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ENABLERS OF
PRODUCTIVITY
a note about the authors

The report has been written by Adrian Davies using analysis
prepared by Dr Yinshan Tang from Winning Moves.Winning Moves
is a private company that has operated the Benchmark Index
service on behalf of the DTI since 1998.

Dr Tang has been instrumental in developing the software that is
the engine for the service. This familiarity - coupled with his
statistical bent - has enabled him to uniquely observe patterns in
the data that are useful not just for businesses but also for policy
makers.

Adrian Davies is an adviser to the public sector on business
improvement strategies for small businesses. He works with the
DTI, the SBS, Regional Development Agencies and other
organisations interested in supporting business. He directed this
analytical exercise and wrote the final version of this document.
executive summary
Benchmark Index data provides a valuable resource to analyse relationships between management policies
and productivity levels. Analysis suggests that:

1. Strategies that aim at building market share and          6. Care should be taken not to take too many days
    continued market protection are likely to result in          out on training in the service sectors. Well-
    lower levels of productivity. Periods of market              targeted, added-value external courses are likely to
    growth should be followed by periods of                      be much more productive than free and/or internal
    consolidation, where existing customer                       courses.
    relationships are maximised.                             7. Old models of ‘customer/supplier’ relationships are
2. Graduate employment has greater impact in                     no longer relevant. Partnerships should be formed
    manufacturing than service sectors, but is vitally           with each player in the supply chain benefiting from
    important to both.                                           the relationship. Companies with better supply
3. In all sectors staff retention is critical. Staff             chain relationships are likely to be much more
    turnover in manufacturing can damage productivity            productive.
    by as much as 19% and in the service sectors by a        8. An innovative approach to products and markets
    massive 25%.                                                 appears to yield earlier benefits for manufacturers
4. The number of days spent on training increases                than companies in the service sectors.
    productivity in manufacturing by up to a massive         9. Productivity is greatly reduced by having a higher
    24%, but actually reduces it in the service sectors          proportion of direct employees to indirect
    by up to 18%.                                                employees, demonstrating that automation may be
5. Expenditure on training can improve productivity by           a key to productivity success.
    as much as 47% in manufacturing and 12% in the           10. Companies with a higher proportion of managers
    service sectors. In both sectors, paid for training          achieve higher productivity, suggesting employee
    has the greatest impact.                                     empowerment is not a key to productivity.


Appendices 1 & 2 provide a graphical summary of the enablers of service sector and manufacturing sector productivity.
title

       Terry Pilcher
                           FOREWORD                                                   by Terry Pilcher,
                                                                                      Assistant Director - Small Business Service




                           The Benchmark Index was launched in 1996. It now           provide the basis for more intelligent decision making.
                           involves over 8,000 companies, making it one of the        Enablers of Productivity follows an earlier study into the
                           largest benchmarking services in the world.                Enablers of Profitability. The results of this earlier work
                           Benchmarking obliges businesses to be humble enough        have been used to make changes to Benchmark Index
                           to admit that other, directly comparable companies may     to provide these ‘predictive’ capabilities, however, the
                           be better at some things than they are. At the same        results have not been written up and published. Maybe,
                           time, it provides the insight for them to learn what to    this could be the topic of a future report?
                           do about it and thereby enables them to become more        It is interesting to consider the link between
                           competitive.                                               productivity and profitability. Clearly, profit is critical to
                           This fundamental philosophy has had a major impact         business, whereas productivity is key to economic
                                                                                      success and is, therefore, often the focus of economists




“
                           and proved to be a very valuable learning experience.
                           Companies that participate in Benchmark Index              and strategists. Can productivity and profitability exist
                           increase their profitability by an average of £75,000*.     as easy bedfellows or are the two mutually exclusive?
Companies that             Some of the other benefits seen are increased sales,        Whilst this report is intended to focus on productivity,
                           greater staff retention and a significant number of jobs    it is interesting to share some observations in this
participate in             created. These benefits prompt 73% of participating         regard. In many cases, the enablers of productivity have
                                                                                      a similar effect on profitability (ie. both positive or
Benchmark Index            companies to re-benchmark using Benchmark Index.
                                                                                      negative), however, there are exceptions and some
                           The service has sought to increase the benefit to
                                                                                      examples are shown below.
increase their             companies. This has led to the development of 12
                           sector-specific modules ranging from Farming to Public      1. Graduate employment in manufacturing is linked to
profitability by an         Sector. It has also prompted the development of 8             higher productivity but to lower profitability.
                           process-based (or thematic) modules ranging from
average of £75,000         Business Excellence to Design.
                                                                                      2. A higher proportion of employees to managers is
                                                                                         associated with higher profitability but lower




                       ”
                           This endeavour to continually develop the service has         productivity in the manufacturing sectors.
                           led to this analysis and report. There is an opportunity   3. A higher number of direct employees to indirect
                           to make Benchmark Index more predicitve by                    leads to lower productivity in manufacturing, but
                           demonstrating the potential impact of specific                 higher profitability.
                           management and investment choices. In this way it will
                                                                                      * independent impact assessment work undertaken during 2002


                                                                                                                                                     1
so why is productivity important?

            A number of recent studies have identified major            There has been much discussion about how this low
            weaknesses in UK productivity when compared to             productivity may be linked to problems with
            companies in the US and elsewhere in Europe.               management and leadership or the slow adoption of
            Productivity is a measure of how efficient we are at        ICT. Many of these expert views may well be correct,
            creating wealth, how prosperous we are as a nation,        but are often based on incomplete information.
            and how likely it is that jobs we create today will
            increase the future prosperity of our country.             In this report we have used Benchmark Index data and
                                                                       sought to link cause and effect. By studying ‘enablers’
            It is important that - as we tackle the decline in many    and productivity, we have been able to determine what
            of the traditional UK industries - we understand the       really adds value to UK business.
            impact of creating jobs in other sectors and industries.
            Replacing high value added jobs in manufacturing with
            low value added service-related jobs, for example, is an
            unattractive long-term prospect. Similarly, we need to
            understand why many sectors of business in the UK
            are less productive than similar sectors elsewhere.




what really adds
    value to UK business?

                                                                                                                                 1
background - about this report
    Enablers of Productivity is based upon the analysis of    Questions such as "should we invest in a new
    over 4,000 companies from the Benchmark Index             Customer Relationship Management (CRM) system to
    database (see Appendix 3). The Benchmark Index core       improve our relationship with our customers, or
    questionnaire collects 59 pieces of data. This analysis   should we invest more in marketing to recruit new
    considers the correlation between these data elements     customers?" for example, can be tested using the
    and productivity performance to establish what can be     Enablers of Profitability system. The new Enablers of
    learned and applied to improve business productivity.     Productivity analysis has the potential to be used in a
                                                              similar manner.
    This work follows a similar exercise that considered
    Enablers of Profitability. This earlier work has since
    been embraced by Benchmark Index. It is certain to
    become a valuable tool to help advisers and their
    customers determine improvement strategies based on
    new predictive capabilities. It shows the potential
    bottom line impact of different business decisions.




