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Productivity is output, efficiency, and production. In economic terms, it is the rate at which a company produces goods or services in relation to a needed amount of materials and employees. Productivity can be defined in two ways:

1) Total labor productivity is simply output divided by the number of workers, or by the number of hours worked. Output can be anything from number of packages to airline miles flown, but more generally it is some very broad aggregate such as gross domestic product. Measures of labor productivity capture the contribution to output of inputs other than hours worked.

2) Total factor productivity, by contrast, captures the contribution to output of everything except labor and capital. Innovation, managerial skill, organization, waste minimization (all forms) and even luck can contribute to total factor productivity. 1

The total labor and total factor productivity concepts are inter-related. Increases in total labor productivity, the amount of output created (in terms of goods produced or services rendered) per unit input used, can reflect the fact that each worker is better equipped with capital. Alternatively, gains in total factor productivity, or any effects in total output not caused by inputs or productivity, are frequently obtained through the use of innovative process improvements or organizational change.

What is waste?
Waste can be identified in many ways and as many things, but ultimately it is any activity that requires allocated resources but adds no value from the customer’s perspective. Some activities, while not directly adding value to a product or process – such as time spent on equipment maintenance or the accounting function – are necessary to the production of goods or services. Other types of non-value-added activities, such as maintaining underutilized inventories or wasting time searching for tools, must be reviewed and constantly re-evaluated, and if identified as waste, appropriate steps should be taken to reach optimal efficiency.

Many initiatives and systematic approaches for improving efficiency have been adopted by manufacturing organizations to help improve their products and processes by focusing on enhancing quality, improving productivity and reducing a wide range of waste.

Productivity improvement methodologies
The Toyota Production System (TPS), developed in Japan in the 1940s, is the framework and philosophy organizing the manufacturing facilities at Toyota and the interaction of these facilities with their suppliers and customers. The TPS framework and philosophy was largely developed and popularized by Toyota engineer Taiichi Ohno. The main goal of TPS (commonly referred to today as lean methodologies) is to eliminate all forms of waste within manufacturing operations, but it has become a very popular tool for improving efficiencies in ALL types of organizations.

Another efficiency improvement method called Total Quality Management (TQM ) is a management approach for an organization. TQM is centered on quality, based on the participation of all organizational members and aimed at long-term success through customer satisfaction and system-wide benefits. Popular in the U.S. during the 1980s, it was developed by W. Edwards Deming and is largely based on a quality revolution started in Japan in the 1940s.

Six Sigma was pioneered by Bill Smith at Motorola, and popularized in manufacturing environments by General Electric’s former CEO, Jack Welch. It emphasizes the use of mathematical and statistical tools to manage process variations which may cause defects, and systematically works toward managing the ultimate goal of consistent and measurable quality.

These three approaches to improving productivity and minimizing waste are being used by many organizations to improve products and processes. Based on the results of the 2006 IndustryWeek/MPI Census of Manufacturers, the implementation of lean methodologies has significantly increased in popularity. In 2006, 40.5 percent of all manufacturers surveyed have adopted lean as their primary improvement method, a jump of nearly 5 percent from the 35.7 percent reported in 2005. 2

Lean – Initiatives for reducing waste
Lean methodologies based on TPS are management philosophies that focus on the reduction of “the seven deadly wastes:”

• Overproduction
• Waiting time
• Transportation
• Processing
• Inventory
• Motion
• Scrap in manufactured products or any type of business

By eliminating waste (roughly translated in Japanese as “muda”), quality is improved production time is reduced and cost is minimized. Lean “tools” (more than three dozen, and growing) include constant process analysis and continuous improvement (kaizen), “pull” production (by means of kanban) and mistake-proofing (poka-yoke). Lean, as a management philosophy, is also heavily focused on creating a better workplace through the Toyota principle of “respect for humanity.”

While some believe that lean methodologies are a set of problem-solving tools, most experts now agree that they are holistic, comprehensive, enterprise-wide programs designed to be integrated into the organization’s core strategy.

Key lean principles also include:
• Continuous improvement: Efforts to reduce costs, improve quality, increase productivity and share information.
• Flexibility: Efforts to produce different mixes or greater diversity of products quickly, without sacrificing efficiency at lower volumes of production.
• Supply chain enhancement: Building and maintaining a long-term, strategic relationship\with suppliers through collaborative risk-sharing, cost-sharing and information-sharing\ arrangements.

Lean basically gets the right things to the right place at the right time in the right quantity while helping minimize waste and being flexible and open to change. 3

Lean implications for MRO/indirect materials procurement and inventory
Indirect procurement activities include “operating resources” that a company purchases to maintain its operations. They comprise a wide variety of goods and services, from standardized low-value items such as office supplies and products used in facilities maintenance, repair and operations (MRO), to complex and costly goods and services such as heavy equipment and consulting services.

Purchasing organizations in many industries sometimes assume incorrectly that “just-in-case” inventories of indirect goods, specifically those used in the maintenance and repair of plants and facilities, are less costly than the cost of downtime or lost production. The perceived pain of not having what may or may not be needed in an emergency or downtime situation often creates inventories of supplies which are never used or become obsolete or damaged. In lean terms, underutilized or obsolete inventories, and their associated procurement activities (those not directly related to production), are considered waste, or muda. The time and resources involved with information administration and gathering supplier contacts, background reviews, negotiations, and fulfillment activities of indirect goods create waste and can reduce overall production activity in often intangible but very real terms.

