“Improved productivity means less human sweat, not more.” ~ Henry Ford
This fact might strike some as surprising: workers in the U.S. business sector worked virtually the same number of hours in 2014 as they had in 2005—approximately 200 billion labor hours. This means that there was ultimately no growth in the number of hours worked over this period, despite the fact that the U.S. population gained over 40 million people during that time!
This fact might strike some as even more surprising: U.S. manufacturing costs are now almost as low as China’s. The truth is, the U.S. has been hard at work in this area since the mid-1980’s (Exhibit 1). In this article, we discuss the labor index, trends in ready mix productivity, and recommendations on how the industry can improve performance.
Exhibit 1: Since 1986, unit labor costs of all U.S. manufacturers have declined by 40% relative to the average unit labor cost of 14 countries1 that are major competitors in global markets.
1 The 14 countries included in the comparison are: Canada, Japan, Republic of Korea, Taiwan, Belgium, Denmark, France, Germany, Italy, Netherlands, Norway, Spain, Sweden, and the United Kingdom.
Following the worst downturn since the Great Depression, U.S. manufacturing operations are as much as 27% more productive (productivity being defined as the ratio of production to the labor hours devoted to that production) today than a decade ago, according to data supplied by the Bureau of Labor Statistics. However, the Building Materials sector (non-metallic mineral products like glass, cement, brick, gypsum board, insulation etc.) lags far behind in the recovery with a relatively anemic 11% productivity improvement (Exhibit 2). Because the production labor component represents somewhere between 11%-18% of overall costs, this has registered some concern for owners and managers in the industry.
But upon further peeling of this onion, even the 11% gain is misleading. There is much variability within an industry that accounts for $93 billion in products every year. While glass producers (18%) are creeping closer to the national average (Exhibit 3), cement and ready mix businesses are actually negative in their productivity positions, compared to 2005.
Exhibit 2: Despite sharing the same space 10 years ago, businesses related to construction and building materials have not enjoyed the same gains in labor productivity as the average U.S. manufacturer.
Exhibit 3: Ready mix businesses are not only lagging behind, they are going backwards in productivity (labor hours per cubic yard produced) over the past 10 years.
What is clear is that with the collapse in housing from 2009-2011, this industry is just one of many that has emerged from the storm bruised and hungrily seeking to recoup long-elusive profits. And as pure volume goes, why yes, it can heal a lot of ailments but can also hide some dangerous inefficiencies if left unchecked. (Warren Buffet says, "Only when the tide goes out do you discover who's been swimming naked!")
This begs the question, “What is everybody else doing?”
There is a common thread among the companies who ultimately achieve high value for every hour paid and it boils down to executing on three fronts simultaneously (based on research from McKinsey & Co. and sourced from annual reports):
They focus on optimization. Management should encourage openness to trying new approaches and adopting new technologies, like the use of advanced analytics to harness the potential of the vast amounts of data available today. One such analytic tool can be found via linear programming. Also called linear optimization, linear programming works to achieve the best outcome using a mathematical model whose requirements are represented as constraints and highest profitability or lowest cost is solved for within those constraints. Companies report anywhere between 3% to 8% improvement in bottom line costs when using decision support systems like these.
They prioritize improvement programs. Operational excellence implies a continuous focus on improvement and enables ongoing cost reduction and throughput improvement. To do this requires a determined focus on eliminating all forms of waste, reducing variability, and improving productivity of assets. However, many companies struggle with the organizational energy and costs required to maintain dedicated Op Ex departments. More effective strategies take the form of “targeted step change” initiatives, structured processes in which key managers are taken out of their jobs for short periods of time every 3 years to identify and prioritize the 80/20 projects that will impact the bottom line. The organization then spends the next year implementing those high impact/high return projects only.
They integrate management systems. Having a reliable operational system filled with real data can promote greater transparency on actual performance. However, companies that are lagging behind in productivity often complain about having to maintain two systems: a) the enterprise one that costs millions of dollars and is filled with incomplete or surface operational data and b) the dozens of Excel spreadsheets elsewhere that capture the real essence of what is going on. Having an accessible and usable database will help resolve an important challenge that this industry has struggled with: making productivity performance (and its measurement) a priority. This in turn should free people up to focus on the two variables that drive higher productivity: higher sales volume at lower costs.
Exhibit 4: The industry’s reduction in labor force since 2005 has not been enough to offset changes in labor costs and production volumes.
Certainly the construction materials industry was among the hardest hit during the economic tidal wave and clawing back to the beach while maintaining solvency hasn’t been easy. But despite pricing volatility and the strength of the U.S. recovery, the same economic fundamentals hold true: those manufacturers that can raise and lower their outputs cost effectively are rewarded in the marketplace. This means that the concrete companies who are able to succeed by taking advantage of optimization advances, focus on truly impactful ideas and integrate operations into the decision making process will be amongst the biggest winners. And wearing swim trunks.
Ryan Brown is the founding consultant at Next Level Essentials LLC., a profit improvement practice for the construction materials industry. E-mail Ryan at email@example.com or visit www.nextlevelessentials.net.