Minus the question mark, the second part of this article’s title, borrowed from the lyrics of a Bruce Springsteen song, is an apt summary of the state of productivity as we approach the end of 2022. Yes, there are more than a few formidable economic challenges to productivity, but it's not a total washout and conditions still exist in some quarters that warrant optimism as 2023 approaches.
As a pragmatic eternal optimist (is that an oxymoron?) I firmly believe in the intrinsic nature of the human spirit. Along with knowledge, rationally applied to future plans, and actions that are based on data and performance metrics, it forms a union of invaluable tools for future growth and sustainability. With that in mind, let us look at some recent statistics and take stock (no pun intended) of recent trends in productivity.
In its revised second-quarter productivity and economic news release, the U.S Bureau of Labor Statistics (BLS) reported that “nonfarm business sector labor productivity fell 4.1% in the second quarter of 2022, as output decreased 1.4% and hours worked increased 2.7%.”
To further paint a less-than-rosy picture of the recent past, they reported that “labor costs in the nonfarm business sector increased 10.2% in the second quarter of 2022, reflecting a 5.7% increase in hourly compensation and a 4.1% decrease in productivity.”
On an annual basis BLS also reported that, “…unit labor costs increased 9.3% over the last four quarters.” It is the largest four-quarter increase in this measure since the first quarter of 1982. BLS calculates unit labor costs as the ratio of hourly compensation to labor productivity. About every instance of an increase in hourly compensation increases unit labor costs.
The good news: increases in productivity tend to reduce them.
The reality: the second quarter of 2022 is the second consecutive quarter in which output per hour worked declined; across the board, labor productivity fell 7.4% in the first quarter of 2022.
But here's a bright spot.
A report, issued by the Office of Productivity and Technology (OPT), offers some “one step up” news when comparing short and long-term productivity trends. As a core function of its designated authority, the OPT measures how efficiently the U.S. converts inputs into the outputs of goods and services.
In context with this OPT function, it is important to remember that increased (and more consistent) volumes of output which require fewer units of input leads to gross margin improvements, quality improvements, and a range of other benefits, which ultimately result in true value creation.
It states that more industries saw “…productivity growth over the long term than the short term.” This was especially evident in 2020 due to the onset of the COVID-19 pandemic. Over the long-term period from 1987 to 2020, it states, “Total productivity grew in 56 manufacturing industries, compared to only 26 from 2019 to 2020. If we exclude the impact of the pandemic in 2020, 61 manufacturing industries had positive total productivity growth from 1987 to 2019 compared to just 28 from 2018 to 2019.”
Taken in total, these numbers suggest that while there are a variety of “curves” that need to be bent upwards and additional headwinds like the cost of goods increases and supply chain disruptions, the future is not without promise. Sustainable productivity that benefits all stakeholders should be front and center on everyone’s mind in the coming year. Achieving this will require a departure from the well-worn, conventional top-down methods.
Successfully navigating the uncertainties of economic conditions, forward-thinking leadership and their companies will benefit from a transformational bottom-up reexamination and modernization. Noteworthy is Albert Einstein’s well-documented definition of insanity, “Doing the same thing over and over again and expecting different results.”
A cliché? Most definitely. But that's because, as it relates to far too many companies who attempt to increase productivity by doing the same things…over and over again, all too often the result is little-to-no discernable improvement.
Achieving and maintaining a state of “sanity”? It requires diligent and constant effort in good times and not-so-good times alike. It takes commitment and ongoing support from senior management. More than a top-down plan of attack, however, it's an “inside out” approach, which incorporates the contributions of a company’s entire workforce while considering external forces such as economic conditions and market pressures.
That’s the single vision and purpose of the productivity generation system that comprises the Tight Lines Performance Accelerator. When this type of dynamic strategy and process is effectively applied and everyone in an organization ‘pulls together’ synergy, efficiency, and sustainable productivity is created. These organizations will be motivated to grow and emerge stronger in the uncertain economic times of the coming year.
So, as we look to 2023, here are a few things that are on the horizon and trending. They serve to provide some insights and opportunities in the interests of organizational productivity and bottom-line growth.
First, the obvious.
High inflation is not transitory. That trend is projected to continue at an elevated level for at least the first half of 2023 and according to several economists, may not abate until the following year. Disconcerting to say the least.
Under the guise of these market conditions, the trend for onshoring continues as an effort to offset a variety of global headwinds. The shift from lower to higher labor costs, supply chain issues, material costs, and omnipresent inflation can be daunting.