2
                                                                                   “            should we invest?
                                                                                                                        ”
what is productivity?
Within Benchmark Index there are 3 measures of           The use of Value Added is particularly appropriate as it
productivity – though the data exists to calculate       is consistent with other measures used by the DTI in
productivity in a number of other ways. The 3 existing   considering productivity, namely:
measures are:
                                                         P1. Labour Productivity – the value added per
                                                             employee
1. Pre-tax profit per employee                            P2. Value Adding Efficiency – which relates value added
                                                             (the output) to the main inputs of labour and
2. Turnover per employee
                                                             capital equipment. It is calculated by dividing Value
3. Value Added per Employee                                  Added by the sum of Employee Costs and
                                                             Depreciation

Value Added is a measure of wealth creation. It is       In this report, we have predominately used P1 (Labour
simply defined as sales less the cost of bought in        Productivity) though we have used P2 (Value Adding
materials, components and services.                      Efficiency) in the sectoral analysis.




                                                                                                                     3
a few words about the analysis
                                             analysis was undertaken in 2 stages                           possible limitations of the analysis
              >10m        <200k
                                  200-500k   1. Determining Potential Enablers – an initial analysis       1) This analysis has considered the manufacturing and
      4m-9m
                                                was undertaken of the potential correlations                  service sectors in a broader context (see Appendix
                                                between Value Added per Employee and the data                 4 for a list of manufacturing and service industries).
                                                collected from the Benchmark Index core                       In reality each sector will have its own unique
                                                questionnaire. This identified positive and negative           characteristics, which might show different
                                                relationships, in other words, highlighting factors that      responses to the various enablers.
                                                had a positive or negative effect on productivity.
     2m-4m
                                                During this first stage analysis, we also looked            2) This analysis looked at the dataset at a specific point
                                  500k-1m       closely at those expected enablers where, in fact,            in time, with no consideration to the time effects of
               1m-2m
                                                there was no obvious correlation.                             strategy. Additional analysis of the productivity
                                                                                                              growth of companies investing in R&D, capital
        BI data distribution by turnover
                                             2. Determining the relevance and importance of these             equipment or people development, for example,
                                                enablers – having identified potential enablers, their         might well demonstrate the longer-term benefits of
                 >250                           relevance was tested by comparing companies with              such strategies.
    200-250                    <10
    150-200                                     low (bottom third), medium (middle third) and high
    100-150                                     (top third) performance in those areas to determine        the data sample
                                                their impact on productivity. For example, this
                                                report considers the impact on productivity of             This analysis has been conducted using the data from
                                                training. One measure of this is the amount of             4,000 UK companies. The sectors and their value
                                                training expenditure per employee. The differences         added are shown overleaf.
                                                in productivity between those with a low, medium           The charts on the left show the profile of the data in
                                                and high-level of training expenditure are compared.       terms of company size: turnover and number of
     50-100                                     The basis of this analysis will become clear later.        employees.
                                     10-20
                       20-50


        BI data distribution by number
        of employees
4
how the sectors compare
table 1 – how significant are the sectors at creating wealth?
                                                                                                                                                VA % of Emp +
Sectors                                                                                    Value Added            % of Total    VAPE - P1         Dpn – P2

Construction                                                                               1,202,956,321            15.01         40,235            223%
Manufacture of Basic Metals and Fabricated Metal Products                                  1,157,307,228            14.44         27,864            177%
Manufacture of Chemicals, Plastics and Ceramics                                              861,872,095            10.76         40,436            314%
Manufacture of Food Products, Beverages and Tobacco                                          665,849,594             8.31         35,965            401%
Manufacture of Transport Equipment                                                           600,262,445             7.49         26,680            240%
Financial Intermediation, Real Estate, Renting and Business Activities                       521,156,708             6.50         33,640            338%
Manufacture of Electrical and Optical Equipment                                              457,346,297             5.71         33,797            265%
Manufacture of Machinery and Equipment Not Elsewhere Classified                               371,021,059             4.63         36,450            155%
Manufacture of Wood, Paper and Printing                                                      361,825,985             4.52         40,391            290%
Other Manufacturing                                                                          342,203,887             4.27         38,394            277%
Wholesale and Retail Trade; Repair of Motor Vehicles and House Goods                         335,890,731             4.19         25,684            103%
Public Administration and Defence; Compulsory Social Security                                328,822,680             4.10         50,674            297%
Transport, Storage and Communication                                                         173,420,310             2.16         27,874            306%
Other Services                                                                               133,818,377             1.67         24,788             25%
Education                                                                                    122,158,992             1.52         15,217            287%
Agriculture, Hunting, Forestry and Fishing                                                   120,943,617             1.51         26,594             16%
Manufacture of Textiles, Leather and Related Products                                        116,544,025             1.45         22,110             57%
Hotels and Restaurants                                                                        94,137,892             1.17         20,145            302%
Mining and Quarrying                                                                          40,635,460             0.51         53,893            295%
Electricity, Gas and Water Supply                                                              4,917,203             0.06         19,436            292%



The table above has been sorted in terms of the Value Added for that            1.   employee remuneration
sector. Too much should not be read into this as we do not know whether         2.   return on capital to investors or business owners
the data is generally representative of UK business as a whole – though the     3.   invested back into the business for future growth
quantity and quality of the data suggest that it will be broadly accurate. It   4.   taxes
does however show that Construction, Manufacture of Basic Metal
Products, Other Manufacturing and Food and Drink are very important             It is important for businesses that they generate sufficient capital to recruit
elements within Benchmark Index.                                                and retain appropriate skill and experience and also to continue to invest in
                                                                                their business and equipment. In fact, a business generates its Value Added
Value Added is an output, showing the wealth created by a business.             using its people, its processes and its equipment to change raw materials
This wealth can be shared in a number of ways:                                  into something its customers want. The higher the Value Added, the better
                                                                                or more efficient it is at doing this.
                                                                                                                                                                 5
Labour productivity – P1                              Value adding efficiency – P2
    In terms of labour productivity the most successful   As described earlier, this relates Value Added (as an
    sectors are Mining and Quarrying; Manufacturing of    output) to the inputs of labour and capital
    Wood, Paper and Printing; and Manufacture of          equipment usages.
    Chemicals, Plastics and Ceramics.
                                                          Using this measure of productivity, Food
    On the other hand, Other Services, Hotels and         Processing; Financial Intermediation and Real Estate;
    Restaurants, and Manufacturers of Textiles, Leather   and companies involved in the Manufacture of
    and Related products perform comparatively badly.     Chemicals, Plastics and Ceramics are very efficient.

                                                          Companies in Agriculture, Other Services, and
                                                          Textiles and Leather Manufacture are comparatively
                                                          inefficient.




