What is Higher Productivity Really Worth?

Many companies pay lip service to raising productivity, but few companies actually achieve productivity gains. In fact, few people in manufacturing even understand why raising productivity is so important or how immediately it will boost their bottom line.

To show how raising productivity works, take the example of an injection molding plant with 20 presses. To keep the math easy, let's say that all the presses are the same size and tonnage. Our model plant runs five days a week, 24 hours a day, 50 weeks a year, with an operator on every press. Again, to simplify the math, let's say the operators cost $10/hr and the press hourly rate is $35, not including the operator or profit. If the plant operates at 90% capacity, its operating costs will look like column 1 (“Current Operation”) in the accompanying table.

 

Lowering overhead

If the productivity of our model plant is increased 20%, then 16 presses will accomplish the workload of 20, leaving four presses idle. That means eliminating four operators per shift, or a total of 12 operators from the payroll, which saves $240,000/yr (12 operators x $10/hr x 40 hr/wk x 50 wk/yr). Not running those four presses, will also save approximately $37,500 per year in electricity cost. So that's a total annual cost saving of approximately $277,500. Because the plant is still producing the same amount of product, all fixed and variable overhead costs are now covered by the 16 presses, but the profit is increased by $277,500 or 53%. (This calculation uses an average profit figure of 6.3% determined in a recent SPI study.) So, with a 20% increase in productivity and the elimination of 12 jobs, the plant's operating finances look like column 2 in the table.

 

‘Growing the business'

The 20% increase in effective capacity resulting from higher productivity provided the equivalent of four new presses at no cost to purchase, install, or debug. If the four idled presses are now filled with new work, all fixed and variable overhead expenses (except energy) are already paid for by the other 16 presses. So the entire hourly rate for those four presses (minus electricity) generates over-absorbed overhead, which falls directly to profit. If the four presses are filled to 90% of capacity, they will generate $1,676,768 in sales, of which $756,000 is over-absorbed overhead (4 presses x $35/hr x 120 hr/wk x 50 wk/yr x 90%).

That entire amount minus $37,500 in electricity cost, or $718,500, is profit contribution. There is also a profit margin of 5% on the sales from the four presses, which adds another $105,637 to profit contribution. So filling those four empty presses makes the plant's operation look like column 4 in the table. Notice that the incremental sales generated from the four presses is actually at 50.3% profit because the overhead expense is paid for by the other 16 presses.

However, we need to look at column 4 in the table for an overall look at plant performance after a 20% increase in productivity has been achieved and a 20% increase in sales is added. Note the relative contribution to profit increase. The 20% increase in productivity provided a 53% increase in profit, while the 20% increase in sales produced another 156% gain in profit. Thus, a productivity program that focuses only on reducing costs and not on increasing sales at the same time is leaving 156% profit on the table.

 

Roadblocks to success

If raising productivity is so great, why don't more companies do it, instead of just paying lip service to it? In our simplified example, all the presses are the same tonnage. In a real plant, idle press time can be scattered over many different size classifications, making it difficult to identify and remove unneeded labor. It takes real discipline to remove excess labor from the manufacturing floor when idled presses are not needed to maintain a given level of business.

But the biggest roadblock to increasing productivity is staff attitude. Staffs generally don't believe that it is really possible to increase productivity and often give excuses like, “We tried that 20 years ago and it didn't work.”

The problem is that many molders don't have degreed engineers on staff who can analyze processes and optimize them. Even basic techniques like optimizing the efficiency of mold cooling often are not practiced at the manufacturing-floor level.

Molding technology has significantly improved over the past 20 years, but many companies feel they don't have the cash to invest in new equipment like sensors and process instrumentation that could increase productivity. Often they don't realize how rapid the payback would be.

Another obstacle related to staff attitude may be the way staff is rewarded. Many companies reward and promote employees for being good at problem solving or “putting out fires.” Increasing productivity, however, is a planned project activity, unlike firefighting. Trying to implement projects in a plant run with a firefighting mentality is a lose/lose situation. Either the immediate operating problems don't get solved or the projects aren't completed or both. A common mistake is to assign existing maintenance and technical staff to implement a productivity-improvement project in their “spare time.” When that doesn't produce results, the conclusion tends to be that the plant is already running as well as it can.

Management must create a structure and environment that rewards both firefighters and project people, based on results. An important shift in personnel policy is to focus on building staff skills to raise productivity. For example, you can upgrade existing staff with computer-based training products, such as “Skill Builder” from Paulson Training Programs (Chester, Conn.), which teaches cause-and-effect relations in molding that can improve efficiency and productivity.

Another way to improve staff training is to base pay raises on employees' skill levels and on what they have learned, not on cost-of-living increases or years of service. That motivates employees to learn on the job.

Another way molders can raise productivity is to hire a consultant. This can jump-start a productivity-improvement program, especially when the staff doesn't believe productivity can really be increased. A consultant can benefit from the backing of top management and doesn't have conflicting job responsibilities. So productivity-improvement tasks get done in a more timely manner and can be measured in terms of financial return.

Lastly, external economic factors will affect productivity results. In the case of our model plant, if the 20% productivity increase is achieved at a time when new business can be put into the four idled presses, then profitability can be raised by a whopping 209%—a big bang for the effort. But if the same productivity improvement is achieved during a business slowdown, and we assume that existing sales can be retained but the empty presses cannot be filled with new sales, the best results that could be expected from a 20% productivity increase would be the 53% increase in profitability from idling four presses and laying off 12 workers.

However, that smaller productivity increase has the side benefit of lowering the financial break-even point for the company, making it a lower-cost manufacturer. That will help ensure its survival in tough times and increase its competitiveness once better business conditions return. —Edited by Jan H. Schut

 

 

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EFFECT OF PRODUCTIVITY & SALES INCREASES ON 20-MACHINE MOLDING PLANT
	Current Operation,  20 Presses	20% Increased Productivity, 16 Presses	20% Increased In Sales, 4 Presses	Incr. Sales  & Productivity, total
Fixed & Variable Overhead
All overhead	$3,780,000	$3,742,500		$3,742,500
Over-Absorbed Overhead			$718,500	$718,500
Labor
20 operators x $10/hr x 3 shifts x 40 hr/wk x 50 wk/yr	$1,200,000
16 operators x $10/hr x 3 shifts x 40 hr/wk x 50 wk/yr		$960,000		$960,000
4 operators x $10/hr x 3 shifts x 40 hr/wk x 50 wk/yr			$240,000	$240,000
Material
Resin - 20 presses	$2,875,657
Resin - 16 presses		$2,875,657		$2,875,657
Resin - 4 presses		$575,131		$575,131
Total Manufacturing Costs	$7,855,657	$7,578,157	$1,533,631	$9,111,788
Pre-Tax Profit @ 6.3%a
Profit on 20 presses	$528,182
Profit on 16 presses		$805,682		$805,682
Profit on 4 presses			$105,637	$105,637
Total Sales	$8,383,839	$8,383,839	$1,639,268	$10,023,107
Profit
Profit on 20 presses @ 6.3%	$528,182
Profit on 16 presses @ 6.3%		$805,682		$805,682
Profit on 4 presses @ 6.3%			$105,637	$105,637
Over-Absorbed Overhead			$718,500	$718,500
Total Profit	$528,182	$805,682	$824,137	$1,629,819
% Profit	6.3%	9.6%	50.3%	16.3%
Profit Increase		53%		209%
aMaterial and profit rations taken from SPI's Financial and Operating Ratios Report, 1999.