Flow Time Innovations: The Effect on Productivity and Production in US Manufacturing
Douglas S. Thomas
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. This paper 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. Using data on US manufacturing from 2005 to 2015, 12 regression models are presented and four simulations are developed to examine the impact of flow time on productivity and value added. The flow time for work-in-process goods and that for inventories is examined. 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. A simulated 20 % decrease in work-in-process flow time results in a 1.21 % increase in multifactor productivity and a 2.23 % 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 industrys work-in-process flow time from 2005 to 2015 increased 98.8 %. During this same period, multifactor productivity declined an average of 2.2 %. If flow time had remained unchanged from 2005, multifactor productivity would have increased 1.73 % through other factors, according to our model.