March 1, 2006
American industry today is threatened by the industrialization of China, a country with cheap manpower and readily available raw materials. In 2004, the U.S. imported about $172.9 million worth of pulp, paper, and paperboard from China, a substantial increase over 2000, when these imports totaled $10.4 million.
Free trade is now cemented into U.S. foreign policy, which threatens this industry. Our national tradition of protecting industries behind tariff walls has eroded since World War II, when the U.S. Government gradually reduced tariffs in an effort to revive the economies of war-ravaged Europe. By the 1970s, President Richard Nixon had begun efforts to establish cordial relations with China to offset Russian power, and in 1992, the North American Free Trade Agreement (NAFTA) further opened U.S. borders to less costly competition.
Producers today perhaps face their most awesome competitive threat in China. The U.S. Government eased the entrance of China into the World Trade Organization in 2000, allowing it to export to the U.S. under Most Favored Nation tariff levels. Urging China to become a more democratic nation with a free-market economy has become a major foreign policy effort. Chinaâ€™s trade surplus with the U.S. has continued to balloon, approaching a record $200 billion in 2005, and Chinaâ€™s exports to the U.S. are six times its imports from here. The U. S. Department of Commerce estimates the Chinese economy will grow at 9% annually for the next 20 years, as against 3-4% for the U.S.
Alan Greenspan, former chairman of the Federal Reserve System, has hammered away on industry to become more efficient and boost worker productivity. Cutting costs and prices is the only way American industry can maintain profits and market share. However, Greenspan assumes that all manufacturers understand what worker productivity means, how to measure it, and how to improve it. On the contrary, many do not. In 2003, George Mason University published a study covering four southeastern states that found many manufacturers really do not know how to measure their productivity.
Productivity and competition
Simply defined, productivity is output for each hour worked. For example, assume that a manufacturer produces 2,000 lbs of paper one month with 87 employees working a total of 5,000 hours at $10/hr. After a program to increase productivity two months later, the mill produces the same 2,000 lbs of paper with 87 employees, but this time it required only 4,500 hours, for a savings of 500 hours.
If employees were still paid $10/hr, lowering per unit labor costs enables the paper producer either to reduce price and maintain margin, or maintain the original price and increase profit margin. Either alternative could enable the company to maintain its profit margin and still meet Chinese or other competition. In addition, American quality is often better and on-time delivery is more dependable.
This example over-simplifies the productivity problem by focusing on one product. In reality, the total output in any month might be a heterogeneous mixture of different products, each requiring differing numbers of man-hours worked, so ascertaining overall productivity is complex. Many companies have given up trying to determine exact productivity every month, and merely guess at some rough total or how to improve it.
Financial success for all parties
This is not the end of the productivity situation. To achieve higher productivity requires more than exhorting the work force to work more carefully to curtail quality errors and more efficiently to boost production. Somehow employees have to be rewarded for such more careful consistent efforts.
Where does that reward come from? In the previous example, the productivity gain of 500 hours was equal to a savings of $5,000 in direct wage cost. If that $5,000 dollar gain was split 50:50 with the work force, everybody comes out ahead. This is a self-funded method of rewarding the work force and the company for the improved performance without increasing total cost. This sharing of the gain is now technically known as a Gainsharing Plan and is a means to boosting productivity as Greenspan mandated.
Many executives look to outside experts to design a customized Gainsharing Plan engineered for their company with its unique patterns of manufacturing and personnel. The design includes finding a common denominator to measure productivity month by month, figuring the proper level of reward for the work force for their higher productivity and quality efforts, orienting the management on their responsibilities under the plan, and carefully educating the workforce in their role in making the plan a financial success for everyone.
A.A. Imberman, PhD, is chairman and CEO of Imberman and DeForest Inc.