PRODUCTIVITY SPECTATOR: When staff cuts don't measure up

Cutting staff in bad times and hiring more in an upswing does nothing for efficiency – far better to practice close cash flow measurement, which can mean the difference between survival and bankruptcy.

Productivity Spectator

The recent turmoil in Australian and global stock markets should be a wake-up call to thousands of Australian companies who do not understand what is about to happen to their enterprise.

Unless they can first measure productivity and then bring it up to world standards they may not survive.

Neil Plumridge is lead partner of Advisory Ernst & Young Oceania and he is across what is happening in a vast number of Australian businesses. And he delivers to Productivity Spectator his alarming conclusion that too many businesses have failed to fundamentally understand what is their core unit of production. He believes that in this environment, a large number of these enterprises will go under unless they get this critical business tool right.

Those businesses that thought they had escaped the GFC are now – or should be – scrambling back to their books to understand where their true costs lie and what relationship those costs have to revenues. For many service firms, this is particularly difficult because it often seems impossible to quantify the paper pushing that is the primary activity of the average white-collar organisation.

Indeed, productivity measures for service enterprises can be such a problem that one of the service firms I spoke to was desperate to find out how productivity can be measured even though the firm had been very successful at driving a new program. Watch today’s interview with Neil Plumridge to learn where to start. And for retailers, who have been among the hardest hit by recent events, the Plumridge measures could mean the difference between survival and bankruptcy.

These conclusions have been backed by the results from the Telstra Productivity Indicator, which found that only 25 per cent of top firms were measuring productivity. Those that did were winning market share.

A common feature of many of the companies we have featured on Productivity Spectator is the fact that they measure every aspect of what they do. A gross measure of revenue over direct costs is not enough because often it is the unnoticed, obscured costs that can make the all-important difference to a firm’s cash flow.

Last week James Fazzino of Incitec Pivot talked about one of his company’s plants in Wyoming. Across the four shifts, each manager had what he believed was the best operating system. So at the start of each shift, that manager and his team would undo the previous setup of the previous manager. It drained productivity on the factory floor.

When Incitec Pivot applied its new techniques and measured each production activity, right down to the ambient plant temperature on an hourly basis, this plant uncovered $3 million in savings in a year. That number goes straight to the bottom line.

Similarly, Donald McGurk at Codan measures every single component of the highly advanced radios and metal detectors the company manufactures in Adelaide and Malaysia against past sales data. He now knows that he can build 80 per cent of a product in advance, but not store any unnecessary inventory. What he calls 'highest common factor' production allows Codan to deliver a product at a far faster speed than his far larger competitors (Squeezed between China and the dollar, May 14).

The rumblings resurfacing in the global economy will have managers looking at their cost structures. Too many will decide that the easiest place to start is to reduce head count. As Neil Plumridge will tell you, cutting staff in bad times and hiring more in good times is not a clever way to do business. When you think about Australia’s productivity problem, our numbers look bad because this is the established practice – yet it has no impact on our efficiency or effectiveness.

As a business owner, getting your productivity numbers measured correctly will give you a headstart on your competitors. If you are an employee, it might make the difference to whose head is on the chopping block.