The Paradox of Productivity: When more output doesn’t always mean more value

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A business is a network of interdependent components that work in concert to achieve a purpose. Examples of system components include customers, suppliers, labor, capital, processes, and methods. A business is a system whose long-term success depends on the components understanding and aligning with the system purpose, and the system directing itself with the knowledge that the system is more than the sum of its parts.

Continually improving the potential of the business system is a fundamental imperative to survival and success. One important dimension to improving business potential is productivity. Productivity is simply the ratio of business output to business input.

The objective of focusing on productivity is to produce more output per unit of input, and to do so increasingly over time. Increasing productivity increases profits for businesses, provides higher wages for individuals, and delivers greater value to customers. It also provides resources to care for the environment and improve communities.

Businesses put a great deal of focus and resources into managing and improving productivity. Some businesses are successful at improving productivity metrics. But sometimes there is a problem. Improvements in productivity metrics do not always translate into improvements to metrics around profits, wages, and customer value. Why? This is the paradox of productivity.

Capital and Labor Efficiency

Classical measures of productivity focus on the utilization of capital assets (e.g., machines) and the labor content of a product or service. There is merit to understanding metrics like these, but it is important to understand their limitations.

First, just because a resource (capital or labor) is utilized, does not mean it is productive or adding value. For example, how productive is a 99% utilized machine that produces 30% defectives. Or what value is a busy person if what they are doing is engaging in overproduction.

The objective of a business is to make money, not to be highly utilized or busy. Resources should be utilized to meet customer demand, not on what can frequently be arbitrary utilization or productivity goals.

Reductionism

Conventional wisdom on productivity is dominated by western reductionist thinking. Reductionism is a scientific based methodology that attempts to explain the causes and effects of a dynamic system in terms of its individual parts. Reductionism has led to great advances in science and technology. And while it has great power in those domains, reductionism has a blind spot in business. In business the entire system must also be the object of attention for potential realization.

Reductionism leads to an error in logical reasoning known as the fallacy of composition. The fallacy of composition postulates that just because something is beneficial to the parts, it does not necessarily follow that it is beneficial to the whole. A classic example from macroeconomics involves individuals increasing the proportion of income budgeted to saving. It is clearly beneficial for individuals to save more money. But if all individuals in an economy increase their rate of savings, the macro economy would suffer due to a significant decrease in aggregate demand (people are saving more and thus consuming less).

Implementing Dynamics 365

There is no one-size-fits-all approach to implementing or optimizing Dynamics 365, and each company will be in a different phase of readiness. So, the first step lies in auditing your current state before scaffolding goals for the future.

Start by identifying what truly needs to be fixed, organized, or set aside. Carefully consider data migration and cleanup, which is often a substantially heavy lift. Then, outline the personnel needed for successful implementation.

Overall, you must ensure buy-in and vision before jumping in.

If you’d like professional support in this phase, explore a strategic manufacturing assessment like Connected Blueprint. The resulting information can help you align business goals, identify broken systems and processes, and eventually hit the ground running with Dynamics 365.

Resolving the Paradox

The fallacy of composition is an important piece in the productivity puzzle. Changing the mindset of how we understand productivity and how we measure productivity are central to resolving the paradox.

We need to recognize that productivity potential realization must occur at the business system level and the individual process level. The thought that maximizing the productivity of each individual process, machine, or individual will lead to the maximizing of productivity for the system needs to be replaced. It needs to be replaced with a more balanced approach that considers not only the productivity of the individual processes, but also the flow of material and information through the system.

Conventional productivity measures require balance with other measures. The reason is because conventional measures focus on point productivity. What conventional measures do not expose is the system productivity. In most businesses the biggest productivity improvement opportunities exist between processes, not within processes. How do we measure system, or between process productivity?

Leadtime or flow productivity is a useful metric to balance conventional capital and labor measures of productivity. Flow productivity measures how productive the value stream is at turning orders into delivered products (or cash). Flow productivity is measured as the percentage of the lead time that is value added.

Lead time is typically measured as the time from order receipt to product delivery. It is not uncommon for businesses to have flow efficiency measures below 10%. Which means that 90% of the lead time is not value added. Understanding and balancing conventional productivity metrics with flow productivity metrics is a solid foundation to manage and continually improve the system’s productivity potential.