Confronting the Productivity Gap

Over a year ago, this blog offered a post on the large and growing difference in labor productivity between larger and smaller American manufacturing firms. Because of the magnitude of the productivity gap, the earlier post is reproduced below, along with an extended commentary on how smaller manufacturers might confront this.
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The Productivity Gap

From 29 September 2011

America has lost about a third of its manufacturing jobs in the last decade. During the same period, around 42,200 factories shut their doors [i]. However, the total output of America’s factories, stated in constant dollars, has continued to increase! [ii] The increase is due to dramatic improvements in labor productivity. American manufacturing productivity leads the world.

Government reports indicate there is a substantial productivity gap between large manufacturers and smaller manufacturers. In 2007 (the latest data available), smaller (<500 employees) manufacturers account for nearly 99% of all American manufacturers, about 72% of manufacturing employment and about 60% of the total value-added for all U.S manufacturers [iii]. However, it is the few large manufacturers that enjoy the productivity advantage, not the many smaller manufacturers, who are struggling to compete.

The existence of the gap makes sense, since productivity improvements result from innovation and from the implementation of new technologies, including business and manufacturing practices as well as equipment. Larger manufacturers are more likely to have access to the human, technical and financial resources necessary to innovate and to implement new technologies than are smaller firms.


The Productivity Gap
Source: U.S. Census Bureau[iv]

American manufacturing productivity leads the world. However, that productivity edge is concentrated in a relatively few large manufacturers, while the great majority of American manufacturers are less productive. Further, many smaller manufacturers are suppliers to larger firms. The large manufacturers rely on smaller firms to meet stringent quality, delivery and cost requirements.

The smaller firms need to close the Productivity Gap. To continue to lag obviously isn’t sustainable. This is no mean task. The purpose of this blog and the www.JeraSustainableDevelopment.com website is to provide access to free and low cost resources that that can help the smaller manufacturer formulate a plan for competing sustainably within the realities of the 21st century.

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The existence of the productivity gap is rational enough. Larger firms are more likely to have the resources necessary for extensive automation. Economies of scale do exist. And larger firms are more likely to outsource labor intensive processes.

However, the Productivity Gap is a “zoomed out” [v] abstraction. It is a calculated figure that is useful in the general case. It is not directly applicable to any situation in particular. That’s because demand is granular. The closer one “zooms in” on the market, the clearer it becomes that each customer relationship opportunity is unique. “The market” is another zoomed-out abstraction. Your firm does not serve ‘the market”. Rather, it enjoys some number of unique customer relationships. Your success lies in continually understanding and addressing the unique needs of each one better than any challenger.


For the smaller manufacturer, the Productivity Gap does indicate that significant improvements in labor productivity are possible. Since “any challenger” now includes the entire world, it is necessary to continuously improve productivity, hence cost per unit produced, in order to continuously improve your firm’s ability to address those ever changing unique customer needs. — C.H.


S/W Ver: 97.04.30RThoughtful comments and experience reports are always appreciated.


…  Chuck Harrington

(Chuck@JeraSustainableDevelopment.com)


P.S
: When it is time for your firm to seriously pursue Sustainability — and all that entails — contact me.


Photo
: Courtesy of Don Wilson, Sedona AZ


 

[i] Factory closing figure from The American Prospect, quoted in Business Insider, www.businessinsider.com/deindustrialization-factory-closing-2010-9

[ii] There is some dispute over whether the increase in total manufacturing output is real or not. The official Bureau of Labor Statistics figures are used here. The Information Technology and Innovation Foundation (ITIF), an organization that I respect highly, offers an alternative view in The Case for a National Manufacturing Strategy, page 18(f), 26 April 2011. That document is available at www.itif.org/p-reports

[iii] These figures are from the U.S. Census Bureau, 2007 Economic Census: Manufacturing (November 2010), as cited in the Delivering Measurable Results to Manufacturing Clients (March 2011), the 2009 full year report of the Manufacturing Extension Partnership, a service of the National Institute for Science and Technology, part of the U.S. Government Department of Commerce. Download at www.nist.gov/mep/upload/MEP-Measuring-Results-Mar11-FINAL.pdf

[iv] Productivity Gap chart data from the U.S. Census Bureau, 2007 Economic Census: Manufacturing (November 2010 ), as cited in the Delivering Measurable Results to Manufacturing Clients (March 2011), the 2009 full year report of the Manufacturing Extension Partnership, a service of the National Institute for Science and Technology, part of the U.S. Government Department of Commerce. Download at www.nist.gov/mep/upload/MEP-Measuring-Results-Mar11-FINAL.pdf

[v] “Zooming in” and “zooming out” are discussed in Green and the Zoom Lens Mind, this blog, http://blog.jerasustainabledevelopment.com/2012/02/22/green-and-the-zoom-lens-mind.aspx