6
our findings                                                                                                      overall
                                                                                                                  43,000

                                                                                                                  42,000

                                                                                                                  41,000
Our findings have been graphically represented,           As an example, for level of complaints
                                                                                                                  40,000
showing the broad differences between service and        (complaints/orders), companies have been broadly
manufacturing industries. Please refer to the adjacent   grouped into those with a low number (relatively         39,000
graphs.                                                  speaking), those with a medium number and those
                                                                                                                  38,000
                                                         with a high number.
Clearly, each sector will have its own characteristics                                                            37,000
and caution needs to be observed before drawing any      In this example, those with higher complaints have a
                                                                                                                  36,000
conclusions. However, the data does show some            higher productivity, however, it is not always easy to
interesting and noteworthy trends.                       determine the cause and the effect and this too needs    35,000
                                                         to be borne in mind.
                                                                                                                  34,000
Each graph shows the overall impact of the particular
enabler, together with its impact on the manufacturing                                                            33,000
and service sectors separately. For each, the average                                                                         low       medium      high
Value Added per Employee is shown for those
companies with low, medium and high performance
against that particular enabler.                                                                                  Enabler Key:
                                                                                                                  I complaints/orders
                                                                                                                  I rejected orders/orders
                                                                                                                  I new customers/total customers




                                                                                                                                                           7
Enabler Key:
    I complaints/orders
    I rejected orders/orders




                                      “      as the proportion of new customers
    I new customers/total customers

    overall
                                             grows, so productivity falls
                                                                                                        ”
    43,000

    42,000

    41,000




                                      customer focus
    40,000

    39,000

    38,000

    37,000

    36,000

    35,000
                                      1. Level of complaints (complaints / orders) - in both        bigger batch sizes, which could mean that they are
    34,000

    33,000
                                         the manufacturing and service sector, higher labour        working with fewer orders and customers overall.
              low   medium   high        productivity is linked to higher complaints. There         This could mean that order rejection rates appear
                                         are a number of potential reasons:                         higher. However, as order rejections rates increase
    manufacturing
                                         a. higher added value companies are better and             even further, labour productivity sharply decreases,
    45,000                                  more thorough at recognising and recording              no doubt as a result of reworking required.
    40,000                                  complaints.
    35,000                               b. customers of higher value added companies may         3. New customers (new customers / total customers)
    30,000
                                            have higher expectations and more likely to              – as the proportion of new customers grows, so
    25,000
                                            complain.                                                productivity falls.
    20,000                               It is a long-held belief that the customer is the final     This negative impact on productivity is almost twice
    15,000                               arbiter in product and service quality and that a          as bad in service industries (27% reduction) as it is
    10,000                               high level of complaints is bad for business.What if       in manufacturing (14% reduction).There are two
     5,000                               higher value added companies encouraged                    observations:
        0                                complaints and used the feedback to shape product          a. it is more labour intensive to recruit new
              low   medium   high
                                         and service offerings? This could explain why higher          customers, with more sales people required and
                                         added value companies seem to have more                       possibly more technical development staff as
    service
                                         complaints than their weaker performing                       well.
    70,000                               counterparts.                                              b. it could be argued that new customers are an
    60,000
                                                                                                       investment in the future and this intuitively
                                      2. Orders rejected (rejected orders / orders) –                  makes sense. However, the results seem to
    50,000
                                         companies with a ‘medium’ level of performance in             suggest at some point a business has to reap
    40,000                               terms of rejected orders seem to be most                      what it has sown and look to maximise the
                                         productive. Once again, this is perhaps counter-              relationship it has with its existing customers.
    30,000
                                         intuitive. We need to bear in mind that higher                Constantly pursuing new customers may not
    20,000                               productivity companies are, perhaps, working in               always be beneficial.
    10,000


         0
              low   medium   high


8
Enabler Key:
                                                                                                                               I graduates/employees




                                                    “        graduate employment is more important in the
                                                             manufacturing sector than the service sector


                                                                                                                           ”
                                                                                                                               I early leavers/employees
                                                                                                                               I new employees/employees
                                                                                                                               I total leavers/employees
                                                                                                                               I absenteeism/employees

                                                                                                                               overall



people satisfaction
                                                                                                                                50,000

                                                                                                                                45,000

                                                                                                                                40,000

                                                                                                                                35,000

                                                                                                                                30,000

                                                                                                                                25,000

                                                                                                                                20,000

1. Graduate appointments (graduates/employees)                 4. Staff retention (total leavers/employees) – as you            15,000

   the proportion of graduates seems more important               might expect, the results are very similar to                 10,000

   in the manufacturing sectors than service sectors,             measure 3 above (new employees / employees).                   5,000

                                                                                                                                        0
   where companies with the highest proportion of                                                                                            low   medium     high

   graduates see a decreasing amount of labour                 5. Absenteeism (number of days lost per year per
                                                                                                                               manufacturing
   productivity.                                                  employee) – surprisingly, there is little impact on
                                                                                                                                50,000
                                                                  manufacturing productivity between companies with
                                                                                                                                45,000
2. Rate of early leavers (those leaving within 6 months           low and high levels of absenteeism.This could be as
                                                                                                                                40,000
   of joining) – generally, there is a negative                   a result of automation, which minimises the impact
                                                                                                                                35,000
   correlation with lower productivity associated with            of staff illness. Conversely, there is a positive             30,000
   a high incidence of early leavers.This correlation is          correlation between absenteeism and productivity              25,000
   stronger in the service sector than it is for                  in the service sectors, with companies with high              20,000

   manufacturing.                                                 levels of absenteeism being much more productive              15,000

                                                                  than those with a low level. Again, we have to ask,           10,000

3. Level of new employees (new employees                          what is ‘cause’ and what is ‘effect’? Could it be that         5,000

   /employees) – the higher the proportion of new                 companies with higher levels of productivity suffer                   0
                                                                                                                                             low    medium    high
   employees to total employees, the lower the rate of            higher absenteeism rates? This could be as a result
                                                                                                                               service
   labour productivity.                                           of extra pressure placed on people, for example.
                                                                                                                               60,000
   For manufacturing, productivity is similar for
   companies with a low and medium number of new



                                                             “       companies with higher
                                                                                                                               50,000

   employees, showing this is less sensitive in this area,
   possibly as a result of automation and clearly                                                                              40,000


   defined processes. However, as the rate of new
   starters continues to increase, manufacturing
                                                                     levels of productivity                                    30,000



   becomes more sensitive to it, perhaps, because even
   though they might be highly automated, process                    suffer higher                                             20,000



                                                                                                                               10,000
   driven methods begin to suffer.
                                                                     absenteeism rates                                             0
                                                                                                                                            low    medium    high


                                                                                                                                                                     9
Enabler Key:




                                       “
     I training days per employee
     I traning expenditure/employees             manufacturers that spend heavily on staff training enjoy
                                                 47% better productivity than those that spend little
     overall
     60,000



     50,000
                                       continuous learning
                                                                                                                                                  ”
     40,000



