Editorial from the December 2006 issue of Managing Automation

Redefining Manufacturing Productivity

by Jeff Moad, MA Editorial Staff

Posted on Wednesday, December 13, 2006 5:03:10 PM                                     

Over the past 25 years, even while coping with an unprecedented pace of change, U.S. manufacturers have managed to maintain at least one constant: a solid, unbroken track record of productivity improvement. Vertically integrated enterprises have given way to virtual networks capable of taking advantage of trends such as cheap offshore production. Long, steady production runs have changed to short, demand-driven production bursts. Manageable bills of materials and product catalogues have exploded as the number of products and features has skyrocketed. Yet, through it all, U.S. manufacturers have remained at or near the top in driving productivity, at least as measured in the traditional terms of output per worker hour.

And it's a good thing, too. Without the breakthrough productivity gains that they have achieved in recent years, many U.S. manufacturers would not have been able to overcome an avalanche of rising costs for everything from raw materials to energy. Nor would U.S. consumers have enjoyed the steady supply of low-cost manufactured goods that has played a major role in stimulating economic growth.

"While it tends to be cyclical, the long-term rise in manufacturing productivity has resulted in a competitive advantage for U.S. manufacturers and an important boost for the economy, driving down inflation," says Dan Meckstroth, chief economist at the Manufacturers Alliance/MAPI, a manufacturing industry trade group. "It's really quite a success story."

But how much further can U.S. manufacturers push productivity gains? After more than two decades of continual and impressive improvements, are manufacturers finally beginning to see diminishing returns from the tools and techniques that have delivered world-beating productivity gains in the past? Or are the opportunities for boosting productivity as wide open as ever? In other words, how close to the productivity summit have U.S. manufacturers climbed?

The answer, experts say, is that manufacturers are nowhere near maxing out on potential productivity gains. But, in order to cash in on tomorrow's opportunities, manufacturers will need to shift their thinking about what constitutes meaningful productivity improvements and, in many cases, change their internal organizations and cultures in order to achieve them. There's still plenty of productivity headroom available to manufacturers, for example, who transform push-oriented supply chains into more agile, demand-driven supply networks. Similarly, although manufacturers have attempted over the past few years to apply lean and Six Sigma principles, most have only scratched the surface of what can be achieved, experts say. And most manufacturers have only begun to realize efficiency gains that are available from the integration of processes and systems that have historically been separate, such as manufacturing and supply chain.

"I don't think we are out of gas here by any stretch of imagination," says John Berra, president of Emerson Process Management. "In fact, we could be entering an era where the kind of productivity improvements we've seen in the past can be not only sustained but improved on."

That's saying a lot. Over the past 25 years, U.S. manufacturers have outdone most of the rest of the world when it comes to sheer output per worker hour. According to figures compiled by the U.S. Bureau of Labor Statistics, U.S. manufacturers between 1979 and 2005 generated productivity gains averaging 4.1% per year. That puts U.S. manufacturers behind only a handful of countries studied during that period.

And productivity improvement rates in the U.S. show no signs of slowing down. Between 2004 and 2005, output per worker hour among U.S. manufacturers climbed by 5.1%. The productivity growth rate among U.S. manufacturers continues to be about double the rate of the rest of the country's non-farm economy, says MAPI's Meckstroth. In fact, in the fourth quarter alone, productivity improvements helped U.S. manufacturers cut unit labor costs by 2.8% while meeting rising demand.

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