Productivity Payoff?

Dec. 21, 2004
IW's Best Plants research suggests IT does spur productivity.

The debate has been simmering for years: Is corporate America really getting its money's worth from the billions of dollars it has invested in computer systems? Most people who use information technology (IT) in one form or another intuitively sense that it does enhance their productivity -- by enabling them do their work faster, easier, or more accurately. But rigorous proof of a productivity payoff on a wide scale has been somewhat elusive. Even management guru Peter F. Drucker alluded to the scarcity of hard evidence in a recent interview when he observed: "IT people are so hypnotized by the technology they don't look for real results." However, information provided by 64 plants that were winners or finalists in IndustryWeek's America's Best Plants program makes a strong case for IT investment as a productivity booster, at least in manufacturing operations. A recent analysis using a computer-searchable database of information on the Best Plants revealed a distinct correlation between the level of IT spending and productivity improvement. The exercise focused on those plants that had supplied data on their annual investment in information systems, including hardware, software, and training costs, as a percentage of the total plant budget. Of those, 29 reported IT expenditures amounting to 4% or more of the plant budget, while 35 indicated investment levels of less than 4%. The first group -- call them the "heavy spenders" -- did remarkably better in boosting productivity. On average, over a five-year period, they recorded a 99.5% increase in productivity, compared with a 45.5% improvement for the plants with lower levels of IT investment. (In this case, productivity gain was based on value-added per employee for all employees at the site, not just direct labor.) An equally dramatic difference showed up in a comparison of median productivity increases: 60.1% for the heavy spenders vs 28.8% for those plants reporting lower investment levels. Another exercise, cited in a new IW research report, Paths to Excellence: Manufacturing Best Practices Analysis on America's Best Plants, found a similar correlation between IT spending and cost control. The finalists whose IT investments represented 4% or more of their total plant budget had a median five-year manufacturing cost reduction of 27.5% per unit of product, compared with a 19.6% median reduction for plants spending less than 4% on IT systems. The findings don't surprise manufacturing professionals at several of the plants involved. "I would say that about half of our IT investment has either directly or indirectly influenced productivity," says Walter Marcum, facilities and industrial-engineering section head at TRW Inc.'s Vehicle Safety Systems complex in Cookeville, Tenn., which achieved a 60.1% productivity increase over five years. A 1995 Best Plants winner, the TRW facility makes automotive air-bag modules and components. At the time it submitted its entry, it was spending 19% of its total plant budget on IT systems. A sizable portion of that investment was allocated for electronic mistake-proofing systems -- often called poka-yoke systems. For example, it installed numerous sensors on its production equipment to detect such things as missing components or improperly positioned parts. One result was to enhance productivity by keeping scrap and rework to a minimum. More recently, Marcum points out, poka-yoke features have been designed into the products themselves; for example, spacing holes in a bracket in such a way that "if you try to put it on backward or upside down, it won't go together." Such techniques have reduced the need for electronic sensors, he notes. In the early part of this decade, a large slice of the Cookeville facility's IT budget was dedicated to development of a product-traceability system required by its customers, the auto companies. While necessary for legal purposes, that system had little to do with improving productivity. "We build thousands of air-bag modules a day, and we collect information on each one," Marcum explains. "And we have to retain that information for 15 or 20 years. But it is information that you hope you never have to use." In recent years, the TRW plant's investment in its information infrastructure, including servers, has leveled off or decreased. Moreover, the plant has begun to deploy more economical information-technology solutions in some areas. For example, where it once made wide use of vision systems to ensure that labels were applied correctly, it now designs small bar codes into its labels. "We use fairly inexpensive bar-code scanners to determine if the labels are in the proper location, rather than expensive vision systems," Marcum explains. "We are figuring out less-expensive ways to achieve the same end." Use of radio frequency (RF) technology in the plant warehouse has enhanced productivity. While doing order-picking in a high-bay storage area, operators of wire-guided lift trucks use hand-held scanners attached to RF terminals to scan bar codes on the storage racks and on the parts. "It automatically updates our inventory records," Marcum says. "And if the operator moves an item to another location, we automatically know where it is. The [productivity] benefit is that you don't spend unnecessary time trying to locate materials in transit." Bob Gilbert, manager of manufacturing systems at Lockheed Martin Corp.'s Tactical Aircraft Systems division in Ft. Worth, agrees