You Get What You Measure

You've been measuring productivity for a long time. You know what it means; you know what it looks like. It's time to look a little deeper.

Editor's Note: This is the second installment of a six-part series "Who Will Work For You?" that examines the future of the U.S. manufacturing labor force. It appears in the August 2004 issue of IndustryWeek. IW will introduce a new installment each month throughout the remainder of 2004.

How valuable is my labor force? do I have the right number of employees?

For many manufacturers, these questions would be answered by tracking productivity, a traditional measure of inputs and outputs. While manufacturing has changed dramatically during the past two decades -- and customers are more demanding on delivery, innovation, quality and service -- the formula for measuring productivity has stayed more or less the same.

Is that a good thing?

"There's no right or wrong way to measure productivity," says Roger Schroeder, professor of operations management at the University of Minnesota's Carlson School of Management. It's a favorite factory-level metric because it's perceived to be within management's control. If sales drop, output will go down; but if inputs are reduced, productivity can still be high.

As a real indicator of performance though, productivity alone is not enough. Schroeder notes that many productivity calculations presume quality is constant. Output is output. Better quality, which is certainly better from the customer's point of view, won't show up in a standard productivity measure. Product complexity changes also are difficult to account for.

"Productivity doesn't consider whether you deliver on time or not. It doesn't consider flexibility. It doesn't consider lead time. It's more of cost measure," says Schroeder. He believes value-added productivity (sales minus materials, services and everything purchased to produce a product) or total factor productivity, which also seeks to factor in every input, are superior productivity measures.

These holistic measures make perfect sense as a theoretical ideal, but the complexity of multiple product lines and data reporting systems can make them impractical or impossible to roll up at the operating-unit level on a timely enough basis to be useful. The U.S. government itself releases labor productivity measures (output per hour) on a quarterly basis, frequently enough to give observers a reliable indicator of changes in economic conditions. (See "Productivity Growth is Good") But because some of the necessary data is available only on an annual basis, the Bureau of Labor Statistics releases its "multi-factor" productivity measures just once a year for the two years previous. The agency released its most recent multi-factor productivity report -- which attempts to account for technology changes, other capital inputs, and purchases of energy, materials, and business services -- in February 2004 for 2001.

The obvious answer is to track a variety of metrics. When asked how he measures productivity, Paul Adelberg, vice president of manufacturing, Hayward Pool Products, Elizabeth, N.J., says his company measures units per operator per hour. Each plant makes a different product -- heaters in Nashville, cleaners in Pomona, Calif. -- so the measures themselves aren't comparable, but they watch the trend lines closely.

When pressed about the significance of the productivity number, however, Adelberg quickly jumps to the significance of a different measure -- takt time, or adherence to customer demand rate. "Adherence to takt time is so critical," he says. "This is what the customer needs when he needs it. If you don't hit takt time, it's impacting the customer." When one of his manufacturing or assembly lines doesn't meet takt time, it must record why: "materials not available" for example. These failures are tracked over time in order to identify root causes.

Both productivity and takt time are part of broader list of key performance indicators tracked within Hayward's manufacturing plants. The list includes molding downtime, mold changeover times, scrap, inventory, first-time quality, safety and continuous improvement activity.

Such a multi-faceted performance assessment would be applauded by Andy Carlino, founder and partner of the Lean Learning Center, Novi, Mich. "Traditional measurements drive a lot of wasteful behavior." He characterizes standard labor productivity, operating efficiency and equipment uptime measures as an "autopsy."

"Whatever has happened has happened. That's the past. It doesn't represent current reality," he explains. "You have to have the reports, because they validate what you're doing, but you sure shouldn't be making decisions based on that. You should be making decisions based on what current reality is not what the past is. It's too late."

If an organization focuses too much on a particular factor, it can drive the wrong behavior. Carlino says he once worked for a large organization where plant managers received a bonus if they reduced direct labor. The easiest way to do that is to automate, which is what happened at this company in a big way. The result, he recalls, was more downtime and poor quality, which required more support by indirect labor, which lead directly to customer quality and delivery issues. At the end of the day, direct labor went down, but total costs increased.

The problem therefore isn't labor productivity per se, but how such measures tend to be used. Carlino says operations managers must recognize that the biggest side of being productive is being able to sell what you make.

Dave Layman, senior vice president of operations at La-Z-Boy, notes that he's beginning to shift his mindset with regard to productivity as his operations move from a batch mode to one-piece flow. One plant that's further along on what's typically characterized as the "lean manufacturing" approach has proven to him that they can lose on the productivity number, but because they've taken so much wasteful activity out of their processes, they're more profitable than ever. In the end, profitability is what really counts.

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