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Evidence Suggests Increased Flow Time Suppressed US Manufacturing Productivity

AEO WallClock

Between 2005 and 2016, US multifactor productivity declined an average 0.3 % annually. Some debate has ensued about the cause of this decline or whether there even was a decline in productivity. One aspect of productivity that is neglected in the literature is the effect of flow time on production and productivity.  

NIST AMS 100-25 examines the impact that innovations in material, finished goods, and work-in-process flow time have on productivity and production, measured using the multifactor productivity index and manufacturing value added. Findings show that if work-in-process flow time had stayed constant at 2005 levels, multifactor productivity would have grown between 1.7 % and 3.4 % instead of declining 2.2 %. That is, work-in-process time increased enough to suppress US manufacturing productivity.

The results of the report are drawn from using data on US manufacturing from 2005 to 2015. 12 regression models are presented and 19 simulations are developed to examine the impact of flow time on productivity and value added. The results suggest that flow time innovations have a significant impact on multifactor productivity and production. That is, manufacturers can increase productivity through flow time or lose productivity through increases in flow time, as might be expected. The more significant findings are in regards to the magnitude of impact of flow time. A simulated 20 % decrease in work-in-process flow time results in a 1.2 % increase in multifactor productivity and a 2.2 % increase in value added. A simulated 20 % decrease in material and finished goods flow time increases productivity by 0.29 % and increases value added by 2.80 %. These changes may seem small; however, the average industry’s work-in-process flow time from 2005 to 2015 increased 98.8 %.

It may seem obvious that flow time impacts productivity; however, the magnitude of its impact at the industry level is not well understood. In order to prioritize research investments, such as those made at manufacturing facilities and other organizations, there is a need to understand the effects of changing various factors of production. Studies at individual firms provide limited insight, as it is not clear to what extent findings apply to the greater economy. This study aims to understand industry wide implications for changes in flow time.

Created January 24, 2020