The Efficiency Fallacy

Businesses have been trying to improve their efficiencies for over a hundred years, but few have actually reaped the full benefit from it. Here’s why …

The pursuit of efficiency has been one of the major objectives businesses have adopted over the last hundred years or more. In fact, you could argue that this has been a regular aim of management ever since F. W. Taylor determined to improve industrial efficiency at the turn of the 20th century in what came to be known as the “Scientific Management” movement.

Taylor’s “Scientific Management”

Prior to Taylor, work was generally carried out by skilled craftsmen responsible for completing the whole range of tasks involved in the production of things. Taylor broadly broke down these production processes into a series of simpler, inter-related tasks, one feeding into the next. Management then designed the quickest, most efficient way of executing each task and trained a less skilled worker to do it.

The major benefit of this approach was that as each unskilled worker became more proficient at their task, it took them less time to carry it out (i.e. their productivity increased). Add to this the fact that lower rates were paid to the unskilled workers, and the result was that the overall cost per unit produced was reduced, even though the earnings of the individual unskilled workers (now based on piece-meal rates) were increasing.

With such an incentive this idea was eagerly taken up by industrialists of the time, most notably Henry Ford whose early adoption of the method, together with his introduction of the moving production line, played no small part in enabling his company to produce a motor vehicle cheaply enough to be within financial reach of ‘the masses’.

However, by the mid-20th century arguments were being raised against this approach, centring around the ideas at the very core of Taylor’s reasoning.

Efficiency at all costs

Taylor had broken down a start-to-finish process into a series of subprocesses and focussed on each one to improve its efficiency, focussing on the ‘cost per unit of production’ as its measure. The underlying assumption was that the sum of the efficiency gains over all subprocesses in the total process would equate to the gain in efficiency over the whole.

The later views, however, believed this often not to be the case as some improvements in efficiencies in subprocesses could have adverse effects elsewhere either in, or outside of, the overall process. And the eager pursuit of efficiency purely in cost terms had similarly adverse impacts beyond Scientific Management. So, for example: –

  • In production runs, the less frequently you change setup, the less time is wasted in non-productive activities (i.e. setups), which leads to longer production runs being used whenever possible. This was often leading to over production, over stocking and ultimately writing off obsolescent stock (with larger than necessary storage facilities used as a side effect).
  • Executing relatively mindless tasks with an emphasis on number of units produced can lead to a lack of focus and attention on the part of the worker who, while producing more units, produces units of lower and less consistent quality. The impact was being felt later in the process or, worse still, by the customer.
  • Reductions are made in resources needed to service the customer (without a redesign of the process – the reduced resources are simply required to “work harder”), resulting in inferior customer service. (If you’re unsure what this means, think back to the last time you called a business and were left on hold, listening to a looped message telling you how important your call was to them!).
  • When the push for efficiency extends to the purchasing function, the search for the lowest unit price often leads to purchasing in bulk, and over stocking (similar to over production), with wastage due to obsolescence and storage facilities.
  • Likewise, the search for the lowest unit price also can lead to a compromise in quality (not always avoidable through specifications), again causing issues either later in the production process or in the hands of the customer.

So, while each individual subprocess is improving its measures of efficiency, the wastage generated in the business as a whole, together with poorer service to the customer, is offsetting these gains, quite possibly completely.

While this can be managed by exercising stronger control over the process in its entirety, this very rarely happens effectively in practice. When each supervisor/manager of each subprocess is concerned primarily, if not solely, with their own subprocess and is measured on the results within their subprocess (and quite possibly is rewarded on that basis), this encourages a very blinkered, self-centred approach. Plus, it’s easier to manage in this isolationist way in practice as coordination over several functions requires greater thought and effort.

As a consequence, the way improving efficiency has been carried out in practice over the past decades (and to this day, in most circumstances) has had an adverse impact on business profitability, both through inferior customer service and lost customers, and through additional waste, which is exactly the opposite to what the business originally set out to achieve.

A better approach to efficiency

So, how can you increase efficiency and raise profitability? First you must ensure you put the satisfaction of your customer ahead of your efficiency drive, accepting that otherwise what you gain in efficiencies (and probably more) could easily be lost through losing customers and/or your reputation. By all means you should look for efficiencies, because a lower operating cost will help you compete with alternative suppliers and/or boost your profitability, but only look for these efficiencies after your customer service has been safeguarded.

Once this priority has been established and customer service has been retained, you then have to ensure that the ‘silo’ approach to subprocesses is kept in check by taking a more holistic view of the total process. This can be achieved by introducing a mechanism that evaluates any proposed improvements to subprocesses in the context of the whole process prior to them being implemented. This will ensure any adverse consequences that would be felt elsewhere are addressed and avoided before any damage is done.

If you can manage to do this (no mean feat, which is why many are not up to the challenge and take the lazy way out) you’ll be providing a better service all round, and at a lower cost … something very few can achieve, but by no means impossible … and worth its weight in gold!