     30,000
                                          and improvement
     20,000
                                       It is a widely held belief that organisational performance    What this potentially tells us is that in the service
     10,000                            is maximised when it is based on the management and           sectors, the matter of training and development is far
         0
                                       sharing of knowledge, within a culture of learning and        from clear-cut. Days out of the office on training
               low   medium   high
                                       improvement. While this is evident in manufacturing, it       courses have a negative impact on productivity. But
                                       is not the same in service industries.                        companies spending the most money on training see a
     manufacturing
     60,000
                                                                                                     worthwhile gain in productivity.
                                       Manufacturers that provide a high number of days for
     50,000
                                       staff training enjoy productivity that is 24% better than     The key seems to be invest prudently in only those
     40,000
                                       manufacturers that provide very little time for staff         courses that will add the most value (even though they
                                       training. The opposite is true in the service sector,         are likely to be the most expensive) but do not
     30,000                            where companies that provide lots of time for staff           necessarily let people attend courses just because they
                                       training have 18% worse productivity than those who           are free.
     20,000
                                       provide little time for this activity.
     10,000




                                                                                                     “       service companies that
                                       There is a similar curious pattern in terms of training
         0
               low   medium   high     expenditure. Manufacturers that spend heavily on staff
                                       training enjoy 47% better productivity than those that
     service
     60,000                            spend little. The same is true in service sectors. While              spend heavily on training
                                       those that spend heavily on staff training enjoy better
     50,000
                                       productivity, the difference is only 13%. It is worth
                                       noting that in the service sectors, productivity falls with
                                                                                                             enjoy only 13% better
     40,000
                                       training expenditure between those spending the least                 productivity
     30,000



     20,000



     10,000



         0
               low   medium   high
                                       and those spending at the medium.


                                                                                                                                          ”
10
Enabler Key:
                                                                             I substandard materials/bought in materials




                                                                             overall
                                                                             41,000


                                                                             40,000




partnership with suppliers                                                   39,000


                                                                             38,000


                                                                             37,000


                                                                             36,000


                                                                             35,000


Substandard supplies have a big impact in both                               34,000


manufacturing (8% reduction in productivity) and                             33,000
                                                                                       low   medium   high
service (28% reduction in productivity) and
demonstrates the importance of supplier relationships.
                                                                             manufacturing
Old models of ‘customer’ and ‘supplier’ relationships                        39,000

                                                                             38,500
need to be re-thought, with a partnership approach
                                                                             38,000
adopted. Companies involved in a supply chain should                         37,500
have mutually beneficial relationships that are built on                      37,000

trust and add value to both parties.                                         36,500

                                                                             36,000

                                                                             35,500

                                                                             35,000

                                                                             34,500




                             “       old models of
                                        ‘customer’ and ‘supplier’
                                   relationships need to be re-thought
                                                                             34,000

                                                                             33,500
                                                                                       low   medium   high




                                                                         ”
                                                                             service
                                                                             60,000



                                                                             50,000



                                                                             40,000



                                                                             30,000



                                                                             20,000



                                                                             10,000



                                                                                 0
                                                                                       low   medium   high

                                                                                                                           11
Enabler Key:
     I capital investment/turnover
     I income from new products/turnover
     I marketing expenditure/turnover
     I R and D expenditure/turnover


     overall
     45,000

     40,000

     35,000

     30,000
                                           investment for innovation and growth
     25,000

     20,000

     15,000

     10,000
                                           In this section, we are looking at the impact of         1. Innovative companies in the manufacturing sectors
      5,000
                                           investment: in equipment, in products, in market            (those generating income from new products or
         0                                 development, in R&D and in marketing. As with any           markets) see an earlier benefit from investment than
               low   medium   high
                                           investment, the results may not be immediately seen         those in the service sectors, where innovation
                                           and, therefore, it is not always easy to determine the      usually results in a drop in productivity
     manufacturing
     45,000                                effects of the investment. However, there are several
     40,000
                                           noteworthy points:                                       2. Marketing expenditure destroys value in the service
     35,000
                                                                                                       sectors, at least in the short term




                                           ££ “
     30,000

     25,000
                                                                                                    3. R&D expenditure in the manufacturing sectors has
                                                                                                       greater immediate benefit than it does in the service




                                           £
     20,000
                                                                                                       sectors where productivity falls - at least initially
     15,000

     10,000

      5,000

         0
               low   medium   high                                                          marketing expenditure
     service
     60,000
                                                                                            destroys value, at least
     50,000


                                                                                            in the short term
                                                                                                                                                 ”
     40,000



     30,000



     20,000



     10,000


         0
               low   medium   high



12
Enabler Key:
                                                                                                                  I directs/indirects
                                                                                                                  I no employees/managers




                                                                                                                  overall
                                                                                                                  38,000




company structure                                                                                                 37,000


                                                                                                                  36,000


                                                                                                                  35,000


                                                                                                                  34,000


                                                                                                                  33,000
1. Directs/indirects – this looks at the number of         2. Employees/managers – this looks at the ratio of
   people directly involved with the production or            employees to managers. Conventional wisdom          32,000

   provision of a product or service. It is not always        suggests management structures should be flatter,    31,000
                                                                                                                            low   medium   high
   easy to compare this between companies, as there           with fewer managers and a greater number of
   is uncertainty as to whether things such as                people reporting directly to them. The evidence     manufacturing
   transport, or sales and marketing are direct or            here suggests this is not necessarily the case:     38,000

   indirect. However, it is interesting to note that the      the most productive companies in both the
                                                                                                                  37,000
   fewer directs there are, the better the level of           manufacturing and service sectors actually have a
   productivity.                                              lower ratio of employees to managers.               36,000


   This may be as a result of investment in                                                                       35,000

   automation, suggesting that those with a higher
                                                                                                                  34,000
   proportion of directs are less automated and,
   consequently, less productive.                                                                                 33,000


                                                                                                                  32,000




                          “
                                                                                                                  31,000



                                 the fewer the directs
                                                                                                                            low   medium   high


                                                                                                                  service

                                   there are the better the level                                                 40,000

                                                                                                                  39,000




                                of productivity                                                                   38,000




                                                                        ”
                                                                                                                  37,000

                                                                                                                  36,000

                                                                                                                  35,000

                                                                                                                  34,000

                                                                                                                  33,000

                                                                                                                  32,000

                                                                                                                  31,000

                                                                                                                  30,000
                                                                                                                            low   medium   high



                                                                                                                                                  13
income from new products/turnover                       Appendix 1
                                                                 substandard materials/bought in materials               A summary of service enablers
                                                                 total leavers/employees
                                                                 new customers/total customers
                                                                 marketing expenditure/turnover
                                                                 R & D expenditure/turnover
                                                                 training days per employee
                                                                 early leavers/employees
                                                                 directs/indirects
                                                                 rejected orders/orders
                                                                 no employees/managers
                                                                 capital investment/turnover
                                                                 new employees/employees
                          training expenditure/employees
                                 absenteeism/employees
                                      graduates/employees
                                        complaints/orders

     -50%   -40%   -30%        -20%         -10%             0              10%           20%       30%      40%   50%




