Jul 07

Sheffield’s answer to the puzzle

In 2015, the University of Sheffield showed Mark Carney, Governor of the Bank of England, two photographs:

  • One of the Orgreave coking plant that closed in 1990 – ‘a brown and broken edifice dissolving like a rust stain into a post-industrial landscape’

  • The other, taken a decade later, of a solitary gleaming building on the same site – the first AMRC (Advanced Manufacturing Research Centre) building

Today, the AMRC is a hub of a fast-growing, high-value manufacturing cluster

Customers include the likes of Airbus, McLaren and BAe – world champions indeed who seek ‘lung-busting leaps in progress, not a half-point improvement here or a percentage step forward there’

Improvements the AMRC has enabled include:

  • Messier-Dowty reducing landing gear production times by 80%

  • A 50% improvement in fan-disc production for Rolls Royce

  • Boeing cutting component manufacture from over two hours to under six minutes

And thanks to investment in AMRC’s advanced manufacturing systems, BMW Mini in Oxford and JLR (Jaguar Land Rover) in Coventry win more domestic and overseas orders

One question thus follows – can such productivity gains by the big boys in manufacturing be replicated at SME level in the same sector:

  • Their answer is ‘yes’

  • But only if the government intervenes and supports ‘collaborative R&D hubs’ where solutions can be tried and tested before SMEs adopt them, thereby offloading their risks

  • Also, ‘SMEs cannot retrain their staff to use these new tools, so universities up and down the country must have more freedom to lead on training and knowledge exchange’

  • Otherwise, they’re in serious danger of becoming ‘no longer economically viable’ – as per the coking plant

A further question has to be asked given the claim that the above will have a major impact on UK productivity:

  • Manufacturing comprises only some 15% of the UK economy, so even massive productivity gains in this narrow area will not solve the overall UK productivity problem

  • So is anyone investigating if there’s any big impact possible using AMRC applications in the other 85% of the economy i.e. services?

  • Surely digitally-integrated systems have a role there too?

At present, all we hear from Services is one or other of the following:

  • It’s too difficult to measure, so nigh impossible to improve

  • Most now employ computers/ ICT but their benefits don’t show up in the stats

  • Or AI (Artificial Intelligence) is only now gathering pace but will soon transform all sectors everywhere

Very few recognise the enormous waste of costly resources and time that they incur at present – often over 50% of their total costs! – so they do nothing about it

And those that do seek to improve tend to invest in leading edge ideas and technology rather than explore the potential most have by better use of their existing resources, so avoiding any major investment costs

It’s such pig-headed attitudes which, after WW2, drove the world famous American statisticians Deming, Juran and Crosby (DJC), who were ignored by American manufacturing, to advise Japanese competitors to first cut waste and use existing resources better before investing in major new processes and gear – and within just a decade, Japanese manufacturers became world leaders instead

The same attitude is now prevalent in western service sectors – if they do anything to improve, it’s investing in latest gizmos and techniques whilst wasting small fortunes, urged on by management consultants and business schools who position themselves at the same leading edge

I still only know of one UK consultancy out there (n.b. with which I have no contact) which achieves big quantifiable results by repeating the true message of DJC – shame on the rest

 

 

Jun 28

Labour has a terrible productivity idea

According to an article for Bloomberg View by Ferdinando Giugliano, one-time member of the Financial Times editorial committee, the UK’s Labour Party has come up with a ‘terrible idea’ for sorting out the country’s current productivity problem

John McDonnell, Shadow Chancellor, proposes giving the Bank of England (BoE) a yearly 3% productivity growth target to sit alongside its current 2% inflation target and requirement to ‘smooth economic fluctuations by boosting output and employment’ when needed

This wheeze is apparently based on a report by a Graham Turner of GFC Economics, a think-tank not well known to most

What seems to have been overlooked is outcome targets should only be set for people who have a considerable degree of control over the drivers involved – for example, re national productivity, the result of waste and efficiency levels, labour-saving investments, innovation or use of new technology

But all such areas are under the control of internal management – they alone determine the great majority of any national productivity improvement – say 80% – with the other 20% being dependent on population growth and governments, not central banks, for vital investment in infrastructure (e.g. HS2, HR3), R&D and skills training as well as legislation and regulation

The BoE not only lacks expertise and experience in these areas – they also have little, if any, influence over them

Worse still, this new target would be in conflict with its other ones

Whilst organisations seek to minimise all costly inputs, including labour, nations, aided by central banks, seek to maximise employment levels as well as national output (i.e. GDP) to improve standards of living for all

One wonders how this big idea from McDonnell and Turner arose

Presumably, they’ve spotted that national capital investment is currently well below historical norms, with some bigger organisations preferring to divert more net profits into share buybacks and senior managers’ pockets than the long term futures of their companies – and they feel more capex per company would lead to more productivity and so more prosperity for all – and BoE muscle could be applied on those companies to encourage their managers to increase their capex

But making the BoE carry the can for achieving the nation’s most important peace-time aim is a sure-fire recipe for chaos and failure

 

 

Jun 21

UK SMEs waste £57 bn a year

NatWest has unveiled research, conducted by the Cebr (Centre for economic and business research) which reveals UK SMEs (defined as companies with 10 – 259 employees) could add up to £57 billion a year – more than the cost of Brexit – to the UK economy if they were as productive as SMEs in Germany

Apparently, UK SME workers generate a mere £147k worth of output per year, less than half that of their German counterparts (£335k per worker per year) – statistics which have a lot more credibility than the ONS’s  flawed labour productivity data

