Manufacturers Must Increase Productivity NOW if Inflation is to be Controlled

As COVID has raged since the start of 2020, increases in the American manufacturing worker’s productivity rate have been alarmingly low.

According to the Wall Street Journal, the US Bureau of Labor Statistics*, on February 3, reported that there was a 6.6 percent growth in American productivity in Q4 of 2021. Good news since there was a 5% drop reported in Q3. For all of 2021, productivity grew to a tune of 1.9 percent following a 2.4% gain in 2020 and just shy of 2 percent in pre COVID 2019.

All’s well one might say – productivity growth is there to help us beat back the current huge increase in price inflation we are feeling and hearing about daily on the news.

We see higher costs every time we visit the grocery store. We see them when we look to buy a used car because there are not any new cars on dealer lots. It’s even there when we take the kids to McDonald’s for a treat that they have rarely enjoyed during the last two COVID dominated years.

Look deeper than the top line headline from the BLS’ report however, and all is not quite so rosy. We find that the headline number refers to what they call the “Nonfarm Business” sector. In the next section of the report, it says that manufacturing productivity in fact, has declined 0.8% in Q4. This follows an even steeper revision of their reported Q3 productivity drop of -2.6% down from the earlier reported -1.8%. By comparison in 2020, Q4 manufacturing productivity was positive 1%. 2021 was not a good year, plainly stated.

If productivity overall is increasing presently, it certainly is not happening in the goods producing sector of the economy. Times may be very good in areas like finance, shipping, warehouses and software for large corporations — e.g., see Microsoft’s latest results for examples of where net income grew 21% to $18.8B in just one quarter — but manufacturing is clearly struggling.

This, of course, is not a surprise as we see help wanted signs everywhere. Manufacturers cannot find enough workers to fill their orders and their supply chains are strained like never before.

Consumers have money to spend on products but there is limited supply. Money chasing limited supply is a dangerous combination if the objective is to control inflation. If the Federal Reserve raises interest rates to combat inflation like it did in the 1980s, a resulting recession on the back of COVID is not something that would be good for the country — or the world!

If manufacturers have to work with the tight labor resources that they have at hand, they need to look for ways to make them more productive — and quickly. A new ERP or MES system that will be up and running in 18 months is not the solution. They need low cost, easy-to-use automation solutions and software applications that can generate productivity gains now as inflation is already out of the bottle.

The right software would provide continuous improvement tools which can be put to use immediately. This solution would offer quick work cell balancing to handle rapidly changing demands. It would reduce the time to changeover between parts or batches. It would quickly measure and document the optimum process to safely produce a part and insure consistent quality for customers. It would provide digital documentation and actual training videos to capture and retain process knowledge for workers that are yet to join the team.

These are all immediate productivity related gains. Payback should be in a few weeks; not 18 months.
 
If the American worker can produce more of a product in an hour, unit labor costs go down and supply to the customers increases. If the company can ship more products, profits will increase to allow them to offer higher salaries to retain and attract new workers. If they do not have to increase prices as much, then it reduces price pressure and contributes towards inflation control.

Let’s focus on the solution as the alternative is not a pleasant thought…