                                                                 total leavers/employees                                 Appendix 2
                                                                 new customers/total customers
                                                                                                                         A summary of manufacturing enablers
                                                                 early leavers/employees
                                                                 new employees/employees
                                                                 directs/indirects
                                                                 capital investment/turnover
                                                                 no employees/managers
                                                                 substandard materials/bought in materials
                                  rejected orders/orders
                                 absenteeism/employees
                     income from new products/turnover
                          marketing expenditure/turnover
                             R & D expenditure/turnover
                                         complaints/orders
                              training days per employee
                                      graduates/employees
                          training expenditure/employees

     -50%   -40%   -30%        -20%         -10%             0              10%           20%       30%      40%   50%


14
Appendix 3 - Breakdown of sectors                                                                                                        Appendix 4

            Manufacture of Basic Metals and Fabricated Metal Products                                                                    List of manufacture industries
    Financial Intermediation, Real Estate, Renting and Business Activities                                                               Agriculture, Hunting, Forestry and Fishing
                                                            Construction                                                                 Mining and Quarrying
Wholesale and Retail Trade; Repair of Motor Vehicles and House Goods                                                                     Manufacture of Food Products, Beverages and Tobacco
                        Manufacture of Chemicals, Plastics and Ceramics                                                                  Manufacture of Textiles, Leather and Related Products
                        Manufacture of Electrical and Optical Equipment                                                                  Manufacture of Wood, Paper and Printing
                               Agriculture, Hunting, Forestry and Fishing                                                                Manufacture of Chemicals, Plastics and Ceramics
                                                    Other Manufacturing                                                                  Manufacture of Basic Metals and Fabricated Metal Products
                 Manufacture of Food Products, Beverages and Tobacco                                                                     Manufacture of Machinery and Equipment Not Elsewhere Classified
    Manufacture of Machinery and Equipment Not Elsewhere Classified                                                                      Manufacture of Electrical and Optical Equipment
                                    Manufacture of Transport Equipment                                                                   Manufacture of Transport Equipment
                               Manufacture of Wood, Paper and Printing
                                                          Other Services                                                                 List of service industries
                                 Transport, Storage and Communication                                                                    Electricity, Gas and Water Supply Services
                                                  Hotels and Restaurants
                                                                                                                                         Wholesale and Retail Trade, Repair of Motor Vehicles and
                  Manufacture of Textiles, Leather and Related Products
                                                                                                                                         House Goods
                                                               Education
                                                                                                                                         Hotels and Restaurants
        Public Administration and Defence; Compulsory Social Security
                                                                                                                                         Transport, Storage and Communication
                                                   Mining and Quarrying
                                                                                                                                         Financial Intermediation, Real Estate, Renting and Business Activities
                               Electricity, Gas and Water Supply Services
                                                                                                                                         Public Administration and Defence, Compulsory Social Security
                                                                             0   100   200   300       400       500   600   700   800
                                                                                                                                         Other Services
                                                                                                   sample size
                                                                                                                                         Construction
                                                                                                                                         Other Manufacturing
                                                                                                                                         Education




                                                                                                                                                                                                                  15
ISBN: 0 85605 403 8
                                                              URN No. 03/1330
    Benchmark Index is a Business Link Service
    For further information contact Benchmark Index at
    Field House, Mount Road, Stone, Staffordshire. ST15 8LJ
    Benchmark Index Hotline 08700 111143
    e-mail info@benchmarkindex.com www.benchmarkindex.com

1

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Enablers of productivity_report

