Where to Begin?
Productivity – In macroeconomics productivity is measured by our nation’s Gross Domestic Product, and in microeconomics, productivity is measured by the output of production. Calculating marginal cost and marginal revenue in an effort to maximize profits is probably the last thing on your mind when you walk into your production environment. Most likely workforce productivity, the amount of goods produced in a given amount of time, is near the top of your priorities. So we ask where to begin?
Stopwatches have been in use in manufacturing since Fredrick Taylor introduced his concept of scientific management. Yet since that time, stopwatches have been the catalyst for labor disputes and management theory debates. Over the past century, names in the ranks of Deming and Ducker and movements from TQM and Six Sigma, owe their roots to the concept of scientifically managing manufacturing processes. So on the eve of the centennial anniversary of Taylor’s publication, The Principles of Scientific Management (1911), we pay tribute to his thought leadership and explore how every second counts.
A Recap of Taylor’s 4 Principles
Here is a quick recap (with a new century’s bend) on Taylor’s four duties of scientific management, found in chapter 2 (pages 36, 37) of his publication.
Develop a science for each element of work, which replaces the old rule-of-thumb method (heuristic).
- Select, train, and develop each person based on scientific study rather than leaving each person to train themselves.
- Collaborate with workers to scientifically develop work methods and to ensure the work being done follows the scientifically developed methods.
- Likewise, divide work most equally between managers and workers, so that managers plan work using scientific principles for the work they perform and the work planned for the workers.
In a previous blog, we discussed how to define and measure productivity in a three step process. The next step is understanding how every second leads through to the income statement. Just like you, we think time is money.
Productivity & Income Statements
For business owners, managers, and executives everywhere, the Income Statement or Profit and Loss Statement (P&L) is where the productivity of manufacturing processes are realized. Of course, controlling overhead is part of the overall picture, and the principles of the stopwatch can be applied to these necessary functions too.
Let’s get into the thick of it. For our example, we’ll use a manufacturing process to make widget Z. After defining the process and working with a workgroup to find the most efficient processing methods, data shows that it takes 6 minutes (360 seconds) to manufacture widget Z. To simplify things we won’t factor in break times etc.
If we don’t use Taylor’s second rule when demand increases, and we don’t select, train and develop a person based on the scientific study, our second person, Worker B, produces widget Z in 6 minutes and 20 seconds (380 seconds). That’s a 5.6% increase in time, meaning that person would produce approximately ½ a part less an hour, 1.1 whole part less every 2 hours, 4.2 parts less over an entire day, and 1094.7 parts less in an entire year. (If you are running the numbers with us, those decimal points really added up in the long-run.)
Using this data, let’s compare the annual revenue generated by Worker A who is 100% productive based on our scientific method and Worker B who is 95% productive based on our scientific method. Let’s assume the market rate of $40 for widget Z.
The difference in revenue produced by Worker B, from Worker A, is $43,789. Throughout this example the economic principle cēterīs paribus, Latin for all other things being equal or held constant, is employed. We will set the wage of Worker A and Worker B at $25/hr., and just for fun (but it isn’t necessary) let’s assume there is $20 of materials in every unit produced.
|Cost of Materials
|Cost of Goods Sold
At the end of the year Worker A passes along $21,894 more to the bottom line than Worker B. Those 20 extra seconds add up to real dollars; even 5 extra seconds of processing time would add up to be a loss of opportunity equaling $5,698 annually. This makes us wonder – what if scientific management wasn’t used in the first place. . .
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