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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.

13 comments on “The Myth vs. Reality of Worker Productivity

  1. hwong
    June 22, 2011

    The truth is, Americans are very hard working. But yet they are not making enough to save for their retirement. You ask why? Because good paying jobs are taken away due to the greed of Corporate America. So the rich people get alot richer but the rest of us who are employees are just stuck with what is mandated of us.  We are 3 times more productive than 20 years ago. They ask us to do 3 people's jobs.  If you are upset. Then you leave. Then they lay people off and rehire cheaper workers either offshore or younger graduates.

     

    So, what can we do? This is the reality of the society.

  2. Anand
    June 22, 2011

    “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.”

    Ken,

     With oil prices softening, do you think this transportation costs will eventually decrease and make outsourcing attractive?

  3. Mr. Roques
    June 22, 2011

    Maybe by being TOO productive, then you can lay off a few people (when you do the job of 3, there are 2 people unemployed).

    But yes, I get your point.

  4. Hawk
    June 22, 2011

    @hwong, It's a vicious cycle. I recall the statement ascribed to former US president John F. Kennedy who reportedly said: “Ask not what your country can do for you but what you can do for your country.” It was a noble statement worthy of a people moving together in a single direction. My country looks out for me and I look out for it.

    Companies continuously tell employees something similar and it reads like this: “Ask not what your company can do for you, ask what you can do for your company.” Well, this is wearing thin. My company looks out for itself (shareholders, who get dividends, and top management, who get millions in salaries and bonuses while employees get squeezed.) Workers aren't feeling the love that would make them continue to sacrifice for employers so we have all become mercenary in our actions. I do what is right by myself.

    This is the right thing. If my company wants the best of me, it should give me not just the tools to do my work but also the remuneration that would ensure I don't end up as a “Greeter” at Wal-Mart in the twilight of my life. Better still. I understand now: It's not the company's responsibility to prepare me for retirement — that's my job and I'll find a way to do it, with or without the company. Thinking like this frees me to strategize, plan and execute steps meant to make sure I'll succeed.

  5. mario8a
    June 22, 2011

     

    Hello

    one reason why there's so many people w/o retirement plan is because they invest their 401K on stocks and then loose money, I've seen people loosing everything other the stock market.

    however, speacially for Supply chain it will be very difficult for USA to be a competitor on the procurement and achieve lower labor cost than ASIA and middle east.

     

    Regards

  6. prabhakar_deosthali
    June 23, 2011

    The big difference between the Americans and the Asians is not the productivity but the life style.  Americans in general do not save . They live on credit all their life by overspending. As against this Asians are very conservative in their life style and hardly use any credit for their living. Asians start saving early in their life to make their retired life secure. 

  7. Jay_Bond
    June 23, 2011

    @prabhakar_deosthali, you've brought up a very good point. Many Americans, particularly when they are younger want to live for today. They want the best right now instead of later. Credit allows them to do that. They also tend to think that living comfortably and having what they want is better now than later in life.

    @KEN, As for productivity, you are correct. This is more about a system than individuals. Before I moved into an office I was in production. Most days 3 of us did more work than the rest of the crew combined, yet as a group we were viewed most productive because of numbers. Hard workers cover up for lazy workers, and that’s not by choice just work ethics. 

     

  8. AnalyzeThis
    June 23, 2011

    Ken, let me start off by saying that I agree with your thoughts regarding worker productivity. Your thoughts did not make you unpopular with me!

    But I do think it's a little odd that you start the article talking about how not-well-off many Americans are and how many people have given up on even finding jobs, but then later in the article encourage us not to buy American.

    Don't get me wrong — and it's not like I don't agree with you when you say that you should buy local when the value is there — but I just thought the whole thing was rather ironic because it perfectly illustrated one of the many weaknesses with the current American economy.

  9. hwong
    June 23, 2011

    @jay_bond  – The economy of America relies on the way that American spend money. If people dont' spend the money and save up more, then retailers have fewer businesses and hence fewer jobs. That would mean the economy would be worse off. As a result, people will still be without a job.  The growth of America heavily relies on consumers spending and consumer confidence.

  10. Ken Bradley
    June 23, 2011

    DennisQ, Thanks for your comments.

    I do not see my message being “don’t buy American”; but more, let’s make “buying American” more attractive. Inventory Controller asks about oil prices making offshore more attractive, I see the opposite. Over the next couple of years, I see foreign costs getting higher due to inflation, oil (and hence transportation costs) getting higher and the US dollar getting weaker. All of this makes buying locally in America a better value proposition.

    But I don’t see the sourcing equation (cost here vs. costs somewhere else) suddenly bringing all jobs back. Each industry segment and opportunity will have a different in-source threshold so it needs to be looked at often as conditions change.   The missing piece, which Americans have always been good at, is innovation.

    Innovation is what makes the US productivity number high; it is working smarter, not harder. In fact, working harder, as many America’s are doing today, is often counterproductive as in my example of being understaffed in procurement and foregoing cost reductions. Innovation allows companies to pay higher wages and still meet product cost targets. At a time when we need more supply chain innovation, I don’t see it.

     

  11. Nemos
    June 23, 2011

    (You have a point but I can't understand how is connected the unemployed with productivity.)I want also to add this point of view. Even if you can work maximum hours still   productivity maybe be at the lowest level. Because most of the factors that affect the productivity can't be controlled by the worker. For instance, take two workers and give them the same task to do but with different tools or in a different “working environment” the results will be totally different furthermore the productivity will be different.

     

  12. FLYINGSCOT
    June 23, 2011

    I believe people are not educated enough by their employers, their government and themselves with respect to the retirement burden.  If people in the earlier stages of their career were more tuned into what was required to retire comfortably then they would plan and save accordingly.  I understand that many people cannot afford to save for retirement but I do believe that most people could make informed decisions about buying new cars, TVs, holidays instead of saving for retirement.  To retire at 55-60 years old and if one would like $50k per year of retirement income, one would need a retirement pot of $1M……this take a lot of planning and saving to achieve.

  13. Himanshugupta
    June 24, 2011

    I agree with your point that it is not individual productivity but system productivity which matters. But i have an opinion that the system productivity can not be defined alone by the organization in which people work but also by where they work. For example, the same organization can have offices in the west and east but the productivity in these two offices can be hugely different even though the organization rules are the same because the people working in two offices are exposed different external factors.

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