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Inward Investment Guides

Stepping Up Your Game Through Productivity Improvement

Only those suppliers selling parts and components to original equipment manufacturers (OEMs) who improve their overall productivity faster than their competitors will continue to prosper as the economy revives and the OEMs keep driving relentlessly to cut their costs.

Woodruff Imberman, President, Imberman and DeForest (Q2 2014)
Overall productivity growth in America since 1987 has been underwhelming. Overall productivity is best defined as units of output compared to units of asset inputs, i.e., labor, capital, managerial skills, and/or better technology. It has been relatively flat for the last quarter century, according to figures compiled by the Bureau of Labor Statistics. According to the BLS, productivity fell significantly in many industries during the 2007–2009 period. This record reflects the market slump during the Great Recession, when many executives were reluctant to cut highly skilled but redundant workers from their payrolls. Happily, business has rebounded broadly since then, jobs are more secure, and productivity has continued its slow, upward path.

Perhaps this underwhelming growth in overall productivity explains why imports took a growing share of a great number of markets, i.e., precision machined components made for the construction and farm equipment industries; fasteners produced for the automotive and aerospace markets; wire racks formed by wire benders for point-of-purchase makers and makers of consumer durables (stoves, refrigerators), and die castings molded for office and medical equipment makers. But as foreign labor costs — and prices — have increased, domestic buyers of components of all varieties are “reshoring” their purchases. The price differential between American-made and foreign parts has shrunk enough to make putting up with all the difficulties of dealing with suppliers 8,000 miles away an unnecessary headache. (“Reshoring Western Industry,” Industrial Management, September/October 2013, July 2013).

Today’s Reality
Before I paint too rosy a picture of the future, let's look at two snapshots of today’s reality. First, automotive assembly plants now going full blast use about one third of all iron and steel castings and nearly half the nonferrous die-castings produced; consumer durable producers are busy, buying a large share of the wire formed products (racks) used in the new stoves and refrigerators that new home-buyers purchase; and the packages containing the food American consumers buy require nearly half the corrugated boxes made by paperboard converters. American industry is reviving. And with its renaissance, orders for a host of domestically produced packages and components have grown.
One can easily sympathize with the executives of small- to medium-sized component producers who constantly juggle the day-to-day realities of maintenance breakdowns, late raw material deliveries, inept supervisors, ineffective managers, and OEM-customer demands for lower prices and last-minute schedule changes.
However, current high demand for the parts and components used by the OEMs now means even their inefficient suppliers are receiving stronger orders. And because of this, executives of most suppliers — even inefficient ones — now have their hands full meeting customer demands. As a result, they find they have little time to consider boosting their own productivity and enhancing their own market competitiveness. As Ford Motor’s Chairman Bill Ford recently said, “I’ve learned you have to go faster and bet bigger when you are doing well” (Mike Ramsey, “Fuel Goal Tests Ford’s Mettle,

But some executives of the smaller OEM suppliers are looking beyond tomorrow because they know their long-term survival calls for them to “bet bigger.” And they know there are four ways to place their bets: (1) boost employee productivity, (2) increase supervisory efficiency, (3) improve managerial effectiveness, or (4) invest in new labor-saving equipment. The first three can be mastered with a modest investment, a relatively small expenditure of time, and a willingness to challenge the status quo before it becomes the status woe. The last, buying new equipment, costs money, and banks are still reluctant to lend. But taken together, a combination of all four methods will result in lower per-unit costs and the ability to compete successfully now and tomorrow as the economy continues its climb and OEMs continue to squeeze their supply chains. Let's start at the simplest, cheapest, and fastest steps to accomplish, and move to the more expensive and complex.

Employee Productivity
The simplest way to boost productivity is to create incentive systems to motivate the labor force to work smarter and, if needed, harder, in order to increase its output. Most workers want to do a good job, be productive…and be rewarded for their efforts. When a reward system is implemented, history shows that productivity will improve.

But how do you measure workers’ productivity? While many executives stay up late thinking of ways to improve productivity, few do an adequate job of measuring it. Most settle for a simple figure, i.e., sales dollars per man hour worked, whether the workers produce a wide mix of castings made from iron or zinc; widgets stamped out of sheet steel; a large number of different plastic parts from injection molding machines; or many sizes of tubing of different lengths and shapes bent for use in everything from lawn mower handles to industrial racks. All of those parts and components have price tags that fluctuate in part because of tough competition from other suppliers and the toughness of OEM purchasing agents eager for cheap parts. Having dealt with dozens of executives whose companies make components for the OEMs, I have found that few devote enough time formulating understandable productivity measures that can be communicated to employees, or to developing effective incentives that motivate workers to strive for the continuous productivity improvement needed to please today’s price-conscious customers.

A good measure of productivity that can be used in virtually every industry is standard hours of product produced per hour worked. For example, when pricing a new order, most executives estimate how many pieces can be produced per hour in each operation. In a precision job shop machining gears for a lawn mower or snow blower, say an operator on a machine tool may be able to drill and then tap the holes on the surface of 24 ring gears an hour. Then that number —24 — is the standard for the gear machining operation, and 24 pieces per hour equals 100% efficiency. It is a concept that has proven to be easily understood by most workers. It can be measured in terms of direct labor, overall plant labor, or all labor, i.e., plant as well as office workers. This is an effective measure that supplier executives can easily communicate to all.

This is important because suppliers who wish to improve employee productivity must provide employees with understandable benchmarks, as well as rewards for exceeding them. Surveys tell us employees tire of celebration lunches quite quickly.