NatWest go on to report more gloom viz:

  • UK SMEs are uncertain about the actions they need to take to boost business productivity

  • Two fifths don’t even know what productivity means in practice

  • This makes it difficult for them to identify the steps to improve

NatWest’s and Cebr’s finest then recommend UK SMEs take the following measures for the biggest impact on productivity:

  • Invest in workplace culture – team building exercises, mentorship or buddy schemes

  • Offer benefits packages above statutory minima – offer of paid days above the legal minimum, subsidies for meals eaten at work

  • Provide rewards for good performance (financial and non-financial) – commissions, bonuses, other gestures

  • In the UK, only a third follow the first two and only a quarter the last one

We’re told this advice is from ‘someone who has been there, done that and really understood the SME business world’ – yet all could be bracketed under a heading ’employee engagement’ suggesting ‘get that right and all will be hunky-dory’

And one can forget other drivers of productivity levels such as management quality, reduction of waste, increases in efficiency, investment and innovation in new processes and products, competition levels or managed luck – employee motivation matters most of all, apparently

Herewith, one big reason for the UK’s productivity gap problem

Self-appointed back-room experts with power, this time over where big money is spent, bombard managers at all levels with their conclusions and advice about causes and ways to improve productivity – yet the UK productivity gap persists, decade after decade

Is it any wonder why!

 

 

Jun 18

SMEs – Your nation needs you

Help SMEs get practical about solving the productivity puzzle

Under the above heading, Alison Rose, chief executive of commercial & private banking at NatWest wrote the following article which all SMEs would do well to consider

Businesses don’t run on theory – they are focused on the inherently practical (source: Getty)

As we gear up for Brexit, the UK’s flagging productivity performance is continually in the fore of media headlines and economic analysis

Following a further fall in productivity in the first quarter of 2018, policy experts and economists were quick to update their models and offer opinion over blame – however, this economic self-deprecation doesn’t actually make any difference

So what could?

It isn’t that British SMEs don’t have the drive and ambition – nor is it that other countries, such as Germany, the G7’s most productive, are naturally better at enterprise – Britain has an impressive history and vibrant culture when it comes to entrepreneurism – and yet the productivity puzzle persists

Part of the problem may be the academic language of productivity which not only leaves businesses cold, but can feel meaningless, especially for SMEs

In theory, productivity is a simple equation: output divided by input – but businesses don’t run on theory – they’re focused on the inherently practical

At NatWest, we recently spoke to 2,000 SME leaders about their current business priorities – raising productivity came at the bottom of the list, with only one in five placing it top

It’s clear that there is a persistent disconnect between diagnosing the productivity gap as an economic contagion at the macro level, and the treatment which has to start with businesses – especially SMEs – on the ground

We need to get better at focusing on the treatment side of things by coming up with a more practical perspective – most business leaders I speak to understand the general problem, but what our data shows is that they don’t always see how it applies to them and what they could be doing

This is where advisers and lenders of all shapes and sizes can step in, building partnerships of real value to SMEs

But it also means understanding our customers’ businesses and their needs

Most SME leaders are time-poor and have a vast range of roles and responsibilities, from finance director to the shop floor – and if we don’t make tangible suggestions, focus quickly returns to the day job

As I have learned, the key is to help businesses ask themselves two practical questions:

  • Can we cut out waste to become more efficient?

  • What are the steps we can take to become a better business?

This moves the conversation on from the theory of productivity to broader strategies that get to the heart of helping the majority of SMEs

Discussions about productivity often centre on manufacturing – we talk about investing in technology and machinery to improve efficiency, so checking that the right tools are being used to produce and sell products is an obvious first step

But for most businesses, their capacity to change, improve and innovate is interwoven with the performance and attitude of their people:

  • Innovation is not confined to the laboratory – it includes investing in staff, not just in terms of skills and development, but also their enthusiasm and satisfaction

  • Creating the right workplace culture and organisational structure, providing decent, tailored benefits packages, and focusing on employee health and well-being has the ability to improve individual performance, retain talent, and create value

It is these intangible or knowledge-based assets, often inseparable from the people who work in SMEs themselves, which can add billions to the UK economy

Getting better at business is made up of small steps, not silver bullets

And it’s the people who run SMEs who know this best

Jun 18

Communism versus Capitalism

Communism has been defined as a system where:

  • People work according to their ability and receive according to their needs

  • All big decisions are made at the centre

  • All data is processed at the centre

Capitalism, on the other hand, is an alternative where:

  • People are free to buy/ sell/ invest in whatever they like

  • They can make their own decisions

  • Good choices soon follow – mistakes are soon spotted and corrected

  • National data is made available to all

Matthew Parris in The Times made the distinction clearer:

  • Free market competition is thought by some to be wasteful

  • Competition fragments provision, duplicates services in one area, forgoes economies of scale, creates uneven provision across the country, creates an invidious incentive to outperform comrades and siphons off money to profiteering shareholders

  • Co-ordination, collaboration and co-operation are needed across all sectors

  • Different materials which are delivered by different suppliers to get a cheaper deal must be stopped – as must all performance-related bonuses

  • The state should match supply to forecast demand – it can do this better!

  • And set fair prices, fair wages and agreed standards for quality

Hence communism failed

And given “productivity is the guts of capitalism” according to Warren Buffett, capitalist supreme, it’s interesting that Deng Xiaoping, leader of the People’s Republic of China, also said: “without high productivity, socialism is nothing but a boast”

 

 

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