Value from the inside out

By John Abplanalp

Let’s look at some recent statistics and take stock (no pun intended) of recent trends in productivity that will influence the economic landscape in 2023.

In its revised second quarter productivity and economic news release, the U.S Bureau of Labor Statistics (BLS) reported that “nonfarm business sector labor productivity fell 4.1 percent in the second quarter of 2022, as output decreased 1.4 percent and hours worked increased 2.7 percent.” To further paint a less-than-rosy picture of the recent past, they reported that “labor costs in the nonfarm business sector increased 10.2 percent in the second quarter of 2022, reflecting a 5.7-percent increase in hourly compensation and a 4.1-percent decrease in productivity.”

On an annual basis BLS also reported that, “…unit labor costs increased 9.3 percent over the last four quarters.” It is the largest four-quarter increase in this measure since the first quarter of 1982. BLS calculates unit labor costs as the ratio of hourly compensation to labor productivity. About every instance of an increase in hourly compensation increases unit labor costs.

The good news: increases in productivity tend to reduce them.

The reality: the second quarter of 2022 is the second consecutive quarter in which output per hour worked declined; across the board, labor productivity fell 7.4 percent in the first quarter of 2022.

But here is a bright spot. A report, issued by the Office of Productivity and Technology (OPT), offers some “one step up” news when comparing short- and long-term productivity trends. It states that more industries saw “…productivity growth over the long term than the short term.” This was especially evident in 2020 due to onset of the COVID-19 pandemic.

Over the long-term period from 1987 to 2020, it states, “Total productivity grew in fifty-six manufacturing industries, compared to only twenty-six from 2019 to 2020. If we exclude the impact of the pandemic in 2020, sixty-one manufacturing industries had positive total productivity growth from 1987-2019 compared to just twenty-eight from 2018 to 2019.” Taken in total, these numbers suggest that while there are a variety of “curves” that need to be bent upwards and additional headwinds like cost of goods increases, supply chain disruptions, the future is not without promise. Sustainable productivity that benefits all stakeholders should be front and center on everyone’s mind in the coming year. Achieving this will require a departure from the well-worn, conventional top-down methods. Successfully navigating the uncertainties of economic conditions, forward-thinking leadership and their companies will benefit from a transformational bottom-up reexamination and modernization.  So, as we look to 2023, here are a few things that are on the horizon and trending. They serve to provide some insights and opportunities in the interests of organizational productivity and bottom-line growth.

First, the obvious. High inflation is not transitory. That trend is projected to continue at an elevated level for at least the first half 2023 and according to a number of economists, may not abate until the following year. Under the guise of these market conditions the trend for onshoring continues as an effort to offset a variety of global headwinds. The shift from lower to higher labor costs, supply chain issues, material costs, and omnipresent inflation can be daunting. To companies seeking growth and sustainable profitability during these uncertain times the way out is greater productivity throughout the entire organization.

The future will welcome nimble companies that revitalize their operations to meet the goals of its various stakeholder groups. It is a future where the entire organization is evaluated, and appropriate changes are applied to its operational structure in a timely manner. Where changes to facility layout, design, training, and marketing are implemented to capitalize on the company’s performance as it improves.

“Digital” and all that it implies in relation to productivity in general and manufacturing is no longer to be considered as a trend. Rather, its ubiquitous acceptance is being experienced in every facet of business. Yet within the digital realm, technologies continue to emerge that spawn trends (“sub-trends” is a name some digital devotees have suggested) on their own and for good reason.

Professional training and education continue to trend. Many people-centric businesses offer continuous learning and personal development opportunities. Unfortunately, as a result of the pandemic, some were necessarily interrupted, but that is in the rear-view mirror.

That trend will need to accelerate to meet the skills needs in the years ahead. According to a recent study conducted by Deloitte, only 50% of production employees feel ready to take on advanced roles, and 60% of skills shortages are due to insufficient STEM education and vocational training. Employee expectations—especially among younger generations—are changing. The trend: Nearly 40% of new manufacturing talent have different career and job expectations than previous generations.

As the new year approaches, I’m talking with business executives about how to generate value creation and sustainable profitability in 2023 and beyond. Our talks are lively and energetic, sometimes opinionated, but always valuable for the insights and ideas they reveal. If you would like talk about the trends you have read about and how they can affect your productivity, I invite you to contact me.

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