Productivity. What does it mean for an SME Manufacturer? | Manufacturing Growth Programme

We’ve all heard of the word ‘productivity’ and in business we all aim to be more productive. Defined as ‘the effectiveness of productive effort, especially in industry, as measured in terms of the rate of output per unit of input’.

But what does it really mean to UK SME manufacturers?

What is Productivity

According to the Office for National Statistics (ONS) over the long term, increased productivity is the key determinant of economic growth, and together with higher employment is the primary route to higher living standards. Prosperity is usually measured by gross domestic product (GDP) per person: the total output of the economy relative to the UK population. There are essentially two ways of increasing GDP per person:

  1. to have a higher level of employment or hours, so that the total labour input in the economy increases
  2. to increase the amount of output each person produces: that is, increase their productivity

Given potential limitations on the rise of the UK’s labour force, boosting UK productivity growth is generally accepted as the primary route to improving our future standard of living in the long term.

The Government has therefore, for some years, targeted improved UK productivity and competitiveness performance.

Analysis of the underlying components of economic performance suggests that certain factors are critical for determining productivity growth. The Government’s productivity framework identifies five drivers that interact to underlie long-term productivity performance: investment, innovation, skills, enterprise and competition.

Policies designed to increase productivity are often targeted at these drivers. However, to determine the success of such action, the accurate measurement of productivity is vital.

The Productivity ‘puzzle’

The UK’s ‘productivity puzzle’ is a source of much debate and analysis. The so-called productivity puzzle is the unexplained disparity between the UK’s economic performance improving and its labour productivity per hour worked falling.

The mystery is a popular topic for the media, politicians and economic commentators and it’s not difficult to see why.

Part of the UK’s recent poor labour productivity performance has undoubtedly been that low wage growth has increased the attractiveness of employment for companies. This was clearly a major factor causing employment to hold up well during the downturn and to since pick up markedly. It has helped companies to hold on to workers, retaining their experience and knowledge.

Given the uncertain economic and political outlook, some businesses may also be trying to meet demand by taking on labour rather than commit to investment. The relatively low cost of labour relative to capital certainly supports employment over investment.

How Manufacturing supports Productivity

It is clear therefore, that at the whole economy level the UK faces a substantial productivity gap – both compared to competitors and its pre-crisis trend. However, the picture becomes less clear when looking at how different sectors of the economy have performed.

Official statistics indicate that the manufacturing sector’s productivity growth outperforms both that of the services sector and the economy as a whole, both before and after the recession. This suggests that manufacturing is not at the centre of the UK’s weak productivity performance.

By only counting the numbers of people directly employed in the sector, we’ve failed to recognise how manufacturing fuels other industries. Looking solely at the effect on labour, rather than output there has been a haemorrhaging of labour, but manufacturers have managed to increase productivity. The structure has changed from a labour-intensive industry to a capital intensive one.

New equipment, better technology and more sophisticated products and services mean that the insides of modern factories are barely recognisable from what they looked like just 20 years ago. They are cleaner, quieter and more efficient than ever. However, the UK still needs to invest more in machinery, automation and, most importantly, staff.

Previous recessions saw a decline in the UK manufacturing workforce, and the result is there’s an experience gap preventing growth. Businesses have to counter this problem, while also finding a way to acquire new and expensive high-tech machinery – this involves financial commitments some firms are unable or unwilling to make.

Perhaps more interesting, is new research by the ONS into the efficiency of family-owned and run manufacturing firms. That found well-structured management practices were better among larger businesses, multinationals and family-owned businesses that were not managed by members of the owning families.

To put it bluntly the management of family-run firms (which make up more than half of all manufacturing companies) is awful. Even a small improvement in management would see a huge boost in productivity in such businesses.

Governments Industrial Strategy

‘Industrial strategy’ is traditionally understood as a set of government interventions which seek to support or develop specific industries – especially manufacturing, but not only.

However, current usage of the term is much broader. Industrial strategy in recent times has been more about coordinating a wide range of economic policies to achieve particular objectives, which need not be purely economic. For example, an industrial strategy can have social and environmental aims.

The Business Secretary Greg Clark has launched the Government’s ambitious Industrial Strategy (Monday 27 November), setting out a long-term vision for how Britain can build on its economic strengths, address its productivity performance, embrace technological change and support businesses and workers.

Economic Growth Solutions (EGS) supports the government’s long-term plan to boost the productivity and earning power of people throughout the UK and the Industrial Strategy moves us in the right direction.

Martin Coats, Managing Director at Economic Growth Solutions, stated; “Increasing productivity is one of the key factors in helping the UK economy grow sustainably. The Manufacturing Growth Programme, delivered by EGS, has now supported over 2,000 ambitious manufacturing companies to make improvements, become more productive and ultimately to grow.

“We will be delivering productivity improvements to a further 1,200 companies over the coming months which will support the aims of the British Government”.

It is important that we are focusing on both our existing and emerging strengths and invest in the technologies and capabilities that will generate opportunities domestically and across the world.

The government’s plan to make additional financial resources available to Local Enterprise Partnerships, who demonstrate ambitious levels of reform, is also a fantastic opportunity to identify, understand and remove barriers to growth for SME manufacturers.

So… What does it all mean to SME Manufacturers?

Our recent Manufacturing Barometer surveys have focused on the term ‘productivity’ with the aim to delve deeper into the productivity ‘puzzle’ and what it actually means to manufacturers.

Questioning more than 320 senior decision makers of SME manufacturing businesses across the country, provides strong clues as to why manufacturers are bucking the trend and, more importantly, how they are doing it.

The overriding feeling from the report is one of optimism, with 70% of businesses expecting sales turnover to increase over the next six months – the highest recorded since Quarter 2 2015.

They believe that economic growth will be achieved alongside increased employment, with 48% predicting a rise in staff numbers. Over half (56%) of the SMEs we surveyed expect to increase their investment in machinery and premises. By committing to investment, manufactures are encouraging innovation in new product development and resource for more efficient processes.

Manufacturing has proved relatively buoyant in recent years despite economists’ warnings that the UKs productivity continues to lag behind its major trading partners such as the US, France and Germany (according to Office for National Statistics figures).

With the impact of Brexit further underlining the importance of efficiency, the government’s industrial strategy for addressing the UKs ‘productivity puzzle’ has increasingly looked to robotics and automation to boost productivity levels.

However, when asked in last quarters barometer survey how they would most like to improve productivity, most respondents said they are prioritising smarter working practices and better utilisation of existing equipment over new equipment or automation.

Over the last sixteen months, the Manufacturing Growth Programme, has committed £2.6m of tailored manufacturing support to assist businesses in making vital improvements with a view to increase productivity and creating new jobs.

Our Manufacturing Growth managers, who work with ambitious firms to help them overcome barriers to growth, were able to support management teams to introduce lean manufacturing, improve scheduling, put in better supply chain management controls and secure finance towards vital improvement projects.

This isn’t just a quick fix; you need to take a more holistic approach to improve your company. This includes building a high-performance team, encouraging innovation among your staff and identifying skills for the future.

This positive outlook from our manufacturers, and their commitment to invest, bodes well for improved productivity. These same strategies could be just as effective in solving the issue in other sectors, helping to train and develop staff and improve business processes.

Get the balance right and we may just have found the elusive answer to the productivity puzzle.

Contact your Manufacturing Growth Manager today, to support your growth and productivity goals.

Copyright © Economic Growth Solutions, 20th February 2018.