Recovery and resilience: The power of productivity
Our recent project on productivity has some insights on how productivity cuts across all aspects of the business, and is critical in times of demand fluctuation both downwards and upwards.
Firstly, consideration of how flow efficiency can support businesses in not only providing an increase to the productivity top line (output based revenue), it also supports the critical liquidity requirements of business now. Flow efficiency is the ratio of calendar time an order spends in your business, in relation to the time it spends being processed or worked on. Although the latter measurement is often harder to ascertain, the elapsed time is often easily obtained from even the most basic of ERP/MRP or order management systems. Developing and utilising this, or the whole ratio, as a KPI can provide a distinct focus on driving the business performance on overall order fulfilment – and thus sales and cashflow, particularly because when you start analysing why, it will lead to significant insight on to how to improve it.
Secondly, the criticality of the bottom element of the productivity ratio, that of inputs. The pandemic caused businesses to face, almost overnight, a huge mismatch between their level of overall inputs, i.e. their capacity, with their demand, which went into freefall in March. This has been mitigated by the furlough scheme in the short term. However, as demand begins to change businesses that have been supported will need to be much more proximate with their input capacity in relation to their demand, otherwise they will not survive.
As a result, capacity management will become even more of a significant capability for many businesses. This will require a much more holistic understanding of the productivity and efficiency of all their businesses processes, not just ‘production’, at both a micro and macro level.
Here, for all key business processes, a business can develop an appreciation of the theoretical productivity – what one can expect to obtain as an output given a standard input (eg a shift, or a week), and multiply by this by the efficiency (how actual performance compares to theoretical performance). The former is a contextual measure (e.g. widgets per hour) and the latter is a pure %; which results in an actual productivity for the business process in question. These can then be used to construct and develop capacity and demand models, which can be critical in keeping the capacity costs in line with the incoming revenue, and as better times appear, to avoid customer shortages and poor OTIF. We teach all our business and management undergraduates to do this, and they all acquire the ability to develop scenario and scenario planning using the model they have constructed, for this very purpose.
How do we define a key business process, there are two perspectives – firstly that the overall bottleneck or constraint process is the one that determines overall throughput, and that is the process step to focus on. However, if we are concerned with the cost of capacity then we also need to consider processes that have expensive or extensive capacity costs.
In our capacity considerations we are concerned with resource efficiency, but if we return to flow efficiency we want to maximise the resource being allocated to each flow unit (for example a batch of product or order), after all no one gets paid for being efficient.
The more stable and streamlined we can become by reducing the variability of the elapsed time; and then increasing Flow efficiency, provides us with the opportunity to drive up resource efficiency.
This is because the two factors are entwinned. If we decrease the non-value adding time (like waiting) as our order progresses through the business, this means that our resources will have a highly predictable, steady flow of work to do, and this makes the capacity modelling much more exact, and the resource inputs we are paying for are going to spend more of their time adding value to orders.
Combining both approaches allows us to increase productivity on the top line, by supporting sales revenue through flow efficiency, but at the same time by controlling and limiting capacity costs on the bottom line, means an increase in profitability, but perhaps more importantly a degree of resilience to what comes next.
Dr Ollie Jones joined Leeds Business School in 2004 and is a Principal Lecturer in Operations, Enterprise and Supply Chain Management. Ollie graduated in Manufacturing and Business from Cambridge University before working in a large multinational co-operation in a variety of sectors progressing from a graduate to senior management roles. He has been appointed a Teacher Fellow, in recognition of teaching excellence, and continues to works extensively with a different businesses in consultancy, particularly around productivity development, and is currently the research lead for his subject group.