Training and Productivity Issues in Manufacturing Industry

Introduction
The manufacturing industry has seen considerable fluctuations in the turbulence of the global recession. It has been
one of the key growth drivers of the Indian economy in the post-2000 period. However, a cyclical slowdown began
in the industrial sector in 2007-08 and was compounded by the twin global shocks in 2008-09. Economic Survey
2009-10 notes that the effects lingered on briefly in the current fiscal, but growth rebound is now amply evident.
GDP growth has clearly revived in the second quarter of the current year 2009-10 and the industrial sector has
emerged as one of the prime movers of the process.
The recent indicators show evidence that there is a turnaround in the industry performance. The demand for durables
is also showing positive increase. Though the manufacturing industry has come up with high end automation
facilities, the competitive advantage has still been the manpower behind this. Organizations that are keen to become
the giant players in their respective industry are marching ahead to empower their manpower with the competence of
skills. Thus the importance of industrial training is being highlighted. The direct impact of training is seen in
productivity of employees. In recent years trade unions, employers and policy makers have emphasized the
importance of skill upgrading of workers and lifelong learning in order to cope with increased pressures induced by
technological change and globalization (e.g.; European Commission, 2007). While there exists a large literature
showing that the accumulation of human capital through the general education system plays a crucial role in
explaining long run income differences between rich and poor countries, much less work exists on the effects of
training provided by firms, often requiring specific skills from their workers. This paper tries to evaluate some
experiences of training and productivity related issues in the manufacturing industry.
Productivity is a key contributor to income levels. One of the key drivers of productivity is a skilled labor force. The
quantity and quality of skills and the match of these with labor market requirements are critical for improvements in
productivity and sustainable economic growth.

Training: Is it an essential investment in manufacturing industry?

Industry training is essentially an investment in human capital, the economic benefits of which can be thought of as
being shared between:
• The individual trainee, through higher wages (a proxy for labor productivity)
• The firm, through enhanced profitability (a proxy for capital productivity)
• Society as a whole, through “externalities” (returns over and above the private returns to the individual trainee or
firm who pays for the training).
The possible positive externalities of training include the spill-over effects of training on the productivity of a co-
worker. Negative externalities include a firm not training for fear of workers being poached. One consistent finding
from the literature is that those groups of people who gain the most from training, such as those with lower
educational achievements and economic status, in fact receive the least amount of training. This implies that returns
from industry training could be relatively high, as the previous educational achievements of industry trainees tend to
be quite low. When policymakers consider government’s investment in industry training, they need to evaluate
possible market failures, including externalities. Government’s investment in industry training should, theoretically,
equal the difference between the socially optimal and the private optimal level of training.

Productivity- Defined:
Productivity is the ratio of output to one or more of the inputs used in production - labour, land, capital (plant,
machinery and equipment) etc. Labour productivity is defined as: output/labour inputs, and is therefore a partial
productivity measure. Productivity provides us with a way of looking at how efficiently production inputs are used
in an industry and in turn an economy.

The revival of interest in economic growth has renewed the question of the differences in productivity among
countries and regions. Productivity, in the form of technical progress and production efficiency, is actually seen as
the major source of economic growth and convergence of the economies. This question has justified that a growing
research has focused on the manufacturing industry, as the place of innovation and the engine of growth.
Productivity in the manufacturing industry is also central to international competitiveness, as developing countries
face the increasing pressure of globalization. High productivity gains have been seen as a powerful means of
improving export capacity and diversifying the economy.

Firm level relative productivity of labour: A global comparison

Source: Report by CERDI, Université d’Auvergne, France

* Ranking is from countries with the most productive firms to the ones with the least productive firms.

Enablers of Productivity:
The UK has been in the forefront of benchmarking activities for many years. This has been driven by the perceived
need to improve productivity and thereby become more competitive. A report published by BCS management
services highlights the focus on productivity. The report has also identified the role of management policies in
enabling productivity.

Customer Focus
In both the manufacturing and service sector higher labour productivity is linked to higher complaints. There could
be a number of potential reasons for this. Firstly, higher added value companies are better and more thorough at
recording complaints and secondly customers of higher value added companies may have higher expectations and
are more likely to complain. It is a long-held belief that the customer is the final arbiter in product and service
quality and that a high level of complaints is bad for business. What if high value added companies encouraged
complaints and used the feedback to shape product and service offerings? This could explain why higher added
value companies seem to have more complaints than their weaker performing counterparts.
The research also showed that companies with a ‘medium’ level of performance in terms of rejected orders seem to
be most productive. Once again, this is perhaps counterintuitive. It is needed to keep in mind that higher productivity
companies are, perhaps, working in bigger batch sizes, which could mean that they are working with fewer orders
and customers overall. This could lead to order rejection rates appearing higher. However, as order rejection rates
increase even further, labour productivity sharply decreases, no doubt as a result of reworking required.
Another finding was that as the proportion of new customers grows productivity falls. This negative impact on
productivity is almost twice as bad in service industries (27% reduction) as it is in manufacturing (14% reduction).
There are two observations on this situation. Firstly, it is more labour intensive to recruit new customers, with more
sales people required and possibly more technical development staff as well.
Secondly, it could be argued that new customers are an investment in the future and this intuitively makes sense.
However, the results seem to suggest at some point a business has to reap what it has sown and look to maximise the
relationship that it has with its existing customers. Constantly pursuing new customers may not always be
beneficial.

