Implications of Changes in Investment

Charles Stewart dives into the numbers behind the economy to focus on gross private domestic investment. The outlook and policy options he presents are bleak – almost anything the government does will lead to reduced employment. However he does offer a path to better outcomes for individual firms:

Total factor productivity has risen 3.2% in each of the last 2 years, the highest rate since the BLS started keeping tabs in 1987. The average long-term rate has been around 1%. We know that it is investment, not labor, that is mainly responsible, because labor productivity increased by only half, to 3.6%, while total factor productivity tripled. We can produce the same output today with 7% less labor than two years ago. Investment in equipment and software is reducing employment.

Stewart’s insight has several implications for domestic manufacturers looking to improve their chances in today’s economy. First is a hard lesson — if you are not getting the same output from 7% less labor, you are falling behind your competitors. This benchmark comes from national statistics, so half of all manufacturers have plenty of room for improved results. Even those getting by on a 7% labor reduction may be falling behind, that is the average not the top performance.

To catch up to and potentially leap ahead of your competitors requires investment. This investment must be carefully targeted. Adding staff exposes manufacturers to uncertain regulatory costs. Adding inventory is trickier, unless it moves it is dead weight on the balance sheet and prevents investments with real returns. The key is investment in equipment and software to increase total productivity of the firm. This is not an either / or investment, modern CnC machines and ERP software work together to generate greater returns than either alone. Work with vendors to fit these investments within your balance sheet.

When you set investment priorities, focus on the business value, and on enabling strategies that take advantage of opportunities in the current environment. Identify a business opportunity tied to a successful business strategy for today, then invest in a solution to that problem. A troubled economy is the wrong time to get misled by industry hype about technical nuances of competing products. If the vendor isn’t focused on direct business value, no value will be realized. Potential success strategies include processing faster and more flexibly than foreign competitors by combining lean production techniques with automated product configuration. Investments include better ERP plus modern factory equipment. Results include dramatically reduced order processing time, fewer production errors, reduced inventory, and reduced labor costs. If you can invest before your competitors do you may achieve growth in spite of the poor economy.

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