Over the past 10 years, the issue of stagnating UK productivity has grown to seem almost unstoppable. Each multifactor release from the Office of National Statistics (ONS) offers few signs of hope — to the point that no individual solution seems sufficient to tackle such an overwhelming problem.
But multifactor productivity (MFP) research can bring more than just misery. Take a deep dive on the methodology that the ONS use, and a four-part strategy to escape the productivity trap becomes clear.
Breaking down multifactor productivity
Like any productivity measure, MFP analyses how efficiently an economy, area or business is converting its inputs (labour, capital and resources) into outputs (sales).
There are four ‘factors’ that manufacturers should pay attention to: quality-adjusted labour input, capital inputs, intermediate inputs and gross value added.
Break down each in turn, and the issue of stagnating productivity becomes manageable.
How to enact the four-factor method
Reducing capital inputs requires a two-pronged approach: using what’s there efficiently and eliminating costs with new technology.
Manufacturers tend to be deeply invested in equipment, property and technology. Boosting MFP requires eeking as much as possible from this investment. For example, by keeping stock levels lean to keep property costs down.
Eliminating IT costs is an even better route. Many manufacturers are spending far too much on keeping legacy systems up and running, or upgrading them to the latest version.
Unlike investment into equipment and hardware, these costs are easy to reduce or remove: research by Microsoft and Invensys found that cloud-based manufacturing tools can save 54% from IT budgets.
Quality-adjusted labour input
The key here lies in the first two words: ‘quality-adjusted‘.
Much coverage of the productivity gap has focused on UK manufacturing’s skills shortage. But while this is undoubtedly a grave issue, hiring new highly skilled staff won’t deliver MFP growth.
Why? Because they demand higher wages — and quality-adjusted labour input takes staff costs into account.
The answer, then, lies in doing more with existing workers.
According to research by Gallup, an engaged workforce is up to 17% more productive than an unengaged one — so look for ways to empower workers by automating the tasks they hate.
For many manufacturers, automation is synonymous with new equipment. But investing further into hardware will increase capital inputs and lower MFP.
Software is a good alternative that’s often more cost-effective and agile. Volcano Coffee Works, a London-based coffee roaster, provides a good example: it saved staff hours each week by automating manual entry.
Plenty of overheads fall under the ‘intermediate inputs’ umbrella. But to transform MFP, manufacturers only need to focus on two: purchasing and production costs.
Supply chains and production processes are more complicated today than ever. Without complete traceability, a business can easily waste cash on uncompetitive pricing, freight costs or lost stock. These issues eat into margins and take up staff time — doubling up on the productivity pain.
However, there are quick solutions to these complex issues.
For example, incorporating comprehensive supplier management tools or tracking margins with accurate landed costs. Simply put, a ‘bought for X and sold for X’ approach to margins is no longer going to cut it.
Manufacturers need 100% margin accuracy and transparency across the entire supply chain. Achieving this with Excel or other basic systems is tricky, but not impossible. However, an inventory upgrade will help things immensely.
Gross value added
But reducing costs is only one half of the margin equation — and inputs only make up half of the multifactor methodology.
Manufacturers can now take advantage of numerous customer-centric sales opportunities across both the B2B and B2C spheres. Focusing on mastering pricing, empowering customers and selling at scale is the final step in our four-factor method.
Incorporating sophisticated pricing strategies is the natural next evolution once a business can see accurate margins. Selling each product at its absolute optimum price point — and giving customers prices based on their behaviour — is crucial to growing MFP.
A B2B Store, meanwhile, empowers wholesale customers to engage on their terms. It puts an end to the days of forcing customers to call or email with orders: reducing errors, saving time and making life easier for everyone involved.
Selling at scale is now a real possibility for companies of any size.
Multichannel can help sidestep barriers such as timezone, language or culture; push time-intensive tasks back onto customers and unlock opportunities in entirely new markets.
Volcano Coffee, for instance, used multichannel to expand into Europe without hiring foreign-speaking staff.
This provides the means to increase sales without increasing inputs, which is the fundamental basis behind any attempt to deliver MFP growth.
Solving stagnating productivity may seem out of the reach of a single independent manufacturer. But by doing more with labour, capital and intermediate inputs — plus adding value to outputs — companies can cut a potentially overwhelming issue down to size.