People Satisfaction
The proportion of graduates seems to be more important in the manufacturing sectors than in the service sectors,
where companies with the highest proportion of graduates see a decreasing amount of labour productivity. More
generally, there is a negative correlation with lower productivity being associated with a high incidence of early
leavers (those leaving within 6 months). Also, the report shows that the higher the proportion of new employees to
total employees the lower the rate of labour productivity. For manufacturing, productivity is similar for companies
with a low or medium number of new employees, showing this issue is less sensitive in this area, possibly as a result
of automation and clearly defined processes. However, as the rate of new starters continues to increase,
manufacturing becomes more sensitive to it as even highly automated process driven activity begins to suffer. As
would be expected similar results apply to staff retention.
Surprisingly, there is little impact on manufacturing productivity between companies with low and high levels of
absenteeism. This could be as a result of automation, which minimises the impact of staff not turning up for work.
Conversely, there is a positive correlation between absenteeism and productivity in the service sectors, where
companies with high levels of absenteeism are much more productive than those with a low level. Again, we need to
ask what is ‘cause’ and what is ‘effect’? It might be that companies with higher levels of productivity suffer higher
absenteeism rates. This could be as a result of extra pressure placed on people working to high unsustainable targets.

Continuous Learning and Improvement

It is a widely held belief that organisational performance is maximised when it is based on the management and
sharing of knowledge, within a culture of learning and improvement. While the data supports this concept for the
manufacturing sector it is not the case in the service industries.
Manufacturers that provide a high number of days for staff training enjoy productivity that is 24% better than
manufacturers that provide very little time for staff training. The opposite is true in the service sector, where
companies that provide significant time for staff training have 18% worse productivity than those that provide little
time for this activity.
There is a similar curious pattern in terms of training expenditure. Manufacturers that spend heavily on staff training
enjoy 47% better productivity than those that spend little. The same is true in the service sectors. While those that
spend heavily on staff training enjoy better productivity the difference is only 13%. It is worth noting that in the
service sectors, productivity falls with training expenditure between those spending least and those spending at the
medium.
What this potentially tells us is that in the service sectors, the matter of training and development is far from clear-
cut. Days out of the office on training courses have a negative impact on productivity. However, companies
spending the most on training see a worthwhile gain in productivity.

Partnership with Suppliers

Substandard supplies have a big impact in manufacturing industry. The reduction in quality supplies increases the
risk of reduction in productivity. This shows the importance of supplier relationships. Old models of ‘customer’ and
‘supplier’ relationships need to be re-thought, with a partnership approach adopted. Companies involved in a supply
chain should have mutually beneficial relationships that are built on trust and value to both parties.

Investment for Innovation and Growth

The research looked at the impact of investment in equipment, in products, in market development, in R&D and in
marketing. As with any investment, the results may not be immediately seen and, therefore, it is not always easy to
determine the effects of the investment. However, there are several areas of note. Firstly, innovative companies in
the manufacturing sectors (those generating income from new products or markets) see an earlier benefit from
investment than those in the service sectors, where innovation usually results in a drop in productivity. Secondly,
marketing expenditure destroys value in the service sectors, at least in the short term. Thirdly, R&D expenditure in
the manufacturing sectors has greater immediate benefits than it does in the service sectors where productivity falls,
at least initially.
Company Structure
The research looked at the number of people directly involved with the production or provision of a product or
service. It is not always easy to compare this between companies, as there is uncertainty as to whether things such as
transport, or sales and marketing are direct or indirect. However, it is interesting to note that the fewer directs there
are, the better the level of productivity. The ratio of employees to managers was the final area that was studied.
Conventional wisdom suggests that management structures should be flatter, with fewer managers and a greater
number of people reporting directly to them. The evidence from the research suggests that this is not necessarily the
case. The most productive companies within the Benchmark Index database, both in manufacturing and service
sectors actually have a lower ratio of employees to managers.

Impact of Training on Productivity:

There have been several studies made world around to find the impact of training on productivity related issues.
Some studies were able to quantify the results where some of them could only provide information on behavioral
issues.