that the combination of bar coding and portable RF devices packs a strong productivity punch. "I think bar coding is a very efficient way of handling small transactions very quickly -- dock-to-stock kinds of things and inventory control. It allows you to support labor-in/labor-out -- that is, recording the start and finish of a task -- without having to do anything with a keyboard. It is a neat technology that doesn't get a lot of fanfare, but it is a tremendous enabler." A 1998 Best Plants winner, the Ft. Worth plant uses wireless handheld RF devices to reorder perishable tools remotely. The reorder signals are transmitted real-time to the plant's integrated computer system, and then by electronic data interchange to the supplier. At Alcatel USA's telecommunications-equipment plant in Raleigh, the productivity impact of IT investments has registered most heavily in support-staff functions such as materials management. "That's where most of the costs are in our business," notes William King, senior director of operations. "Our labor content is less than 5%, so it is much more important for us to manage material correctly than to [minimize] factory labor." A 1997 Best Plants winner, the Alcatel facility experienced a 168% productivity jump in five years. In its entry, it credited its plant teams, adoption of a pull system, and product-design improvements as factors contributing to the productivity improvement, as well as information systems that "provide the right data, without errors, to employees." Effective IT systems rank "very high on the list" of productivity enhancers in support functions such as production planning, King asserts. "If it can allow five planners to do the work of 20, then that is a pretty good improvement," he says. The contribution of planning staffs, he notes, is leveraged by having the ability to do what-if analyses using manufacturing-resource-planning data, asking such things as: "What if we make more of this product and less of that product?" Alcatel now uses software from Manugistics Inc. for some of its optimization analyses. "It allows you to study your current status and try out a lot of different alternatives without destroying your online systems," King says. "You can analyze situations very, very rapidly. Things that used to take weeks we can now do in hours." Web-based workflow management for such tasks as phasing in new designs also has been helpful, King adds. "It speeds up the execution because all the bits of information always flow to the right places, since you force-fit them into the form." One of the largest productivity leaps reported by any of the Best Plants winners was a 300% increase at EG&G Astrophysics, a Long Beach, Calif., unit of EG&G Inc. A maker of security X-ray screening systems, such as those used in airports and government buildings, the plant attributed much of the gain to implementation of cellular manufacturing and adoption of continuous-improvement practices "as a way of life." But information technology, including Internet and e-mail systems, has played an important supporting role. For example, improving communications with suppliers helped the Astrophysics plant to compress supplier leadtimes by a remarkable 98%. One of the keys to managing leadtimes, says Rob Elliott, director of operations and continuous improvement, "is to establish a crisp platform to communicate with your suppliers. I think the Internet is driving people to a whole new mentality about communicating with suppliers and customers." In managing its inventory, the EG&G plant uses a two-bin kanban system with pull signals. When one of its bins containing frames is empty, for example, it sends an e-mail kanban signal to its frame supplier to ship four more frames. The replenishment occurs within three days. "The e-mail message gives the supplier an immediate alert and the traditional paperwork -- the purchase order -- follows," Elliott notes. "Even though the system is very simple, I think it went a long way in enabling us to manage the mix of parts that we use." Simplifying plant operations was a key to productivity improvement at EG&G. "What fueled our success here was a simple execution system, with a wraparound of Internet and e-mail technology," Elliott says. "We want efficient and timely information flow to manage our kanban and lean-manufacturing strategies. "The goal is to simplify information flow in a world of increasing technological complexity, including the signaling process with your suppliers. The sooner I can translate changes in the quantities of parts [scheduled for] consumption into an executable plan for replenishing supplies, the better off I am." The productivity payback for investments in IT systems may be as much a result of how the funds are allocated as the size of the outlays. In a multivariable data-slicing exercise using the Best Plants database, an attempt was made to correlate value-added productivity improvement with a combination of factors -- use of specific computer-related technologies and the overall investment level. One finding: Among plants that extensively use shop-floor data-collection systems, the plants whose annual IT spending exceeded 4% of the total plant budget showed a median productivity gain of 53%, while those plants investing less than 4% had a median improvement of just 27%. A similar productivity advantage emerged for the big spenders who had implemented links between computer-aided-design systems and computer-aided-manufacturing systems.

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