The cost of any product is the sum of the resource costs used to produce it. By manipulating the resources and/or improving the work process the lower the unit cost to produce a product will be. By lowering the unit cost, demand will increase and drive more sales. More sales will generate more profit and yield social benefits in job growth and higher living standards.
If productivity is so important, then how do we improve it? There are five ways to improve business productivity, they are;
1. Increase resources but get a greater increase in output.
An increase in output through an increase in resources usually involves capital investment. And there is risk in pursuing this course of action. If the company has a history of poor maintenance practices chances are those poor practices will carry forward. Once applied to new equipment, in time, the output will drop and the investment in new resources will not yield a benefit. Before management goes ahead it must have confidence in its maintenance practices.
2. Maintain resources but increase output.
This requires improving the work process. Employees need to know how to study work. They must know how to organize and classify the facts and apply common sense to improve the process. This requires knowledge in tools and techniques and the time needed to do the work. If management doesn’t provide training and the time to do the work this course of action will fail.
3. Decrease resources with a smaller decrease in output
This usually involves a course of experimental development that optimizes the use of resources. It results in a lower resource cost but may cause an incremental drop in output but yields a unit cost that is better. As along as the drop in output can meet demand, this course of action is often justified.
4. Decrease resources but maintain output.
This usually requires Research and Development. Such research may find better ways to use materials that lead to less consumption. This result can lead to more output per unit material consumed. Other research efforts may find alternative materials that are better and cost less.
5. Decrease resources but increase output.
This requires improvements in resources (R&D) and work process (Continuous Improvement). But, this can only happen if the company has retained earnings and the time to work on projects.
No organization, public or private, can afford to ignore the need to always improve productivity. Management and employees alike must do their part. Together they can cut resource costs and simplify the way they work to improve productivity. Productivity is not difficult; the only prerequisite is commitment and the time to make it happen. It’s not difficult to do once you know the basics involved in;
1. Experimental Development,
3. standard setting, and the
4. simplification of work.
The reason productivity improvement programs fail is the excessive fire-fighting organizations do. People are so busy putting out fires they don’t have enough time to meet the needs of today’s production. This leaves no residual time to improve productivity today. When demand increases they use extra labor and soon become unproductive. Once an organization becomes unproductive, profitability decreases. Once profitability decreases the company will soon realize a loss. The pressure to raise prices will increase and the company will face the risk of becoming uncompetitive. Once they become uncompetitive they cut jobs and fall into a state of chaos.
Companies with higher levels of productivity have two things working for them. They have “retained earnings” plus “the gift of time” to fund R&D and drive Continuous Improvement. Companies that are PRODUCTIVE use their money and time to free up staff to work on innovative products and services. The product of this work drives more demand. In this context, productivity is a prerequisite to innovation! Think about it. Have you ever seen a company that was innovative and unproductive at the same time? Chances are it never survived!