  • 2. a note about the authors The report has been written by Adrian Davies using analysis prepared by Dr Yinshan Tang from Winning Moves.Winning Moves is a private company that has operated the Benchmark Index service on behalf of the DTI since 1998. Dr Tang has been instrumental in developing the software that is the engine for the service. This familiarity - coupled with his statistical bent - has enabled him to uniquely observe patterns in the data that are useful not just for businesses but also for policy makers. Adrian Davies is an adviser to the public sector on business improvement strategies for small businesses. He works with the DTI, the SBS, Regional Development Agencies and other organisations interested in supporting business. He directed this analytical exercise and wrote the final version of this document.
  • 3. executive summary Benchmark Index data provides a valuable resource to analyse relationships between management policies and productivity levels. Analysis suggests that: 1. Strategies that aim at building market share and 6. Care should be taken not to take too many days continued market protection are likely to result in out on training in the service sectors. Well- lower levels of productivity. Periods of market targeted, added-value external courses are likely to growth should be followed by periods of be much more productive than free and/or internal consolidation, where existing customer courses. relationships are maximised. 7. Old models of ‘customer/supplier’ relationships are 2. Graduate employment has greater impact in no longer relevant. Partnerships should be formed manufacturing than service sectors, but is vitally with each player in the supply chain benefiting from important to both. the relationship. Companies with better supply 3. In all sectors staff retention is critical. Staff chain relationships are likely to be much more turnover in manufacturing can damage productivity productive. by as much as 19% and in the service sectors by a 8. An innovative approach to products and markets massive 25%. appears to yield earlier benefits for manufacturers 4. The number of days spent on training increases than companies in the service sectors. productivity in manufacturing by up to a massive 9. Productivity is greatly reduced by having a higher 24%, but actually reduces it in the service sectors proportion of direct employees to indirect by up to 18%. employees, demonstrating that automation may be 5. Expenditure on training can improve productivity by a key to productivity success. as much as 47% in manufacturing and 12% in the 10. Companies with a higher proportion of managers service sectors. In both sectors, paid for training achieve higher productivity, suggesting employee has the greatest impact. empowerment is not a key to productivity. Appendices 1 & 2 provide a graphical summary of the enablers of service sector and manufacturing sector productivity.
  • 4. title Terry Pilcher FOREWORD by Terry Pilcher, Assistant Director - Small Business Service The Benchmark Index was launched in 1996. It now provide the basis for more intelligent decision making. involves over 8,000 companies, making it one of the Enablers of Productivity follows an earlier study into the largest benchmarking services in the world. Enablers of Profitability. The results of this earlier work Benchmarking obliges businesses to be humble enough have been used to make changes to Benchmark Index to admit that other, directly comparable companies may to provide these ‘predictive’ capabilities, however, the be better at some things than they are. At the same results have not been written up and published. Maybe, time, it provides the insight for them to learn what to this could be the topic of a future report? do about it and thereby enables them to become more It is interesting to consider the link between competitive. productivity and profitability. Clearly, profit is critical to This fundamental philosophy has had a major impact business, whereas productivity is key to economic success and is, therefore, often the focus of economists “ and proved to be a very valuable learning experience. Companies that participate in Benchmark Index and strategists. Can productivity and profitability exist increase their profitability by an average of £75,000*. as easy bedfellows or are the two mutually exclusive? Companies that Some of the other benefits seen are increased sales, Whilst this report is intended to focus on productivity, greater staff retention and a significant number of jobs it is interesting to share some observations in this participate in created. These benefits prompt 73% of participating regard. In many cases, the enablers of productivity have a similar effect on profitability (ie. both positive or Benchmark Index companies to re-benchmark using Benchmark Index. negative), however, there are exceptions and some The service has sought to increase the benefit to examples are shown below. increase their companies. This has led to the development of 12 sector-specific modules ranging from Farming to Public 1. Graduate employment in manufacturing is linked to profitability by an Sector. It has also prompted the development of 8 higher productivity but to lower profitability. process-based (or thematic) modules ranging from average of £75,000 Business Excellence to Design. 2. A higher proportion of employees to managers is associated with higher profitability but lower ” This endeavour to continually develop the service has productivity in the manufacturing sectors. led to this analysis and report. There is an opportunity 3. A higher number of direct employees to indirect to make Benchmark Index more predicitve by leads to lower productivity in manufacturing, but demonstrating the potential impact of specific higher profitability. management and investment choices. In this way it will * independent impact assessment work undertaken during 2002 1
  • 5. so why is productivity important? A number of recent studies have identified major There has been much discussion about how this low weaknesses in UK productivity when compared to productivity may be linked to problems with companies in the US and elsewhere in Europe. management and leadership or the slow adoption of Productivity is a measure of how efficient we are at ICT. Many of these expert views may well be correct, creating wealth, how prosperous we are as a nation, but are often based on incomplete information. and how likely it is that jobs we create today will increase the future prosperity of our country. In this report we have used Benchmark Index data and sought to link cause and effect. By studying ‘enablers’ It is important that - as we tackle the decline in many and productivity, we have been able to determine what of the traditional UK industries - we understand the really adds value to UK business. impact of creating jobs in other sectors and industries. Replacing high value added jobs in manufacturing with low value added service-related jobs, for example, is an unattractive long-term prospect. Similarly, we need to understand why many sectors of business in the UK are less productive than similar sectors elsewhere. what really adds value to UK business? 1
  • 6. background - about this report Enablers of Productivity is based upon the analysis of Questions such as "should we invest in a new over 4,000 companies from the Benchmark Index Customer Relationship Management (CRM) system to database (see Appendix 3). The Benchmark Index core improve our relationship with our customers, or questionnaire collects 59 pieces of data. This analysis should we invest more in marketing to recruit new considers the correlation between these data elements customers?" for example, can be tested using the and productivity performance to establish what can be Enablers of Profitability system. The new Enablers of learned and applied to improve business productivity. Productivity analysis has the potential to be used in a similar manner. This work follows a similar exercise that considered Enablers of Profitability. This earlier work has since been embraced by Benchmark Index. It is certain to become a valuable tool to help advisers and their customers determine improvement strategies based on new predictive capabilities. It shows the potential bottom line impact of different business decisions. 2 “ should we invest? ”
  • 7. what is productivity? Within Benchmark Index there are 3 measures of The use of Value Added is particularly appropriate as it productivity – though the data exists to calculate is consistent with other measures used by the DTI in productivity in a number of other ways. The 3 existing considering productivity, namely: measures are: P1. Labour Productivity – the value added per employee 1. Pre-tax profit per employee P2. Value Adding Efficiency – which relates value added (the output) to the main inputs of labour and 2. Turnover per employee capital equipment. It is calculated by dividing Value 3. Value Added per Employee Added by the sum of Employee Costs and Depreciation Value Added is a measure of wealth creation. It is In this report, we have predominately used P1 (Labour simply defined as sales less the cost of bought in Productivity) though we have used P2 (Value Adding materials, components and services. Efficiency) in the sectoral analysis. 3