Many organizations have strategic sourcing initiatives in place, but they do not extend to the indirect purchasing categories, specifically MRO. Literally hundreds of thousands of products can be considered MRO in categories such as lighting or safety products. Of this MRO category of products, buyers consider about 40 percent of requirements are for spot buys or unplanned purchases.

What is an unplanned purchase?
Unplanned purchases refer to the type of buying  associated with MRO products that are bought infrequently, needed on an unpredictable basis and not typically purchased year after year. The purchase is unplanned not because someone isn’t a good buyer or maintenance professional; while frequently considered emergency downtime situations, these occasions are unplanned primarily because of the way the item is used in a facility. For example, an elevator’s up and down button is something that neither purchasing nor maintenance personnel plans to stop working; and when it does, purchasing typically needs to place an order for the item if it is not found on a storeroom shelf. 4

Supplier consolidation lowers costs and improves productivity
The trend in the MRO business is moving toward organizations trying to reduce the number of suppliers and lower the total cost of procuring tools, safety equipment, lighting and other maintenance products used to keep their businesses running. What is actually required in these situations are lean supply channels that: 1) incorporate more of a thorough understanding of customer needs; and, 2) are able to provide needed goods at the appropriate place and time as determined by demand (pulled).

Supplier consolidation could solve two problems –  1) the reduction of the costs (waste) associated with holding rarely used items in inventories, and 2) allowing organizations to focus on their core competencies and production efforts, while not spending time (waste) sourcing and procuring infrequently used MRO requirements.

For planned purchases, a typical company amy use as many as 5 to 10 suppliers from whom they purchase a few high-volume commodity items. For unplanned purchases, a typical company may have more than 20 suppliers to buy thousands of different products every year. Managing those relationships and adjusting to different suppliers takes time and can affect productivity. Managing as few relationships as possible for making unplanned purchases can help minimize procurement complexity and its associated costs.

In some cases, MRO suppliers even offer discount structures tied specifically to the indirect spend for buyers who use a consolidated approach for MRO purchases.

Consolidation to one source simplifies the process, saves valuable time, and reduces costs for product search and availability, helping to increase productivity.

Consider using Grainger as a broad-line national MRO distributor.
Grainger is a broad-line national distributor who maintains inventories of literally hundreds of thousands of MRO items. Grainger uses extensive networks of distribution centers and local branch offices to ensure prompt and reliable deliveries to their customers. Over the years, they have developed strong relationships with thousands of manufacturers of the items needed to maintain, repair, and operate all types of facilities. This integrated approach ultimately can save customers time and money. The scale advantages provided by broad product lines, extensive customer coverage and logistics network of branches/distribution centers positions Grainger as the perfect solution for unplanned occasion purchases.

In addition, Grainger's e-commerce platform can provide customers with procurement integration solutions to handle and streamline the indirect product purchasing processes. Its wide range of e-solutions will grow with a customers future needs, whether they are integrating a sophisticated e-procurement system or streamlining an ordering process – from electronic data interchange (EDI) and marketplace platforms, to online order management tools. These types of systems will provide some real, easy-to-take cost benefits, like reduced inventory, better cash flow and lower labor costs.

Grainger offers consulting services teams that specialize in reviewing current business practices. They have significant experience with MRO procurement practices, and will be happy to share their insights with you. They use that knowledge to create a powerful set of diagnostic, analytical and reporting tools that can give customers a major advantage in identifying cost inefficiencies and correcting them. These tools are applied by experienced people who work closely with customers to ensure smooth transitions and complete integration for maximum results.

Grainger is positioned to consistently supply the right product, to the right place, at the right time. Their integrated solutions will help improve efficiency, maximize productivity and reduce total cost by helping to minimize customers inventory investments, as well as the time and effort required procuring them. As with any LEAN initiative, focusing on reducing waste in MRO procurement practices can be beneficial and tangible for any organization.

Webinar:
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Sources of Information:
1. Sylvia Nasar – The Concise Encyclopedia of Economics © 1993, 2002
David R. Henderson - http://www.econlib.org/library/Enc/Productivity.html
2. IndustryWeek/Manufacturing Performance Institute Census of Manufacturers
October 1, 2006 - http://www.industryweek.com
3. James Womack & Daniel Jones, – Lean Thinking – © 1996 Simon & Schuster
“Principles of LEAN” © 1997-2006 by the Lean Enterprise Institute
http://www.lean.org/WhatsLean/Principles.cfm
4. “The Power of Planning the Unplanned” - Solutions from Grainger

The Center for Industrial Research and Service (CIRAS) – © 2005, Iowa State University of Science and Technology.
http://www.ciras.iastate.edu/library/toc/distributionsupplychain.asp

Wikipedia – September 2006 – © 2000, 2001, 2002 Free Software Foundation, Inc. http://en.wikipedia.org

Optimizing MRO Inventory Management Bryan Ashenbaum – © CAPS Research -Critical Issues Report, August 2005
http://www.capsresearch.org/publications/pdfs-protected/cir082005.pdf

Related links:
www.grainger.com/productivity
www.lean.org