What Are You Measuring

by BILL WADDELL

The economic theory of lean is universal - pretty much the same whether it is applied to the company, or to an individual or to the country.  Resources - human resources in terms of hours and natural resources - that create value are good and ones that do not are bad.  Lean is all about eliminating the ones that do not create value.  One common, big problem is that we tend to measure work al the same - work is good - doing something is inherently better than doing nothing.  In fact, the guy who spends half his day creating value and the other half surfing the net and playing games on Facebook is actually more productive than the guy who works like a dog every waking moment on non-value adding stuff.  Ideally, of course, no one would be surfing the net or knocking him or herself out of non-value adding work, but in order to get there we need to rethink how we measure work.

Case in point - how we measure the GDP.  Let's say that, instead of the gradual, inevitable transition from brick and mortar retailing to e-tailing we could wave a magic wand and have half of our consumer buying take place online.  I don't mean buying it from Walmart on line, but buying it directly from the manufacturer's web site. That would be a good thing - right?  We would get all of that stuff without the cost of trucking large quantities to distribution centers; the cost of the DC's themselves; then trucking to stores; and all of the cost of the stores.  We would save all the natural resources and fossil fuels that go into all of that trucking and all of those buildings.  Stuff would be cheaper because we would not have to pay for all of those manhours that don't add value and natural resources that didn't go into the product.  The only offset would be the much lower consumption of resources necessary for UPS or FedEx to bring the package to us.

While all logic and common sense dictates that would be a big boost to national productivity and the environment - a very good thing indeed - it would be an economic catastrophe of the highest order in the eyes of many.  According to a guy named Robert Yuskavage of the US Department of Commerce who wrote a paper with the eye-catching name of "Distributive Services in the US Economic Accounts" in 2006, "The industries that provide these services - wholesale trade, retail trade and transportation and warehousing - account for about 15 percent of gross domestic product (GDP), 18% of total employment, and, in 2004, contributed nearly 20% to real GDP growth."

If half of retail buying were to switch to on line buying the GDP would drop by some 7-8%.  To put that in perspective that GDP dropped by 5.1% in the recent recession.  So much for GDP as an accurate measure of economic goodness.  So much for the notion that the service economy is just as valuable as that portion of the economy that actually creates wealth - value.  The truth is that the GDP has been a false measure - and grossly overstated measure - of the economy for a long, long time.

Yuskavage asserts that, "Retailers, for example, provide services that are values by consumers in addition to the merchandise, such as convenient hours and locations, a selection of different types of merchandise, speedy or efficient check-out and information about products."  That value proposition has to justify the customer paying $20-25 for a product that cost $10 to make.

More and more, however, both manufacturers and customers are looking at Yuskavage's value proposition and deciding that there are no hours more convenient than the 24-7 of the internet, no location more convenient than the customer's own living room, no store selection as broad as the selection on line, no check out speedier and more efficient than on-line check out, and that the typical minimum wage store employee knows far less about the product than the information on the manufacturer's web site.

 All of this grand economic theory is one thing, but the same confusion between people working and people actually creating value takes place in spades at the company level.  Warehouse people are measured on the basis of how much stuff they put on and take off of racks; accounting people are measured on the basis of how many documents or transactions they process; quality inspectors are measured on the basis of how much stuff they inspect ... and we tend to assume all is well with them as long as they are doing plenty of work even though the work they are doing shouldn't be done at all.

At an individual level we have an increasing number of unemployed and under-employed young people with liberal arts degrees who were never told that the paycheck is tied to the value they create - and the value propositions in the philosophy, anthropology, poetry and Romance languages businesses are tough.

Creating value is the essence of all economics, whether one is in Washington, the corner office of the business, or in one's own living room.  And real economic growth comes only from eliminating things that don't add value for customers.  That is what we need to measure - not just how hard we are working.

Original: http://www.idatix.com/manufacturing-leadership/what-are-you-measuring/

Comments

[Al Forthman]

OK - you sold me - how would you (or any astute reader) propose to measure the national economy? Is there a measure out there (or even the bones of one) that can help us understand whether value is being created at an increasing or at a shrinking rate?

[Bill Fester]

I agree,,, except for one little word: Perceived. Because in the end, it's not necessarily actual value that drives a market (or economy) it's perceived value, and that can be a fairly soft and unmeasurable thing indeed.

[david foster]

OT: Bill/Kevin/others....a discussion on the importance or lack thereof of US manufacturing which you might want to participate in, at Ricochet:

http://ricochet.com/main-feed/Manufactured-Myths-and-Phony-Nostalgia

Commenting at Ricochet requires (paid) registration...it's a useful site with good discussions...alternatively, if you want to respond here, I can post a link back from the discussion thread.

[Bill Waddell]

Al - the GDP is actually calculated in terms of both goods produces and services produced. Goods produced is a lot closer to the truth (although it would be slightly understated to the extent that some services actually do ceate wealth.

