The US productivity revolution

Work moves faster these days at Banta Publications Group, a printing plant outside Kansas City, Mo., that turns out magazines for everyone from televangelists to computer firms.

Banta used to take five days to transfer a magazine's contents from a computer, to special film, to heavy aluminum printing plates. Thanks to a $16 million investment in new equipment and training, it now only takes 48 hours. "Our raw efficiency in terms of labor costs is going way, way up," says general manager Richard Johnson.

That's a boast thousands of other firms throughout the US can make today. From tires to textiles, and appliances to aircraft, companies are experiencing fundamental gains in productivity without changing the nature of the products they make.

The rise in output-per-worker has been one of the most important forces behind the booming US economy of the late 1990s. It has gone on for so long, and developed such momentum, that it may mark a fundamental change in the efficiency of US business.

No less an authority than Federal Reserve Chairman Alan Greenspan cites the increased efficiencies stemming from the adoption of new chip-based technologies as nothing short of a revolution.

"We are witnessing this decade, in the United States, history's most compelling demonstration of the productive capacity of free peoples operating in free markets," said Mr. Greenspan in a speech earlier this fall.

There was more evidence of that this week as the Labor Department announced Tuesday that productivity showed its biggest gain in almost seven years in the third quarter of 1999.

Boffo statistics

Output per hour worked rose 4.9 percent for the period, up from an initial figure of 4.2, according to government figures. That puts the measure on track to match 1998's 2.8 percent gain for the overall year.

Economists consider productivity gains a basic measure of a nation's ability to increase its workers' standard of living. In the short run, however, some of the measures taken to increase output efficiency - such as automation - can be painful to the workers they directly affect.

Higher productivity growth allows an economy to grow at a faster rate without fear of igniting inflation. The Federal Reserve now appears to believe that thanks, in part, to strong output gains, it can afford to let the economy speed up to around a 3 percent annual increase, as opposed to the 2.3 percent annual "speed limit" of the 1980s.

For the US economy, the golden age of productivity growth was the 1950s and '60s. Output per worker consistently went up at more than 2 percent a year. Living standards in the postwar period improved along with this rise.

Then in the 1970s the rising cost of oil and overall inflation caused productivity growth to languish at around 1 percent annually.

Today the times of consistent 2 percent-plus increases seem to have returned.

"We've moved back to a plateau of productivity growth - perhaps not as high as we saw in the '50s or '60s, but certainly not as low as in the '70s or '80s, either," says John Challenger, a partner in the Chicago personnel firm Challenger, Gray, & Christmas.

The most obvious force behind the return of strong output numbers is technology - more specifically, the revolution in information technology that has now affected virtually every desk in US business.

Computers make some processes simply move faster, as at Banta's printing plant. But the surge in information available to decisionmakers has also sharply reduced the uncertainties that confront business management, according to Greenspan.

Precise data about what customers are buying, where, and when, makes the management of inventories much easier. It eliminates the need for costly and inefficient overstock.

Intermediate production and distribution processes can work much more quickly in an age when delivery trucks can be tracked virtually block-by-block across the nation.

Furthermore, the Internet is creating a 24-hour economy. This means more than shopping at 2 a.m. in pajamas. It also includes software developers who hand off work to colleagues in another continent when they go home, and pick it up, improved, in the morning.

"Technology is playing a very vital role, especially in globally integrated firms like Microsoft," says Ross DeVol, director of regional studies at the Milken Institute in Santa Monica, Calif.

You don't have to work at Microsoft or Dell Computer to see productivity go up via the Internet, however.

Ford looks for a better idea

Ford Motor Co., for instance, hopes that doing business with its suppliers over the Internet will help it cut its considerable purchasing costs. Sales-per-worker costs for Internet-based stores are much lower than they are for bricks-and-mortar equivalents.

"We are in a period of rapid technological change which is beginning to show up in productivity numbers," says Richard O'Brien, chief economist at Hewlett Packard.

But technology is not the only reason for productivity's surge. Economists cite a virtuous cycle in which various factors accentuate each other.

Technology creates the need for employee training, which increases satisfaction and stability, while making the use of pay incentives more effective.

Sales increase - meaning more money for more technology. The circle remains unbroken.

Take Frieda's Specialty Foods, a 100-employee family-owned business in Los Angeles. Computers have helped Frieda's managers reconfigure their warehouse to fill orders more efficiently.

Computerized planning guides allow them to more closely follow customer preferences. Employees wanted more training on all this stuff - which they got.

Small touches such as surprise bonuses and the inclusion of Spanish-language translators at employee feedback meetings have helped. A Web site has helped sales productivity climb 72 percent.

"We track all these numbers very carefully and are having more dollars in sales per person and more cases per man hour in filling orders," says Karen Caplan, company president.

Reinventing AVG

Technology has definitely helped at AVG Inc., a Chatsworth, Calif., manufacturer of robotics for the amusement industry. Advances in software allowed them to recently complete an order from South America in two months, as opposed to the three months it would have taken last year, judges president Alvaro Villa.

But there are more mundane reasons for AVG's increasing efficiency, as well. Business is steady, so people don't get laid off. They are better able to train new employees, in turn, when they come in.

"And also, people are getting better at their jobs," says Mr. Villa.

Nor is technology an instant panacea. For all the tales of wonder software that has improved business life, there are four tales of how long it took to get that software to work.

Back near Kansas City, Banta's new printing technology is a glorious thing - now that it's running.

"It took us about a year to debug it all," says Mr. Johnson, the general manager.

*Staff writer Abraham McLaughlin contributed to this report from Chicago.

(c) Copyright 1999. The Christian Science Publishing Society