  • 8. a few words about the analysis analysis was undertaken in 2 stages possible limitations of the analysis >10m <200k 200-500k 1. Determining Potential Enablers – an initial analysis 1) This analysis has considered the manufacturing and 4m-9m was undertaken of the potential correlations service sectors in a broader context (see Appendix between Value Added per Employee and the data 4 for a list of manufacturing and service industries). collected from the Benchmark Index core In reality each sector will have its own unique questionnaire. This identified positive and negative characteristics, which might show different relationships, in other words, highlighting factors that responses to the various enablers. had a positive or negative effect on productivity. 2m-4m During this first stage analysis, we also looked 2) This analysis looked at the dataset at a specific point 500k-1m closely at those expected enablers where, in fact, in time, with no consideration to the time effects of 1m-2m there was no obvious correlation. strategy. Additional analysis of the productivity growth of companies investing in R&D, capital BI data distribution by turnover 2. Determining the relevance and importance of these equipment or people development, for example, enablers – having identified potential enablers, their might well demonstrate the longer-term benefits of >250 relevance was tested by comparing companies with such strategies. 200-250 <10 150-200 low (bottom third), medium (middle third) and high 100-150 (top third) performance in those areas to determine the data sample their impact on productivity. For example, this report considers the impact on productivity of This analysis has been conducted using the data from training. One measure of this is the amount of 4,000 UK companies. The sectors and their value training expenditure per employee. The differences added are shown overleaf. in productivity between those with a low, medium The charts on the left show the profile of the data in and high-level of training expenditure are compared. terms of company size: turnover and number of 50-100 The basis of this analysis will become clear later. employees. 10-20 20-50 BI data distribution by number of employees 4
  • 9. how the sectors compare table 1 – how significant are the sectors at creating wealth? VA % of Emp + Sectors Value Added % of Total VAPE - P1 Dpn – P2 Construction 1,202,956,321 15.01 40,235 223% Manufacture of Basic Metals and Fabricated Metal Products 1,157,307,228 14.44 27,864 177% Manufacture of Chemicals, Plastics and Ceramics 861,872,095 10.76 40,436 314% Manufacture of Food Products, Beverages and Tobacco 665,849,594 8.31 35,965 401% Manufacture of Transport Equipment 600,262,445 7.49 26,680 240% Financial Intermediation, Real Estate, Renting and Business Activities 521,156,708 6.50 33,640 338% Manufacture of Electrical and Optical Equipment 457,346,297 5.71 33,797 265% Manufacture of Machinery and Equipment Not Elsewhere Classified 371,021,059 4.63 36,450 155% Manufacture of Wood, Paper and Printing 361,825,985 4.52 40,391 290% Other Manufacturing 342,203,887 4.27 38,394 277% Wholesale and Retail Trade; Repair of Motor Vehicles and House Goods 335,890,731 4.19 25,684 103% Public Administration and Defence; Compulsory Social Security 328,822,680 4.10 50,674 297% Transport, Storage and Communication 173,420,310 2.16 27,874 306% Other Services 133,818,377 1.67 24,788 25% Education 122,158,992 1.52 15,217 287% Agriculture, Hunting, Forestry and Fishing 120,943,617 1.51 26,594 16% Manufacture of Textiles, Leather and Related Products 116,544,025 1.45 22,110 57% Hotels and Restaurants 94,137,892 1.17 20,145 302% Mining and Quarrying 40,635,460 0.51 53,893 295% Electricity, Gas and Water Supply 4,917,203 0.06 19,436 292% The table above has been sorted in terms of the Value Added for that 1. employee remuneration sector. Too much should not be read into this as we do not know whether 2. return on capital to investors or business owners the data is generally representative of UK business as a whole – though the 3. invested back into the business for future growth quantity and quality of the data suggest that it will be broadly accurate. It 4. taxes does however show that Construction, Manufacture of Basic Metal Products, Other Manufacturing and Food and Drink are very important It is important for businesses that they generate sufficient capital to recruit elements within Benchmark Index. and retain appropriate skill and experience and also to continue to invest in their business and equipment. In fact, a business generates its Value Added Value Added is an output, showing the wealth created by a business. using its people, its processes and its equipment to change raw materials This wealth can be shared in a number of ways: into something its customers want. The higher the Value Added, the better or more efficient it is at doing this. 5
  • 10. Labour productivity – P1 Value adding efficiency – P2 In terms of labour productivity the most successful As described earlier, this relates Value Added (as an sectors are Mining and Quarrying; Manufacturing of output) to the inputs of labour and capital Wood, Paper and Printing; and Manufacture of equipment usages. Chemicals, Plastics and Ceramics. Using this measure of productivity, Food On the other hand, Other Services, Hotels and Processing; Financial Intermediation and Real Estate; Restaurants, and Manufacturers of Textiles, Leather and companies involved in the Manufacture of and Related products perform comparatively badly. Chemicals, Plastics and Ceramics are very efficient. Companies in Agriculture, Other Services, and Textiles and Leather Manufacture are comparatively inefficient. 6
  • 11. our findings overall 43,000 42,000 41,000 Our findings have been graphically represented, As an example, for level of complaints 40,000 showing the broad differences between service and (complaints/orders), companies have been broadly manufacturing industries. Please refer to the adjacent grouped into those with a low number (relatively 39,000 graphs. speaking), those with a medium number and those 38,000 with a high number. Clearly, each sector will have its own characteristics 37,000 and caution needs to be observed before drawing any In this example, those with higher complaints have a 36,000 conclusions. However, the data does show some higher productivity, however, it is not always easy to interesting and noteworthy trends. determine the cause and the effect and this too needs 35,000 to be borne in mind. 34,000 Each graph shows the overall impact of the particular enabler, together with its impact on the manufacturing 33,000 and service sectors separately. For each, the average low medium high Value Added per Employee is shown for those companies with low, medium and high performance against that particular enabler. Enabler Key: I complaints/orders I rejected orders/orders I new customers/total customers 7
  • 12. Enabler Key: I complaints/orders I rejected orders/orders “ as the proportion of new customers I new customers/total customers overall grows, so productivity falls ” 43,000 42,000 41,000 customer focus 40,000 39,000 38,000 37,000 36,000 35,000 1. Level of complaints (complaints / orders) - in both bigger batch sizes, which could mean that they are 34,000 33,000 the manufacturing and service sector, higher labour working with fewer orders and customers overall. low medium high productivity is linked to higher complaints. There This could mean that order rejection rates appear are a number of potential reasons: higher. However, as order rejections rates increase manufacturing a. higher added value companies are better and even further, labour productivity sharply decreases, 45,000 more thorough at recognising and recording no doubt as a result of reworking required. 40,000 complaints. 35,000 b. customers of higher value added companies may 3. New customers (new customers / total customers) 30,000 have higher expectations and more likely to – as the proportion of new customers grows, so 25,000 complain. productivity falls. 20,000 It is a long-held belief that the customer is the final This negative impact on productivity is almost twice 15,000 arbiter in product and service quality and that a as bad in service industries (27% reduction) as it is 10,000 high level of complaints is bad for business.What if in manufacturing (14% reduction).There are two 5,000 higher value added companies encouraged observations: 0 complaints and used the feedback to shape product a. it is more labour intensive to recruit new low medium high and service offerings? This could explain why higher customers, with more sales people required and added value companies seem to have more possibly more technical development staff as service complaints than their weaker performing well. 70,000 counterparts. b. it could be argued that new customers are an 60,000 investment in the future and this intuitively 2. Orders rejected (rejected orders / orders) – makes sense. However, the results seem to 50,000 companies with a ‘medium’ level of performance in suggest at some point a business has to reap 40,000 terms of rejected orders seem to be most what it has sown and look to maximise the productive. Once again, this is perhaps counter- relationship it has with its existing customers. 30,000 intuitive. We need to bear in mind that higher Constantly pursuing new customers may not 20,000 productivity companies are, perhaps, working in always be beneficial. 10,000 0 low medium high 8
  • 13. Enabler Key: I graduates/employees “ graduate employment is more important in the manufacturing sector than the service sector ” I early leavers/employees I new employees/employees I total leavers/employees I absenteeism/employees overall people satisfaction 50,000 45,000 40,000 35,000 30,000 25,000 20,000 1. Graduate appointments (graduates/employees) 4. Staff retention (total leavers/employees) – as you 15,000 the proportion of graduates seems more important might expect, the results are very similar to 10,000 in the manufacturing sectors than service sectors, measure 3 above (new employees / employees). 5,000 0 where companies with the highest proportion of low medium high graduates see a decreasing amount of labour 5. Absenteeism (number of days lost per year per manufacturing productivity. employee) – surprisingly, there is little impact on 50,000 manufacturing productivity between companies with 45,000 2. Rate of early leavers (those leaving within 6 months low and high levels of absenteeism.This could be as 40,000 of joining) – generally, there is a negative a result of automation, which minimises the impact 35,000 correlation with lower productivity associated with of staff illness. Conversely, there is a positive 30,000 a high incidence of early leavers.This correlation is correlation between absenteeism and productivity 25,000 stronger in the service sector than it is for in the service sectors, with companies with high 20,000 manufacturing. levels of absenteeism being much more productive 15,000 than those with a low level. Again, we have to ask, 10,000 3. Level of new employees (new employees what is ‘cause’ and what is ‘effect’? Could it be that 5,000 /employees) – the higher the proportion of new companies with higher levels of productivity suffer 0 low medium high employees to total employees, the lower the rate of higher absenteeism rates? This could be as a result service labour productivity. of extra pressure placed on people, for example. 60,000 For manufacturing, productivity is similar for companies with a low and medium number of new “ companies with higher 50,000 employees, showing this is less sensitive in this area, possibly as a result of automation and clearly 40,000 defined processes. However, as the rate of new starters continues to increase, manufacturing levels of productivity 30,000 becomes more sensitive to it, perhaps, because even though they might be highly automated, process suffer higher 20,000 10,000 driven methods begin to suffer. absenteeism rates 0 low medium high 9