Bill - yes, perceived value is the rub. A lot of people think their customers perceive a lot more value in what they do than is actually the case. And a lot of companies spend a lot of money on marketing in order to create a greater perception of value than their product merits.

David - thanks. I read the author's bio ... Dartmouth English major, bounced around in finance and telecom, now a building contractor in Arizona ,,, where his credentials as either an economic thinker or a manufacturing sector expert come from is mysterious.

[Robert Drescher]

Hi Bill

I really like the thoughts you shared today. The one thing I would point out is that yes some value can be created by a service, however a service cannot add wealth to the society, it can only; help preserve it, redistribute it, or destroy it. As in the end it actually adds nothing extra to an item that the producer could not do themselves, it is just that they can often due at a lower cost thus they help preserve wealth, which is the best case.

By the way at one time GDP represented only resources extracted, agricultural production, and manufacturing output, services did not count, can't remember when in the seventies or eighties they got added around the same time as the boom in finacial services and mega retailing started and was heralded as the future service economy. Only one question those economist never answered who would have a need for services when there is zero production and zero new wealth created?

[Bill Waddell]

Robert,

Generally I agree with you, however, there are some products that only create wealth when used by people in the 'service' sector. Medical technology comes to mind. An EKG machine can enhance the length and quality of life, but only when a skilled medical professional is there to read and interpret the results - without that service person to use it the machine is little more than a very big, expensive doorstop that represents a complete waste of labor and natural resources.

[Bob G.]

Value is that quality of anything which renders it desirable. Who decides my desire for shopping on the internet versus at Wal-Mart, or to buy a CD (product) for $15 versus hearing the actual artist in concert for $50. Heck, eating a $5 hot dog at a ballgame offers me more "value" than a $1 hot dog in the cafeteria If the U.S. had "0" manufacturing capability (other than perhaps defense)would it really matter as long as we grew and executed our service economy better than anyone else (e.g., arts/entertainment, healthcare, retail, agriculture, education, restaurants, mining, transportation, repairs and maintenance). The math would still work the same: $1 lean manufactured goods = $1 lean service value. Hence GDP should simply be the sum of everything done in exchange for a dollar (not just goods produced).

[Bill Waddell]

Interesting economics, Bob G.

Let me get this straight: If “GDP should simply be the sum of everything done in exchange for a dollar (not just goods produced)”, Then …

You and I go out for a beer and while we are there you talk me into giving you $100 for a life insurance policy, according to you the GDP of the United States went up by the simple act of $100 going from my pocket to yours in exchange for transferring some of my risk to you …

And if, during the same conversation I talk you into giving me the $100 back in exchange for a car insurance policy, the economy of the United States grew by $200, even though all we have done is swapped the same hundred dollar bill back and forth and simply offloaded some of our life risks on each other …

And if we meet again next month and both raise our prices, charging each other $200 this time, we have doubled the contribution to the US economy …. The wealth of the USA went up by $400 as a result of this swapping.

Now let’s say you have been paying some kid to cut your grass every week for years. He charges you $20, as would every other grass cutter in your area. Now I come along and between my smooth talking and your gullibility I convince you that I am a superior grass cutter and you agree to pay me $50. However, I am lying. I use the same lawn mower with the same blade sharpness and do exactly what the kid has been doing. The fact that I have conned you – basically stole $30 from you – means the GDP of the United States went up by $30 simply because you don’t know you were conned?

If this is true we could solve the recession by simply letting all of the scammers and con artists out of prison and cut them loose to grow the economy. If you pay $10 for something clearly worth $5 just because you don’t know any better, the more people that get duped the better for the GDP according to your economics.

One question (to be clear agriculture and mining are goods producing and not part of the service economy), if we had “ ‘0’ manufacturing capability’ and had to import the trillions of dollars we consume each year in manufactured goods, where would the money come from to pay for those goods? Services don’t get exported to any great degree, so if we keep sending trillions to China every year to pay for the goods we need, but only take a few billion in every year for the services we export, we would soon run out of money. What do you propose we do? Just print more? This is a pretty important question so I look forward to your answer. After all, the balance of trade if pretty important so I am anxious to hear why you think it can be ignored.

[Bob G.]

Bill, the math still works the same. If we imported trillions of dollars in manufactured goods from China, while exporting trillions of dollars of services we are equal. Your notion that a dollar of manufactured goods is better somehow than a dollar of services provided is off the mark. The arguement that there is more demand for manufactured dollars than service dollars in the import/export business is the real issue. That's the reason to produce more at home.

[Bill Waddell]

You're right Bob. The gap in demand for imported goods versus exported services is the problem. In 2011 we hada negative balnae of trade of some $778 billion in goods, only partially offset by a positive balance of $178 billion in services, for a net negative of $600 billion.

No one has proposed an economic scheme for a quadrupling of our service exports for the simple reason that most services can be performed just as well in other countries - often cheaper (i.e. call services and transaction processing outsourced to India).