Markets are expected to remain volatile with industry experts projecting them to reflect the inflation trajectory. The economy is performing wildly different across sectors and geographies. To companies seeking growth and sustainable profitability during these uncertain times the way out is greater productivity throughout the entire organization.
And then there’s “traditional wisdom,” which many have subscribed to in the past (a lot still do) that reads something like this: When the economy is running on all cylinders, that's the ideal time to experiment with new offerings for customers in the name of future growth. When the short-term economic future is uncertain, that's when you must dial down the innovation and experimentation and focus instead on “doing what’s worked in the past” and cutting costs whenever and wherever possible.
The key word here is “traditional.” Not “wisdom.”
This way of increasing productivity is part of a “back-in-the-day” mindset. It’s a way of running a business that is as outdated as an eight-track tape player.
I would strongly recommend replacing the word “traditional” with “transformative.”
The future will welcome nimble companies that revitalize their operations to meet the goals of its various stakeholder groups. It's a future where the entire organization is evaluated, and appropriate changes are applied to its operational structure in a timely manner. Where changes to facility layout, design, training, and marketing are implemented to capitalize on the company’s performance as it improves.
The purpose-driven company of tomorrow will progress as all departments continue to experience improvement through constant advancements in digital technology that result in greater efficiency.
“Digital” and all that it implies in relation to productivity in general and manufacturing is no longer to be considered as a trend. Rather, its ubiquitous acceptance is being experienced in every facet of business. Yet within the digital realm, technologies continue to emerge that spawn trends (“sub-trends” is a name some digital devotees have suggested) on their own and for good reason.
These technologies and ways of working help eliminate inefficiencies and wasted time in manufacturing and production processes—which inherently trims costs. Also, they provide the knowledge and data required to create next-gen offerings for customers, driving greater sales and top-line growth.
Professional training and education continue to trend. Many people-centric businesses offer continuous learning and personal development opportunities. Unfortunately, as a result of the pandemic, some were necessarily interrupted, but that is in the rear-view mirror. That trend will need to accelerate to meet the skills needs in the years ahead.
According to a recent study conducted by Deloitte, only 50% of production employees feel ready to take on advanced roles, and 60% of skills shortages are due to insufficient STEM education and vocational training. Employee expectations—especially among younger generations—are changing. The trend: Nearly 40% of new manufacturing talent have different career and job expectations than previous generations.
Tempering the various digital technology trends underway comes the revelations contained in a March 2022 article about a recent study by Enno Siemsen, a professor of operations and information management at the Wisconsin School of Business that offers a cautionary tale of the impact of the digital universe and its effects on productivity. It grew in part out of observing how technology was changing standardization and the nature of work.
A German manufacturing company was the setting for the study. At the plant, workers were using augmented reality (AR) smart glasses but were also still using paper instructions to complete production tasks. Employees were divided into two groups of twenty-five. One group was given smart glasses that directed each step for the wearer while the other group used paper instructions to assemble an actual standardized product for the first time.
The article states that “The AR group used 43.8% less time than the paper group on the first product assembly. During the second product assembly, both groups had to work without smart glasses or paper instructions, respectively. In this case, the results flipped: The AR group needed 23% more time than the paper control group. Not only did the paper group work faster the second time through, but they had a greater degree of innovation and process improvement. When asked to provide ideas for improving the assembly process, only workers from the paper group submitted meaningful improvement recommendations.”
Although the long-term significance is unclear, Professor Siemsen says, taking a hybrid approach to AR implementation might overcome some of what the study suggests are drawbacks. Much is yet to be done in determining the effects of technology on productivity but what this study underscores are the need to tread cautiously before jumping headlong into the emerging digitization of processes as a panacea for improving productivity. Especially at the risk of impacting overall workforce efficiency and their contributions.
Siemsen concludes that, “Technology doesn’t replace human beings; it’s supposed to make them better. In this case, it clearly makes them better, but depending on how you use it, it might not bring out their best.”
My take is to start smartly. Do not make CapEx (either tech or equipment) your default solution initially. Instead, understand, improve, and refine your existing process to get the most out of them. Then, with discretion and restraint, spend as needed and where appropriate.
By all counts, a roller coaster year is anticipated. While many challenges remain and more will inevitably emerge, it is also a time to take advantage of opportunities when and where they appear. To capitalize, leaders must keep one eye on tomorrow and the other squarely on reimagining their organization to be well prepared.
As the new year approaches, I’m talking with business executives about how to generate value creation and sustainable profitability in 2023 and beyond. Our talks are lively and energetic, sometimes opinionated, but always valuable for the insights and ideas they reveal. If you would like to talk about the trends you have read about and how they can affect your productivity, I invite you to contact me.