THE CEO of one medium-sized enterprise woke up one morning to a serious management issue. Without taking his breakfast at home, he rushed to the office and convened a meeting with his department heads. His number one concern: labor productivity — a basic issue often ignored by corporations that are earning a lot of money.
“Why bother when our gross revenue is at its highest? Our customers can’t resist buying our products, even in cash,” the managers nervously chorused with a wink. But the CEO is not convinced. Yes, the organization is earning tons of money, but at the end of the day, the expenses come close to choking the net revenue, leaving the organization with little profit.
The CEO is bent on improving their labor productivity, which to his mind is the easiest to tackle. With no choice, the managers countered with an innocent question: “Really, how do we define productivity?”
Forget about its technical definition. Let me offer a simple idea – productivity is doing more, with less company resources. And when we talk about labor productivity, it means producing more products or rendering efficient service, with the least number of workers. Labor productivity is different from Total Factor Productivity, which covers all areas of production, such as manpower, machine, material and method, among others.
Many organizations cheat by hiring “endo” workers and would consider only regular workers as the basic component when they compute labor productivity. The cheat sheet in most companies includes having a ratio of temps and regular workers at around 90 percent to 10 percent. But with the current administration’s thrust against “contractualization,” how do you propose to perpetuate this so-called “improved” labor productivity with “endo” workers?
Not many people know there are two basic approaches, classified here as either the American or Japanese style of management. Imagine doing the American style of labor productivity, which is very common not only in Western countries, but in the Philippines as well. Suppose the CEO in our story directs his managers to increase the labor productivity of the company by at least 20 percent? Then how are they going to do it, given this simple and easy to understand scenario: Let’s say with a company producing 100 electric fans a month with the help of 10 regular workers.
If that company opts to use the American approach of improving labor productivity, its management would simply dismiss two workers and require the surviving eight to make the same amount of 100 units a month. Easy does it! The result is 20 percent productivity improvement. Indeed, it’s a no-brainer.
How about the Japanese style of improving labor productivity? The solution is a socially accepted approach. First of all, management should commit to a no-firing policy. Instead, the 10 workers will be required to produce 120 units of electric fans a month, or even top that. That’s also a 20 percent labor productivity improvement.
The Japanese style is the better strategy. Knowing that management would not resort to indiscriminate firing, the workers would be more than cooperative to comply with the management directive, making them more productive and loyal to the organization in the long term.
Related to the Japanese style of management, and if it can’t be helped, there’s no other way but to reduce the number of temps. For the regulars, they must be transferred to other areas within the same company, where they are best needed, if not trained in other tasks. In extreme cases, they are assigned temporarily (or seconded) to the suppliers, subcontractors, even their customers who are requested to pay for the workers’ pay and perks, because they will benefit from the expertise.
The basic principle in common-sense management is this: the fewer employees on the line, the higher labor productivity. More than this, it minimizes quality issues, “since fewer hands present fewer opportunities to make mistakes” or defects according to my former boss, Masaaki Imai – the Kaizen guru, who advocates the non-firing of employees as a result of any continual improvement activities in any organization.
“Productivity is never an accident. It is always the result of a commitment to excellence, intelligent planning, and focused effort,” says Paul Meyer in launchyourgenius.com. To do this, you have to measure labor productivity. If you can’t measure it, you can’t manage it. Without labor productivity measures in particular, you will never know if management efforts actually contribute to increased productivity.
And that’s where one should use the following formula: total number of working hours divided by the total output, equals the total labor productivity. For example, if a worker has 40 hours a week with total output valued at P30,000, then his productivity is P750 per hour in a week. But what if that worker is earning P1,000 per hour? Then, you’ll readily know where the problem lies, and management can quickly understand what to focus on.
If management doesn’t know how to compute this, at best, it may only be rocking the chair without any foreseeable result, other than a good afternoon siesta for granny.
Now, what’s the Filipino style of improving labor productivity?
Rey Elbo is a business consultant on human resources and total quality management as a fused interest. Send feedback to firstname.lastname@example.org or follow him on Facebook, LinkedIn, or Twitter for his random thoughts on Elbonomics.