  • 14. Enabler Key: “ I training days per employee I traning expenditure/employees manufacturers that spend heavily on staff training enjoy 47% better productivity than those that spend little overall 60,000 50,000 continuous learning ” 40,000 30,000 and improvement 20,000 It is a widely held belief that organisational performance What this potentially tells us is that in the service 10,000 is maximised when it is based on the management and sectors, the matter of training and development is far 0 sharing of knowledge, within a culture of learning and from clear-cut. Days out of the office on training low medium high improvement. While this is evident in manufacturing, it courses have a negative impact on productivity. But is not the same in service industries. companies spending the most money on training see a manufacturing 60,000 worthwhile gain in productivity. Manufacturers that provide a high number of days for 50,000 staff training enjoy productivity that is 24% better than The key seems to be invest prudently in only those 40,000 manufacturers that provide very little time for staff courses that will add the most value (even though they training. The opposite is true in the service sector, are likely to be the most expensive) but do not 30,000 where companies that provide lots of time for staff necessarily let people attend courses just because they training have 18% worse productivity than those who are free. 20,000 provide little time for this activity. 10,000 “ service companies that There is a similar curious pattern in terms of training 0 low medium high expenditure. Manufacturers that spend heavily on staff training enjoy 47% better productivity than those that service 60,000 spend little. The same is true in service sectors. While spend heavily on training those that spend heavily on staff training enjoy better 50,000 productivity, the difference is only 13%. It is worth noting that in the service sectors, productivity falls with enjoy only 13% better 40,000 training expenditure between those spending the least productivity 30,000 20,000 10,000 0 low medium high and those spending at the medium. ” 10
  • 15. Enabler Key: I substandard materials/bought in materials overall 41,000 40,000 partnership with suppliers 39,000 38,000 37,000 36,000 35,000 Substandard supplies have a big impact in both 34,000 manufacturing (8% reduction in productivity) and 33,000 low medium high service (28% reduction in productivity) and demonstrates the importance of supplier relationships. manufacturing Old models of ‘customer’ and ‘supplier’ relationships 39,000 38,500 need to be re-thought, with a partnership approach 38,000 adopted. Companies involved in a supply chain should 37,500 have mutually beneficial relationships that are built on 37,000 trust and add value to both parties. 36,500 36,000 35,500 35,000 34,500 “ old models of ‘customer’ and ‘supplier’ relationships need to be re-thought 34,000 33,500 low medium high ” service 60,000 50,000 40,000 30,000 20,000 10,000 0 low medium high 11
  • 16. Enabler Key: I capital investment/turnover I income from new products/turnover I marketing expenditure/turnover I R and D expenditure/turnover overall 45,000 40,000 35,000 30,000 investment for innovation and growth 25,000 20,000 15,000 10,000 In this section, we are looking at the impact of 1. Innovative companies in the manufacturing sectors 5,000 investment: in equipment, in products, in market (those generating income from new products or 0 development, in R&D and in marketing. As with any markets) see an earlier benefit from investment than low medium high investment, the results may not be immediately seen those in the service sectors, where innovation and, therefore, it is not always easy to determine the usually results in a drop in productivity manufacturing 45,000 effects of the investment. However, there are several 40,000 noteworthy points: 2. Marketing expenditure destroys value in the service 35,000 sectors, at least in the short term ££ “ 30,000 25,000 3. R&D expenditure in the manufacturing sectors has greater immediate benefit than it does in the service £ 20,000 sectors where productivity falls - at least initially 15,000 10,000 5,000 0 low medium high marketing expenditure service 60,000 destroys value, at least 50,000 in the short term ” 40,000 30,000 20,000 10,000 0 low medium high 12
  • 17. Enabler Key: I directs/indirects I no employees/managers overall 38,000 company structure 37,000 36,000 35,000 34,000 33,000 1. Directs/indirects – this looks at the number of 2. Employees/managers – this looks at the ratio of people directly involved with the production or employees to managers. Conventional wisdom 32,000 provision of a product or service. It is not always suggests management structures should be flatter, 31,000 low medium high easy to compare this between companies, as there with fewer managers and a greater number of is uncertainty as to whether things such as people reporting directly to them. The evidence manufacturing transport, or sales and marketing are direct or here suggests this is not necessarily the case: 38,000 indirect. However, it is interesting to note that the the most productive companies in both the 37,000 fewer directs there are, the better the level of manufacturing and service sectors actually have a productivity. lower ratio of employees to managers. 36,000 This may be as a result of investment in 35,000 automation, suggesting that those with a higher 34,000 proportion of directs are less automated and, consequently, less productive. 33,000 32,000 “ 31,000 the fewer the directs low medium high service there are the better the level 40,000 39,000 of productivity 38,000 ” 37,000 36,000 35,000 34,000 33,000 32,000 31,000 30,000 low medium high 13
  • 18. income from new products/turnover Appendix 1 substandard materials/bought in materials A summary of service enablers total leavers/employees new customers/total customers marketing expenditure/turnover R & D expenditure/turnover training days per employee early leavers/employees directs/indirects rejected orders/orders no employees/managers capital investment/turnover new employees/employees training expenditure/employees absenteeism/employees graduates/employees complaints/orders -50% -40% -30% -20% -10% 0 10% 20% 30% 40% 50% total leavers/employees Appendix 2 new customers/total customers A summary of manufacturing enablers early leavers/employees new employees/employees directs/indirects capital investment/turnover no employees/managers substandard materials/bought in materials rejected orders/orders absenteeism/employees income from new products/turnover marketing expenditure/turnover R & D expenditure/turnover complaints/orders training days per employee graduates/employees training expenditure/employees -50% -40% -30% -20% -10% 0 10% 20% 30% 40% 50% 14
  • 19. Appendix 3 - Breakdown of sectors Appendix 4 Manufacture of Basic Metals and Fabricated Metal Products List of manufacture industries Financial Intermediation, Real Estate, Renting and Business Activities Agriculture, Hunting, Forestry and Fishing Construction Mining and Quarrying Wholesale and Retail Trade; Repair of Motor Vehicles and House Goods Manufacture of Food Products, Beverages and Tobacco Manufacture of Chemicals, Plastics and Ceramics Manufacture of Textiles, Leather and Related Products Manufacture of Electrical and Optical Equipment Manufacture of Wood, Paper and Printing Agriculture, Hunting, Forestry and Fishing Manufacture of Chemicals, Plastics and Ceramics Other Manufacturing Manufacture of Basic Metals and Fabricated Metal Products Manufacture of Food Products, Beverages and Tobacco Manufacture of Machinery and Equipment Not Elsewhere Classified Manufacture of Machinery and Equipment Not Elsewhere Classified Manufacture of Electrical and Optical Equipment Manufacture of Transport Equipment Manufacture of Transport Equipment Manufacture of Wood, Paper and Printing Other Services List of service industries Transport, Storage and Communication Electricity, Gas and Water Supply Services Hotels and Restaurants Wholesale and Retail Trade, Repair of Motor Vehicles and Manufacture of Textiles, Leather and Related Products House Goods Education Hotels and Restaurants Public Administration and Defence; Compulsory Social Security Transport, Storage and Communication Mining and Quarrying Financial Intermediation, Real Estate, Renting and Business Activities Electricity, Gas and Water Supply Services Public Administration and Defence, Compulsory Social Security 0 100 200 300 400 500 600 700 800 Other Services sample size Construction Other Manufacturing Education 15
  • 20. ISBN: 0 85605 403 8 URN No. 03/1330 Benchmark Index is a Business Link Service For further information contact Benchmark Index at Field House, Mount Road, Stone, Staffordshire. ST15 8LJ Benchmark Index Hotline 08700 111143 e-mail info@benchmarkindex.com www.benchmarkindex.com 1