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Why Productivity is the finel frontier

Why Productivity Is the Final Frontier of Competitive Advantage

Whether you’re a nation or a company, improving productivity may be the single most important differentiator and source of true competitive advantage in our global economy. And unless you’re a professional economist, you’re probably not focused on this all-important measure.

While we’re all somewhat familiar with the concept of productivity, few of us truly appreciate its importance. According to Robert D. Atkinson, president of the Information Technology and Innovation Foundation, writing in the December 31, 2016 issue of National Review, “Labor productivity, a tally of the goods and services the country produces per hour of work, has been inching up at an anemic rate of just 1.2 percent per year since 2008. That’s half the rate of the prior 13 years. And in the last year, it has fallen.”

Although these statistics are specific to the United States, other developed nations are seeing similarly slow growth. Why, you might ask, should we care so much about achieving faster productivity growth?

Atkinson explains: “If over the next 30 years U.S. productivity grows at the rate at which it grew from 1995 to 2004 rather than at the current rate, U.S. GDP (and per capita incomes) would increase by 150 percent instead of the currently projected 43 percent.”

In other words, everyone would enjoy a much higher standard of living.

How, then, do we achieve faster productivity growth? The answer is that we need to speed the adoption of automation technology and ultimately the speed of innovation. Notes Atkinson, “Anything that lowers the ratio of capital cost to labor cost will increase the substitution of technology for labor.”

Nations whose policies encourage companies to invest more in machinery, equipment and software to replace labor will be the winners in our hyper-competitive world. And, the companies that take the lead in effectively deploying technology across their operations, including warehousing and distribution, will be the winners within their respective markets.

So what is holding us back? Atkinson explains that, in part, “Because increasing productivity often depends on adopting technologies that are emerging but not yet fully proven, many potential users will hold off until the payoff is clear. Economists refer to this challenge as ‘excess inertia’ or, more commonly, the ‘penguin effect’ – because, in a group of hungry penguins, most are loath to be the first to test the water, lest they become dinner for a predator. But if no penguin dives in, the whole group risks starvation.”

A ground breaking, productivity enhancing innovation like Swisslog’s AutoStore small parts storage system, illustrates the point perfectly. When first offered in the U.S., companies were reluctant to embrace this goods-to-person technology because they didn’t want to be the first to dive in. Now, after nearly 20 successful implementations in the U.S., the technology is considered a safe bet with a clear, compelling payback.

Perhaps the real obstacle to the faster adoption of automation in our space is the fear that we will eliminate jobs.

Atkinson tackles this questions head on: “Won’t automation eventually leave most everyone unemployed? No, just the opposite. History, logic, and scores of economic studies all show that higher productivity is associated with faster job growth, not slower. Faster productivity growth frees up purchasing power, which in turn creates jobs.”

The over-dependence on labor in U.S. warehouses and distribution centers is well documented. Will 2017 be the year that more companies embrace a higher productivity strategy by implementing greater levels of warehouse automation and software?