Memorandum by EEF
1. In March 2001 the EEF produced an interim
report on US-UK manufacturing productivity Lessons from Uncle
Sam based on in-depth interviews with senior managers in manufacturing
companies on both sides of the Atlantic. It highlighted the importance
of improved productivity for UK manufacturing competitiveness
and looked at reasons behind the productivity gap between US and
UK manufacturing. It emphasised a number of reasons for the gap
and the lessons that UK firms could learn from the experience
of their US counterparts.
2. The final report Catching up with
Uncle Sam was published in December 2001. It further investigated
some of the issues raised in the main findings of the interim
report. In particular, a Productivity Survey was conducted by
NOP of 352 EEF member companies by NOP to provide further evidence
on the uptake of lean manufacturing, use of workplace initiatives,
issues surrounding firms' ability to attract the right people
and barriers to investment. The report goes on to look at how
employers and government can work together, tackle the issues
relevant to them and boost productivity growth.
3. There are many measures of productivity
and the size of the gap between US and UK varies depending on
which one is used. The often-quoted Treasury estimate of the productivity
gap with the US is 45 per cent but this refers to data on GDP
per worker and when the data is adjusted for hours worked the
gap is closer to 25 per cent.
4. EEF research for the interim report showed
that some UK companies were more productive than their US counterparts,
but in general a productivity gap does seem to exist between UK
and US manufacturing. However, the crucial issue for policy makers
and manufacturing is how to narrow the gap, rather than debating
the exact size. In fact, even if there were no productivity gap,
boosting productivity in the UK would still be vital to improving
manufacturing competitiveness and overall living standards.
5. It is often forgotten in the productivity
debate that there are structural reasons as to why US manufacturing
might be more productive than that in the UK.
6. The US manufacturing sector is in a better
position to exploit economies of scale given that the sector itself
is much larger, the domestic market is much bigger and the economy
is less open. The homogeneity of this large domestic market means
that US manufacturing industry can benefit from higher volumes
and fewer product variations.
7. The performance of the US Information
and Communications Technology (ICT) manufacturing sector in the
second half of the 1990s was much stronger than in the UK. Given
that it makes up a larger share of the business sector, it will
have had a larger impact on the overall productivity performance.
8. While the structural issues of economies
of scale and role of ICT manufacturing can help to explain part
of the productivity gap with the US, they do not explain it away
totally. There are a number of other areas where UK manufacturing
can learn from the experience of US firms to boost productivity
and these are looked at in detail below.
9. The under-performance of UK manufacturing
investment relative to US manufacturing has been a long-term problem
over the last 30 years. The chart below shows that US firms have
persistently had more capital at their disposal per hour worked
relative to UK manufacturers. UK manufacturing investment has
been volatile over the economic cycle but the level of investment
relative to the size of the manufacturing sector has remained
flat over the long-term.
10. The EEF Productivity Survey shows that
there has been little improvement in manufacturing investment
over the last 12 months and that firms are not planning to dramatically
alter their investment performance over the coming 12 months.
National Statistics data confirms that the situation continues
to deteriorate with manufacturing investment falling further.
11. A lack of manufacturing investment has
undermined company performance and is expected to continue to
do so over the next 12 months.
12. The economic climate of recent years
has significantly constrained manufacturing investment. The three
key barriers to investment; lack of demand, uncertainty over future
demand and the exchange rate all undermine current and future
profitability. While these factors are difficult to tackle outside
of tackling macroeconomic stability, it is crucial that their
side effects on manufacturing investment and competitiveness are
13. The EEF survey shows clearly the link
between investment and company performance. First that have increased
investment over the last 12 months are more likely to have seen
strong growth in productivity and profitability.
14. If increased manufacturing productivity
is a serious economic goal then it is crucial that the long-term
trend of under-investment in manufacturing is broken and that
the negative impact that the economic climate of recent years
has had on investment and productivity is counteracted.
15. The EEF's Interim Report highlighted
that US manufacturers seem to get more out of the lean manufacturing
by applying it more intensively and across the whole of their
organisation. The EEF Productivity Survey provides new evidence
on the extent of lean manufacturing in the UK and the barriers
to its uptake.
16. It shows that many firms are applying
lean manufacturing across the whole of their business and reaping
rewards in terms of improved performance. Yet there is a significant
proportion of firms that has not undertaken any lean manufacturing
and is therefore missing out on the benefits. The take up of lean
manufacturing in the UK is very polarised with a third of firms
pursuing it across the whole organisation, while just over 40
per cent are not undertaking any lean manufacturing.
17. Those firms that are pursuing lean manufacturing
are reaping the rewards in terms of improved productivity and
company performance. In the UK, there is also a greater proportion
of US owned companies using all the key lean manufacturing tools
than is the case for domestically owned firms.
18. There are a number of barriers which
prevent firms from undertaking lean manufacturing and which help
explain why more firms are not using lean techniques. The most
commonly cited barrier is attitudes to change within the firm,
which reflects the attitudes of both employers and employees and
causes inflexibility. There is also a general lack of understanding
of lean and the benefits it can bring, while a shortage of the
right lean skills persists at all levels within the firm.
