good work on productivity, further highlighting manufacturing’s divergent performance seen in Official Statistics. Tomorrow’s blog will look at the steps manufacturers have taken to deliver these productivity improvements, as well as some of the barriers for those that did not.