A report by EEF and leading technology company Infor out today adds value to the major policy debate currently underway about the UK’s productivity performance by presenting the perspective of manufacturers, based on the results of interviews and a survey.
The key take-away points are that UK manufacturers are focused on raising productivity and have taken steps to do so but could do more. Today we provide an overview of the report and we’ll be doing a series over the course of this week that looks at each of the key points in detail.
The UK’s productivity performance is poor
The productivity debate was triggered by official statistics showing that the UK’s performance is weak. The poor performance is worrying because productivity is a key driver of the UK’s long-term economic growth. A key benchmark shows that the productivity of the UK economy lags that of major counterparts such as the US, Germany and France. Closing the productivity gap will be difficult but it’s encouraging that there’s been a precedent as the UK’s productivity converged with its major competitors in the decade leading up to 2007.
There are a number of possible explanations for the convergence, including the increased adoption of information and communications technology over the period, the shakeup in UK manufacturing the early 2000s, and the UK’s heavy reliance on its finance industry boosting productivity in the years leading up to the global financial crisis.
Another key benchmark indicates that the UK’s productivity is lower than where it would be now if it had remained on the trend prior to the crisis. Again, there are number of possible explanations, including the increased regulation of the UK finance industry following the crisis, which required banks to hire additional staff to focus on compliance rather than generate profit.
Yet the productivity debate could be missing a trick because it’s focused on the weakness of the UK’s productivity as an economy-wide problem and not looked at how different sectors such as manufacturing or services have performed. The productivity growth of manufacturing has outperformed that of services and the whole economy, implying that manufacturing may not be the source of the UK’s productivity problem.
Manufacturers are focused on raising productivity
Improving productivity is a key focus of UK manufacturers. They are ambitious about raising productivity, so much so that they have ingrained the goal in their business models. Also, manufacturers measure productivity using a wide range of metrics, ranging from the aggregate level to individual business units. They view economy-wide measures of productivity used by policy makers such as output per hour as inadequate indicators of firm-level productivity. The focus of manufacturers on raising productivity appears to be paying off, with 64% reporting productivity growth in the past two years.
Manufacturers have taken steps to boost productivity
The actions that manufacturers have taken to raise productivity fall into two broad camps: those that deliver steady incremental gains; and others that trigger a radical step change in productivity levels. Continuous improvement processes such as developing talent, lean initiatives and improving the supply chain lead to incremental reductions in costs and improvements in quality. Similarly, investment in maintaining and upgrading machinery typically yields small productivity gains. The largest gains are generally achieved through investment in major technological advances, and research and development.
But they could do more
Despite the focus of UK manufacturers on raising productivity, and the steps they’ve taken, they could still do more. The areas in which there is a need for more manufacturers to take action include looking at productivity of their business holistically rather than focusing only on the shop floor. Also, more manufacturers need to collaborate with suppliers to improve their supply chain. In addition, more need to be proactive about investing in major technological advances. Even though manufacturing may not be the source of the UK’s productivity problem, it has the potential to be a major driving force behind improving the economy’s productivity performance.
On Wednesday we’ll take a closer look at how manufacturers are focused on raising productivity.