Executives in the United States had plenty to celebrate at the start of 2018.
After years of sluggish-to-steady economic growth, signs were increasingly pointing to an increase in business activity. The effects of low unemployment, high consumer spending and record stock market gains were starting to show in factories nationwide.
Orders surged to such a high rate, companies at times struggled to keep up. The mom-and-pop shops that make up many of U.S. suppliers suddenly had to produce more and deliver more quickly. Meanwhile, freight providers had to navigate an already tight market to keep their promise of reliability.
It’s undeniable top-line growth is great, but turning that into profits can prove challenging.
In such an environment, businesses often look to new technology — whether it is production lines or software — to help turn new revenues into long-term productivity gains. But does this have to be the case?
The case for capital-light productivity drives
The boom-and-bust cycle of economics can define business decisions to invest in new technology.
It doesn't take an economist to understand why. As spending falls across the board during recessions, companies often turn to cost-cutting drives to keep P&L margins. When the economy picks back up, boardrooms use windfall revenues to restructure logistics and operations practices, adding new warehouses or machinery to their assets.
In theory, 10 years since the last recession, the U.S. we should be seeing a massive boost in productivity right now. After all, the labor market is so tight it may be more difficult to find suitable talent than a new software solution to implement.
Yet data from the Bureau of Labor Statistics shows the opposite is true. In the past 10 years, productivity – measured as output (GDP components) per unit of input (labor and capital) – has grown at a annual rate of only 0.8%, the lowest since at least 1987.
It’s possible the low productivity growth rates are due to high capital spend. Or, perhaps, the labor pool is not sufficiently trained to seize the gains promised by new technology.
Regardless, amid the hype of digitization and data-driven growth, cost-management strategies seem to have been gotten lost in the fray.
Operations excellence is about more than either containing costs or enabling growth; it is about transforming assets — old and new — into revenue drivers. Sometimes, that takes thinking of ways to improve productivity without adding cost to the mix.
To do this, Adam Mussomeli, a principal at Deloitte’s supply chain & manufacturing operations practice, says executives should start by asking, “how can I get more productivity — be more nimble — out of what I use today?”
4 Tips to boost productivity through process improvement
“All the things you can do require some improvement and investment,” said Mussomeli, but certain process-oriented tasks can help ensure long-term boosts in output. He provided three examples in a recent conversation with Supply Chain Dive:
- Reduce variability — Good supply chain planning is key to productivity, said Mussomeli. “The less accurate your plans are, they reduce your capacity.” Reducing variability in these plans can free up time and work. One straightforward way to do this is by creating a digital plan that adds visibility into workflows. Such twins are not just for machinery; they can also be made for processes.
- Take advantage of unused space — “There is an incredible amount of empty space out there today,” that can be taken advantage of by companies in need, he said. “Things like empty shopping malls or dark stores are being repurposed by various industries to be mini-fulfillment shops.” This can help boost productivity during seasonal demand spikes, but without long-term investment.
- Embrace the sharing economy — Similar to the previous points, companies should look out for opportunities to expand their supply networks and tap into otherwise unused capacity. This could be through transportation, blockchain-enabled systems, warehousing, or even manufacturing. “That sort of idea is starting to percolate for third-party manufacturing,” he said.
A spokesperson for McKinsey&Company shared one more idea with Supply Chain Dive: Adopting a zero-based budgeting policy.
Zero-based budgeting is the idea that budgets restart at the beginning of each fiscal year. Since each manager has to create a new budget, fiscal waste is removed, as employees ask for only what they know they plan to spend.
The process is far from easy, but the consulting firm’s studies are beginning to show such initiatives can be more effective than cost-cutting drives when they instill a new culture into the workforce: one of fiscal responsibility and innovation. The idea is far from new — McKinsey writes it has been around since at least the 1970s — but the firm says it seems to be gaining steam once more.
Regardless, each of the four ways shows there are plenty of process-oriented ways to improve productivity without heavy capital spend — if executives dare to challenge their own processes and workflows.
