Michael Manners Associates, a consultancy focusing on performance improvement in the SME market, management development, psychometric assessments, recruitment processes and sales training looks at why productivity can create better efficiency and economic growth for your auto recycling business.
If you employ someone on minimum wage, assuming a 40 hour week, the cost to an employer is roughly £19,100 per annum. 5 personnel who should be surplus to requirements because they are simply covering procedural inefficiencies, cost £95,500 a year which is taken straight off the bottom line. Productivity is worthy of your attention.
Productivity is the ability to produce more with less and measures the relationship between the physical output of a product and the inputs that have gone into producing it. Productivity should be central to all management efforts because it is a key source of economic growth.
The principal benefits derived from productivity growth are:
- The ability to attract calibre personnel who will make a positive contribution because better pay and conditions are affordable.
- Dividend payments to shareholders will be enhanced through higher profits.
- Customers may benefit from lower prices arising from increased efficiency and competitiveness which in turn may lead to capturing a greater market share.
What makes it difficult for SME’s to invest is any combination of:
- The continuing saga of Brexit.
- Uncertainty.
- A tight cash position.
- An unhealthy Balance Sheet.
- A lack of management focus on the issue of productivity and how to improve it.
- Risk aversion.
Weaker organisations are helped to stay afloat through:
- Low investment which often means simply deferring the inevitable.
- Record low-interest rates which give a false sense of security because at some point interest rates will rise.
- Stagnant real wages making workers more attractive than machines – but this is only a short-term fix.
The main determinants of productivity growth are:
- Investment in physical capital – machinery, equipment, buildings.
- Innovation – exploiting new ideas such as new ways of working, new technologies and new team structures.
- Skills – the quality, training and experience of available labour.
- Enterprise – quick-witted and agile managers seizing new business opportunities.
- Competition – drives productivity improvement by creating incentives to innovate and forces managers to organise workflow and resources more effectively.
- Exploring the benefits of performance-related bonuses.
- Looking into just in time or other methods to reduce inventory.
- Processes and procedures that increase the speed of output. Adopting better work practices.
- Moving from labour-intensive to investment-led – machinery, equipment, buildings, robots, Artificial Intelligence.
- Dedicated IT programmes.
- Improving the production area layout and workflow.
- Mass production versus batch production.
- Research – continually seeking to import best practice.
There are many ways to measure productivity depending on data availability but output per worker per hour is common and managers need to plot trends and take action as dictated by those trends.
The chart below is one example of productivity measurement. The assumption is that a 40 hour week is worked for 48 weeks of the year. By applying a constant, trends become more transparent.
|
Period |
Sales £ |
Total Headcount |
Total Hours Worked (x40x48) |
Total Staff Costs £ |
Cost per Person per Hour £ |
Output per Hour per person (Sales Productivity) £ |
Scale |
|
Year 1 |
10,000,000 |
85 |
163,200 |
1,900,000 |
11.64 |
61.27 |
100 |
|
Year 2 |
12,000,000 |
90 |
172,800 |
2,100,000 |
12.15 |
69.44 |
113 |
|
Year 3 |
15,000,000 |
96 |
184,320 |
2,300,000 |
12.48 |
81.38 |
117 |
|
Year 4 |
18,000,000 |
100 |
192,000 |
2,700,000 |
14.06 |
93.75 |
153 |
|
Year 5 |
25,000,000 |
110 |
211,200 |
3,100,000 |
14.67 |
118.37 |
193 |
|
Year 6 |
30,000,000 |
120 |
230,400 |
3,500,000 |
15.19 |
130.21 |
213 |
The chart above shows that whilst the cost per person per hour has increased by 30% from start to finish (as might be expected and understandable), productivity more than doubled from year 1 to year 6 which means that the increase in headcount was able to process greater demand very cost-effectively.
The disproportionate impact of ‘indirects’ on profit is diluted by the greater number of ‘directs’ because support staff such as directors, senior managers, accounts, HR etc. do not tend to increase in direct proportion.
A high rate of growth of output per person puts the company in a better position to absorb inflationary costs arising from such as wage and raw material increases.
In the auto recycling industry minimising the number of vehicle movements on site is a major contributor to productivity improvement along with site layout to enhance workflow and researching and following best practice in every activity. Cutting out damage through carelessness, selling and not binning all saleable parts, minimising the time taken from receiving a vehicle to cash in the bank all play a part in productivity gain.
To contact Michael for further advice, please email him at michaelmanners05@gmail.com or call him on 07710-056-354.
