First Steps in Inproving Productivity

Economists are in agreement that the only way to improve profits in the long-term is to improve productivity. Events and luck can produce shortages of your products and services that may result in higher demand from your customers, but it won’t last. Competitive markets will eventually bring in competition to drive those prices back down. Only the ability to produce more products and services with fewer inputs will allow you to sustain higher profits.

This can be a daunting task depending upon how you look at it. The idea of spending the rest of your life constantly searching for process improvements can be a downright depressing thought. But, isn’t this the historical definition of the purpose of management -- to produce more outputs with less inputs. Maybe the real problem is that most of us in small business have no formal training in management and as a result we don’t think of managing our business in a manner other than giving orders and overseeing work. If we had, maybe we would see this as a great opportunity rather than a drudge task that takes them away from the sexier role of being a leader. The fact that most small business owners will not make regular productivity reviews a part of their routine means less competition for those that do.

Okay, so you have decided that the economists are right and productivity is the key to better profits. Now what do you do? The old saw “You can’t manage it unless you can measure it” is particularly true when it comes to productivity. The first step is to develop measures. This works best by looking at your major processes and finding some staple of the output that will most likely always be around. The purchasing system is probably always going to produce purchase orders as its core activity. Therefore, the natural measure for the purchasing system productivity is the Cost per Purchase Order. Similarly, the natural measure for the sales order process is the total cost of recording and delivery of the products divided by the number of sales orders.

Once you have established measures, the accounting system must be changed to report the total costs to be related to the measures. This is difficult initially for most small businesses since it is a concept change from classifying costs by the type of costs to grouping them in the process that they are used. This step has some investment requirements, but is not all that expensive to maintain once the system is setup and working.

Once these two steps are complete, you will have some management tools available to you that will allow you to constantly fine tune those processes. These tools will allow you to make changes to the process and give you empirical evidence that the changes worked or did not work. Over time, constant improvement to your processes will lead to higher productivity and higher profits.