19. The survey results show a clear link
between the use of lean manufacturing and higher productivity
and profitability. The chart below shows a higher proportion of
firms in the high productivity brackets that has used four plus
lean tools compared with those that had done no lean manufacturing.
20. If we are to improve the uptake of lean
manufacturing in the UK and improve productivity it is clear that
policy should focus on raising awareness of the benefits of lean
manufacturing, assisting firms to apply lean manufacturing within
their organisation and facilitating a step change in lean skills
across all employees.
21. Workplace initiatives refer to a whole
range of practices designed to offer employees greater incentives
and improve employee involvement and communication. The US experience
in the 1990s provides convincing evidence that new workplace practices
have been a contributing factor to productivity growth in its
manufacturing sector. It is not the adoption of any single practice
that is crucial but the combination of a number of them and the
involvement of employees in decision making.
22. The EEF Productivity Survey shows that
UK manufacturers are embracing new workplace practices with many
firms in the UK using output monitoring, individual performance
appraisal and to a lesser extent employee involvement, suggestions
schemes and total quality processes. However, incentive or profit-based
pay is not used as widely as US-owned firms in the UK are making
greater use of all forms of workplace initiatives than their UK-owned
23. The key goals of firms introducing workplace
initiatives are raising productivity and profitability, and increasing
employee participation and satisfaction. The chart below shows
that over 80 per cent of firms implementing workplace initiatives
find them successful at achieving these goals.
24. In response to the question of what
they see as the key constraints on the uptake of workplace initiatives,
firms cited attitudes to change (of both employees and management)
as by far the most important barrier to the take up of workplace
25. The EEF Survey provides strong evidence
of a link between the use of workplace initiatives and improved
productivity and profitability in UK manufacturing. More widespread
use of new workplace initiatives is clearly a vital ingredient
for improved growth in manufacturing productivity.
26. The EEF Productivity Survey looked closely
at whether firms' ability to attract and retain the right people
is undermining company performance. It showed that while many
firms are successful in attracting and retaining the right people,
nearly a quarter struggle. The vast majority of those that struggle
regard this as one of the key problems the company faces.
27. Offering good basic salaries is the
key method of attracting and retaining skilled individuals in
UK manufacturing. A much lower proportion of firms is offering
bonuses, training, personal development, employee input and a
better work/life balance as ways to attract and retain skilled
28. Pay and skills shortages in the wider
economy are the key reasons why firms struggle to attract and
retain the right staff (see chart). This suggests that firms cannot
get round all these difficulties simply by offering more non-salary
benefits. Improved training is also a crucial factor in overcoming
the barriers to firms attracting and retaining skilled individuals.
29. The results also show that a higher
proportion of US-owned firms based in the UK offer their employees
a better work/life balance, bonuses, training and personal development
compared to their UK owned counterparts. As a result, they are
less constrained by difficulties in attracting and retaining skilled
30. Both employers and government can do
more to ensure that firms are able to attract and retain the people
with the right skills.
31. The planning process as it currently
operates constrains manufacturing productivity by delaying or
preventing firms from moving to new sites or extending current
premises and therefore improving the layout and flow of the production
process. The EEF believes it is vital that the government frees
up the planning process and the CBI document "Planning for
Productivity" emphasises many of the concerns of UK manufacturers.
In particular that:
It is too slow, too often, on decisions
that are vital for a firm's competitiveness.
There are too many uncertainties
surrounding decisions, which translate into higher risks and costs
for business and there is a serious lack of transparency.
There is a widespread feeling that
the process reaches bad decisions.
Burdens on business
32. The EEF has regularly warned of the
damage done to industry by the increasing burden of regulation.
It adds to business costs, diverts management time away from more
productive uses such as increasing efficiency and limits the flexibility
of companies to respond rapidly to changing circumstances.
33. The EEF's productivity work has emphasised
the need for firms to be able to concentrate on boosting productivity
through increasing the use of lean manufacturing, new initiatives
in the workplace and doing more to attract and retain the right
people. New employment legislation coupled with burdens such as
the climate change levy impinges seriously on firms' ability to
push for improvements in these three areas. Continuous improvement
is an ongoing daily process and anything that hinders managers
ability to focus on it, reduces their scope to make productivity
34. It is essential that the government
increases its efforts both to reduce the current burden of regulation
and to limit the impact on business of further measures.
35. A competitive transport system is crucial
to sustained productivity improvements. It is essential that raw
materials and components are delivered at the right time, without
delay and that firms can move goods easily to market. It is vital
that the government concentrates on delivering the planned increases
in spending on the infrastructure and that it meets the transport
needs of the manufacturing industry.
There are issues for Government and employers
36. It is clear that, if we want to boost
productivity in the UK, government and employers will have to
tackle the issues relevant to them. This will mean that employers
focus on improving the understanding/uptake of lean manufacturing,
adopting new approaches in the workplace and using new methods
to attract the right staff. At the same time it is essential that
the government can deliver on stimulating more capital investment,
developing the infrastructure, improving the uptake of lean manufacturing,
addressing skills shortages and encouraging more innovation.
37. If both parties can make inroads
in all these areas, we can expect to see improvements in the productivity
performance of UK manufacturing. Only with action on all these
fronts can we seriously expect to start to narrow the gap with