Measuring Up: Can the wood industry really improve its productivity?

For nearly two decades I have been looking at performance measurements for many industry companies; some I have run and others I have advised. Businesses, large and small, operating in nearly every wood manufacturing market space; some doing quite well financially, but many struggling to find a toehold to higher ground.

Management approaches to improving productivity have taken every conceivable approach, touching every functional area of the business. We’ve tried it all. We’ve built buildings, bought machinery and software, moved into new markets, increased our payroll and benefit expenses. They have been well-intended, required hard work, been expensive as well as risky yet, in the end, only a few have produced the meaningful productivity gains we had hoped for.

The range of what and how companies measure productivity improvement is as varied as the expectations of the customers they serve! Generally, productivity is primarily regarded as a shop floor issue. While it is a significant component of how well we maximize its utilization, plant floor performance is not the sole measurement of productivity.

The overall productivity of the business is not measured solely in terms of panels per man-hour or machine output per shift. Indeed, the very reason we seek to improve the utilization of our production assets is to produce an improved financial outcome – year-on-year growth and net operating income.

Although we measure growth and profitability on a monthly and annual basis, we overlook other more precise measurements that, if part of our regular performance metrics, would help us manage growth and profitability more proactively.

For example, do you measure the productivity of your revenue generation or the profit generated per employee or per dollar of employee payroll? If you don’t, you may want to chew on the following facts.

According to the U.S. Census Bureau, between the years 2012 and 2015, the wood furniture and related products sector (NAICS 337) experienced an increase in the annual revenue generated per employee: from $195,600 to $201,373 respectively; an increase of 2.87%. Yet, when looking at the same dataset, the revenue produced per dollar of payroll invested dropped from $5.16 to $4.80 or a decrease of 7%. While that 7% may seem rather modest, it amounts to a loss of revenue equaling $4.8 billion or $322,965 per company for 2015 alone.

But the news doesn’t stop there. Compared to all other manufacturing sector companies, the wood industry produced only 55% of the revenue per dollar of payroll invested. While the wood industry produced $4.80 in revenue per dollar of payroll, non-wood manufacturers produced $8.71 per dollar of payroll. This difference in revenue productivity represents $3.7billion in revenue opportunity for the wood industry.

Here are some other interesting insights to ponder. In 2015, the wood industry lagged behind all other manufacturing sectors in terms of annual payroll per employee: $41,973 compared to $54,845. Despite a 23.5% payroll advantage, the wood industry spent 20.8% of its revenue on payroll versus 10.8% for all other manufacturing sectors. Simply stated, the wood industry spends nearly twice as much as non-wood industry manufacturers on payroll (measured as a percent of revenue) only to produce half as much revenue per dollar of payroll.

These numbers aren’t a recent problem. In watching these numbers over the past four years, they are in fact, getting worse. The result of the continuing slide is that the industry continues to contract. In 2015 the industry lost 423 more of its businesses and another 8,572 of its employees. These losses in both the number of industry companies and employees (not to put too fine a point on it) are not due to productivity gains. As we have seen, productivity has declined despite investments in machinery, information technology, and higher wages.

While the apparent trend is reason for concern, there are some things that can be done within industry companies that will help them improve their performance. First, company owners and industry leaders must begin to think differently about productivity. They must broaden their view beyond the factory floor and begin to identify the non-manufacturing business behaviors that are driving down productivity.

Second, the data suggests that if your business is not producing $201K in annual revenue per employee, you may already be in trouble. If your business is generating less than $4.80 in revenue per dollar of payroll, you are already in trouble.

Leaders must recognize that revenue productivity is affected by every functional activity in your business. Product design and engineering, your front end and back end processes, your information technology tools, workflow, employee capabilities, and capacity have a direct impact on your revenue productivity. Opportunities for productivity improvement will come from any and all areas of the business; overlook nothing, assume nothing.

Finally, the problems with revenue productivity within the wood industry are not isolated, they are systemic and they are significant. That revenue productivity for wood product manufacturing companies is half that of non-wood manufacturers means the problems are big, and probably deep as well. It also means that the opportunity is similarly big.

The real question is can we fix the problem. Some companies have, but for the rest of the industry, while the question remains an open one, the data suggests we continue to move away from rather than toward the goal.

If you need help analyzing your company performance, I can be reached at 608.279.8089 or dshultz@jemoran.com