Moreover, astute managers look beyond direct labor productivity. They focus on overall productivity by including other work force segments in their calculations. By adding additional classes of employees — supervisors, quality and technical support, and/or office workers — suppliers can quickly determine their effect on overall productivity as well as bottom-line profitability. Whether to hire another maintenance man or an additional office staffer then becomes an easier decision.

Supervisory Efficiency
There are two reasons why few suppliers drill down to measure supervisory efficiency and the effectiveness of their managers or make many efforts to improve either of these. First, it is usually difficult to measure results, and second is inertia. It is easier to blame "lazy" workers for mediocre profits than to upset long-term supervisors and middle managers who are set in their ways. For most manufacturers, especially the smaller ones, "good enough is often good enough," if a modest profit is made. Those trying to upgrade their supervisors often purchase inexpensive training programs from the Internet or a local trade association. While these generalized courses might be a good introduction for bewildered "newbie" supervisors, they give the more experienced ones inured to the inevitable little reason for change. Moreover, most canned training is aimed at helping supervisors manage the behavior of their subordinates, rather than showing them how to manage the work of their subordinates. Teaching supervisors how to deal with sassy employees is fine, but does little for productivity. Constraint theory, real-time scheduling to coordinate and track incoming materials from the receiving dock through fabrication, finishing, packing, and then shipping, does. After all, isn't improving departmental efficiency why supervisors are paid?

A knowledgeable trainer who takes the time to understand existing supervisory practices and attitudes before making recommendations to improve them can rectify these deficiencies. Interviewing the supervisors to determine how they perceive their work environment and then talking with mid-managers to obtain an overall view of how operations are actually conducted can easily accomplish this. Only then can realistic plans be made about the content of the training; how to set proper goals to measure its effectiveness; how to conduct the training with enough pizzazz to keep even the most jaded of supervisors from nodding off; and finally, how to measure the results over time and communicate them back to the supervisors in question.

Managerial Effectiveness
Improving managerial skills through development efforts is a fraught subject. The most obvious skill most managers need is making better use of their time — their scarcest resource. Managerial effectiveness can be improved by helping individual managers define their key objectives and then teaching them how to focus their time on those, leaving the hum-drum to subordinates.

Again, the first step is for a knowledgeable expert to spend time interviewing a company's executives to find out how they perceive the problems, and then checking carefully with mid-managers to validate their concerns. Once accomplished, effective training can be designed based on boots-on-the-ground reality. This is a more realistic approach than merely inflicting upon unsuspecting managers lists of KPIs (Key Performance Indicators) and then expecting them somehow to shine.

Effective training then begins with helping individual managers set their key goals, obviously with input from company executives. Then, after managers are asked to demonstrate just how they actually spend their time, a trainer can show them objectively where they are spinning their wheels and when they are devoting their time to their most worthwhile activities that contribute the most to their key goals. Managers can be shown how much each of their activities contributes to all of their goals. Then, managers can be shown how all their activities contribute to each of their specific goals. Once internalized and reinforced, managers can and will use their time to their maximum advantage — as well as to their company’s.

Capital Investment
Finally, another way to improve overall productivity is to substitute capital for labor, a trend that started the Industrial Revolution centuries ago. Again, in my experience, few executives — especially those in smaller operations — have ever asked themselves what return on capital they want before investing in new equipment or "better" technology.

Let's say a gray iron foundry needs a faster way to make the molds in which to pour the molten iron that ultimately will form compressors for air conditioning units. A new DISA 20 X 24 automatic molding machine with a core setter costs $500,000 and the foundry president needs to show his banker how the investment will produce a 25 percent return. He needs to explain how the $500,000 he invests in the new DISA will result in, say, $75,000 in annual labor savings, i.e., perhaps one man per shift in a two-shift operation on the molding line, plus another $50,000 in savings by reducing the cost of keeping a line of rather outdated molding machines maintained and running.

Obviously, depreciation schedules and other tax issues confuse things, but that’s what keeps accountants and tax attorneys out of trouble. To complicate matters, the return on changing the plant layout to streamline production or implementing an ERP system to monitor workflow are not easy to estimate. But efforts should be made. However, the results of many of these changes are often overestimated by gung-ho managers, again, for two reasons: first, because many need a stronger shot of reality in their morning coffee, and second, because little effort is made to include employees in the decisions. As a result, workers see proposed changes in equipment and process as simple head-chopping exercises and find subtle ways to torpedo them in real life.

In Sum
One can easily sympathize with the executives of small- to medium-sized component producers who constantly juggle the day-to-day realities of maintenance breakdowns, late raw material deliveries, inept supervisors, ineffective managers, and OEM-customer demands for lower prices and last-minute schedule changes. Some of these problems are eternal, and just the nature of being one of many suppliers at the mercy of OEM customers. Customers might not always be right, but they are customers. There are too few of them and too many competitors willing to put up with their transgressions.

Other problems are self-inflicted. It is very easy to sympathize with harried executives in all types of small manufacturing concerns who are so immersed with the day-to-day problems of meeting customer demands that they delay challenging internal inertia within their own companies. This long-term threat to their own companies’ future can be overcome by dealing with subordinates openly and honestly; by rewarding outstanding performers and sanctioning mediocre ones at all levels; by showing managers how to function with high effectiveness; by providing supervisors with the training needed to run their departments with measured efficiency; and by implementing incentive systems for better productivity — because if executives like you don’t do it, your competitors will.
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