economies of scale

Productivity, Productivity - Throughput!

In warehouse operations your most important asset is your people, which is also one of your most expensive assets. In management we all want to increase throughput, improve productivity, and drive the cost per unit down. In logistics and supply chain management a major emphasis is placed on increasing volume, or throughput, to reduce the cost per unit to the greatest extent possible. This is referred to as capturing economies of scale; one of the most important concepts in business.

If you can understand what it means, and focus on increasing productivity, you will cut costs and this “savings” can be leveraged to apply to other areas of your business that need a cash bump, or simply be dropped to your bottom line to reflect greater profits.

Whether you’re a new business owner, or a seasoned business professional, economies of scale can be pursued in just about every aspect of business- it is not limited to the manufacturing environment. If there are people involved in a process, you can find a way to improve their throughput. Improving process efficiencies is a great way to drive down costs, with so many other benefits. BUT, err on the side of caution, as how you go about it can have a significant impact on the morale of your people; your most important asset.

Again, how you go about improving productivity can make a HUGE difference.

The WRONG Approach

Having worked for a major retailer in warehouse operations management it baffled (and frustrated) me by the pressure that was driven top-down to increase productivity, “or else.” Not only did this create continuous discomfort, but it felt downright unconscionable at times. My failure to achieve daily planned metrics was a direct reflection of my leadership abilities, and if I can’t meet the metrics, I must not be a good leader - three strikes and “you’re out.” But let’s take a moment to back-up to the daily planned metrics I just mentioned. Annually, and semi-annually, we would review last years performance (productivity metrics), then we would take our planned units for the coming year, we would figure out how many hours we would need (by day mind you)… and then the God’s from the sky would come down and we’d be told to “take the challenge” and cut hours to increase productivity by 8%-11%. Are you kidding me!!? So back to the drawing board we would go, shuffling hours trying to make them realistic and achievable (not very smart SMART goals), hoping more units would come in than expected so that we might actually meet this really bad goal; that we were being held accountable for.

Did I mention we also had a RIF (Reduction In Forces), slashing 75% of our full-time workforce so we could transition to a part-time workforce! Drumming up reliable part-time employees is quite a challenge in, and of, itself. They become even less motivated and reliable when they can’t consistently have hours of employment. Next, because employee engagement results came in so low the higher powers that be decided a weekly schedule needed to be drafted and posted so that our employees knew how many hours they were getting the next week… oh, and by the way, if the units didn’t come in as expected we have to provide at least 24 hours notice that the hours weren’t available and they wouldn’t be needed the next day… How’s that for a morale booster, for all parties involved. Needless to say, I often wondered who was driving this train, asked myself if they had a conscience, and if they actually believed this was a good way to run a business. The bottom line is all these efforts were in pursuit of attempting to achieve greater economies of scale. Fixed costs are fixed, and as a business owner you are going to pay them regardless of your throughput, so by increasing throughput you reduce your cost per unit.

The Moral – Consider with Caution

The above example was a real-world scenario, and it is an illustration of everything that shouldn’t be done in an effort to improve productivity. Next, let’s dissect where things went wrong. The first issue is the goals didn’t fulfill all of the requirements of a SMART goal (Specific, Measurable, Achievable, Realistic, and Time Bound). While the goals were specific and measurable, they seriously failed to fulfill the achievable and realistic checkbox. And this is what sets everything that follows into a downward spiral; putting leadership into position to plummet into the earth like a fiery comet – Ka-Boom.

When evaluating ways to improve productivity, or throughput, take the time to walk through the goals you are trying to set and achieve. Assess the approach you are going to take in implementing the improvement and try to think of the consequences of how these changes will affect your workforce; whether it’s 2 people or 100. With all the data floating around these days, and all the tools available to capture and evaluate the data, setting specific and measurable goals is fairly easy and accessible. The components that require more thought and consideration are achievable and realistic. While a solid leader may be able to rally the troops and motivate them to spearhead an unachievable or unrealistic goal in the short-term, in the long run the troops will begin to dissent and eventually question the validity of the goal.

A goal is made to achieve. The personal gratification that comes with the achievement is the catalyst of further motivation. It serves to piggy-back off the great leadership you exhibit, and it is a tool to promote and foster a team environment. By understanding your people, and taking into consideration the power of an achievable goal, you can leverage human psychology and the desire to succeed.


Opportunities to improve efficiency and capture greater economies of scale exist in all areas of business where people are involved. To capture these improved efficiencies and therefore reduce the cost per unit, improving your bottom line, take the time to consider your approach and ensure you have SMART goals in place. Focus on achievable and realistic goals, as this is the aspect that has the most impact on your people and they are the ones that will be achieving the goal. Again, people are a businesses greatest asset.