The Myth vs. Reality of Worker Productivity

I am disturbed by how many of my friends are unprepared for retirement. I shouldn’t be surprised, however — walk through Wal-Mart or stay at any North American hotel, and you see too many older people, who should be enjoying their golden years, working. I’m also disturbed by the high levels of unemployment; skilled people who should have jobs don’t, and many jobless people don’t appear in statistics because they have just given up.

With older people trying to get by in the face of failed investments, and the absence of well-paying jobs suited to people’s skill sets, I’m surprised by reports that Americans are the most productive workers in the world. While politicians and unions love to repeat this view, I can’t believe it. Shouldn’t the most productive people be the most employed? I can believe that American companies are the most productive (although, these days, it’s hard to really know the nationality of a company), but, at the risk of making myself unpopular, I’m not so sure about the workers.

I believe the term “worker productivity” is something of a misnomer. To anyone who has seen the red bead/white bead demonstration by the late W. Edwards Deming, it is clear that the individual worker has little to do with the outcome. It’s really the system that workers are in that controls performance.

Substituting workers of any nationality in the system won’t change the output, except in rare and exceptional situations. This suggests that what is called “worker productivity” is really “system productivity,” and the latter can be exported to any part of the world! Not good news for my unemployed friends.

To calculate productivity, you take the country’s GDP and divide it by the number of hours worked. The denominator, number of hours worked, correlates with efficiency controlled by the system. The numerator, GDP, is the value of what is produced — a value related to the cost of materials and labor. Higher wages and materials costs make GDP higher and, counter to intuition, make the “worker productivity” number better.

Every day at Lytica we see North American companies pay too much for electronic components. Paying too much for something doesn’t sound productive! We also observe that North American prices are higher than Asian prices. Asians have lower worker productivity yet lower prices? Maybe the productivity calculation should be normalized using something like the “Big Mac Economic Index” to show what’s really going on.

Throw in national debt, stagnant supply chain innovation, global warming, and a newly-reported concept that with each recession and associated cutbacks companies learn to be more productive (that is, they learn to get by with fewer people) — and we have a real mess on our hands.

By the way, supply chain professionals have a lot to do with this productivity number. Sourcing decisions determine where jobs are created, and price negotiations determine materials costs. So where does this leave supply chain professionals in charge of sourcing? I have a few ideas:

  1. Don’t pay too much in North America for materials. Develop a solid understanding of current market pricing by using a price benchmarking service like FreeBenchmarking.com, and force your suppliers to show their productivity in their pricing. Buy local when the value is there.
  2. Demonstrate that in procurement, the “with each recession, companies get more productive” idea is just wrong. Show how much money is being lost by not going after cost reduction compared to savings from being understaffed.
  3. When other factors are equal, make your sourcing decision based on cost. Include all costs like logistics, inventory carrying costs, duty, and taxes, as well as factory costs. With the long-term value of the dollar getting weaker and transportation costs increasing, there will be a point when local sourcing makes sense against offshore alternatives. Do this calculation often.

I don’t expect these three suggestions to rescue my friends or the unemployed, but every little bit helps.

By Ken Bradley – Lytica Inc. Founder/Chairman/CTO

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