Employee productivity tied to technology spending

by Adam J. Fein, Pembroke Consulting Inc.

What will prompt distributors to spend money on new hardware and software? The answer is unambiguous from a sample of 250 senior industrial distribution executives – improve employee productivity. See exhibit 1.

This result comes from new specialized research conducted jointly by Progressive Distributor and Pembroke Consulting.  The detailed results of our research, which will be published in the first quarter of 2005, will help industrial distributors develop their technology strategies. 

The productivity rationale trumped all other concerns among small and mid-size distributors. The largest distributors are somewhat more focused on revenue gains and boosting customer satisfaction, perhaps due to the continuing success of local and regional distributors. 

The executives in our survey correctly perceive the opportunity provided by technology. Manufacturers have become more sophisticated buyers, wreaking havoc on distributor margins through strategic sourcing and vendor-consolidation initiatives. Intensified foreign competition and economic weakness has forced domestic industrial customers to look toward cost cutting as a competitive weapon. Therefore, industrial distributors must dramatically improve productivity without compromising service levels to remain relevant. 

Productivity is equal to output—such as revenues or line items shipped—divided by input, such as number of personnel, hours worked, or warehouse space. To improve productivity, distributors must increase output, lower inputs, or do both simultaneously.  The largest productivity improvements in wholesale distribution industries have come from substituting information technology for repetitive processing activities such as order processing, billing, inventory control, delivery route scheduling and warehouse management.

As an economic sector, the overall wholesale distribution industry contributed 25 percent of the total productivity gains in the U.S. economy during the 1990s.¹ In other words, wholesale distribution made a disproportionately large contribution to the nation’s productivity.

In contrast, industrial distribution has lagged other distribution sectors in employee productivity growth. Consider growth in output per hour, which measures inflation-indexed revenue per employee hours worked. Productivity in electrical distribution has far outstripped industrial distribution. See Exhibit 2.

One explanation for this disparity has been industry leadership in creating technology resources that help both manufacturers and distributors improve efficiency. For example, the Industry Data Exchange Association (IDEA) was created in 1998 jointly by the National Electrical Manufacturers’ Association and the National Association of Electrical Distributors to create electronic catalog content at an industry level. 

The IDEA has been working to create an industry data warehouse, a central repository for the electronic exchange of standardized product and published pricing information. IDEA aims to provide electrical distributors with one-source access to current product and pricing information from electrical product manufacturers. In addition, manufacturers are encouraged to update this single source with pertinent product and price changes. Surprisingly, no comparable industry-level initiative exists for building an equivalent platform resource for industrial distributors and their manufacturer suppliers. 

Looking ahead, productivity will grow only if distributors can cost-effectively apply technology. However, technology alone can neither remedy customer satisfaction problems nor replace a clear business strategy or provide specific business requirements.

Distribution executives should be sure to have fact-based answers to the following questions before making their next technology investment:

What problem are you trying to solve with this technology? What will happen if you do not solve this problem?

What quantifiable productivity improvements will your company gain from this technology vs. continuing to perform tasks manually?

Will this technology allow us to automate or eliminate internal activities that add costs to our business but do not deliver value to customers or suppliers?

How, if at all, will this technology help you to serve customers better? Will it reduce error rates? Will it improve our self-service capabilities for customers?

If the answers are vague or merely “best guesses,” then your company is unlikely to reap the productivity rewards from your technology spending.

© 2005 Pembroke Consulting Inc. Adam J. Fein, Ph.D. is the founder and president of Pembroke Consulting, a firm that helps senior executives of wholesale distribution, manufacturing and B2B technology companies build and sustain market leadership. He can be reached at (215) 523-5700 or on the Web at www.PembrokeConsulting.com. 

1. “Industry-Level Effects of Information Technology Use on Productivity and Inflation,” Digital Economy 2002, U.S. Department of Commerce. back to story

This article originally appeared in the January/February 2005 issue of Progressive Distributor.

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