Australian National University made an attempt to study training and productivity in US manufacturing industries.
The study found evidence for positive and decreasing effects of on-the-job training in human capital accumulation,
and therefore productivity. In the cross section, training was found more effective in industries with higher human
capital. The effects were quantitatively important, and were increasing substantially when the endogeneity of
training decisions was addressed. On-the-job training on the other hand had no effects on industrial productivity.
Another study which is important in the present context is made by Jozef Konings et al in Belgium. Their paper on
the impact of training on productivity and wages made a few conclusions which are encouraging to the
manufacturing industry to move towards higher investments in human capital. Belgian firms are obliged by law to
submit a supplement to their annual income statement which contains information on various elements of training,
such as the proportion of workers that received training, the number of hours they were trained and the cost of
training to the firm. The study found that there exists considerable sector heterogeneity in the impact of training on
both productivity and wages. Sectors with the largest effects of training include the Chemical sector and Rubber and
Plastic sector.

Moretti (2004) focuses on plant level productivity gains from education, but he has no data on firm provided
training. He finds that plants operating in cities that experience a large increase in the share of college graduates
have higher productivity gains than in cities that have a lower increase in college graduates, but these productivity
gains are offset by wage increases. Bartel (1995) studies how firm provided training affects wage profiles of workers
and job performance scores in one large firm and finds that training has a positive effect. Dearden, Reed and Van
Reenen (2006) analyze the link between training, wages and productivity at the sector level using a panel of British
industries. They find that raising the proportion of workers in an industry who receive training by one percentage
point increases value added per worker in the industry by 0.6% and average wages by 0.3%.

The standard result of Becker (1964) is that if workers are not credit constrained, training investments are efficient
and as such, government intervention is unnecessary or should be directed to the credit markets. However, with
imperfect labor markets and a compressed wage structure, there could be underinvestment in training from a social
point of view.

The U.S. Department of Labor (DOL), Employment and Training Administration (ETA) prepared a report titled
‘Addressing the workforce challenges of America’s Advanced Manufacturing Manufacturing Workforce’. The
report details the efforts around former President George W. Bush’s High Growth Job Training Initiative (HGJTI)
for Advanced Manufacturing. The report identified workforce challenges facing manufacturers; of which Training
stood as the first challenge for innovation.

The Workforce Challenges Facing Manufacturers:

1. Training for innovation: maintaining the competitive edge. The capacity for innovation is the primary
competitive advantage for U.S. manufacturers in the global marketplace. Thus, employers need workers who are
continually focused on improving processes and products.
2. Enhancing the flow of new workers: “pipeline development.” Too few young people consider the possibility of
manufacturing careers and are unaware of the necessary skills. Similarly, the K-12 system does not adequately
impart the skills needed or educate students about manufacturing career opportunities.
3. Confronting a negative public image: Manufacturing confronts a negative public image, characterized by:
“moving offshore,” “declining,” “dirty,” “low pay,” etc. Consequently, too few highly skilled workers seriously
consider manufacturing careers.
4. The challenges of employing workers from “alternative sources”: immigration. The manufacturing workforce
is increasingly foreign-born, meaning that English language skills are becoming a prominent challenge for the
industry. Employers have experienced difficulty finding English as a Second Language (ESL) programs that suit
their particular needs.
5. Hiring employees with adequate foundational skills and competencies: Manufacturers experience difficulty
finding workers with basic employability, academic and technical skills and competencies. Moreover, the industry
does not have accepted standards for industry-wide skills and competencies.
6. The added challenges to small and medium-sized manufacturers: Many small and medium-sized
manufacturers do not have human resources departments or enough experience organizing training programs for
their workers.
7. Matching training providers to business needs: There is difficulty finding training providers that align with
employer needs, for example: coordination of work and training schedules, transportation of workers, and finding
programs that meet specific technology or process needs.
8. The challenges to incumbent worker training: Rising health care and other costs limit the resources available
for incumbent worker training. The Workforce Investment Act (WIA) performance standards may discourage
incumbent worker training because wage gain compliance is difficult to measure. The standards are easier to meet
by training unemployed workers. Additionally, businesses face the dilemma that once trained, the worker will leave.
9. Training the Supply Chain: Manufacturers increasingly need integrated training programs for workers
throughout the supply chain.

Training and Productivity Issues: The Indian picture of Manufacturing Industry

The global competitiveness index 2009-10, has placed India as the 46 th ranked country among 133 other countries.
The report also states that this is among the factors for competitive advantage for investments. The country needs
concentrate on the infrastructure enhancement to expand its economic wings. At the same time, the manufacturing
firms should concentrate on internal changes aimed at improving efficiency and reducing costs. For E.g. a CII-
Mckinsey study identifies the difference in labour productivity across multiple sectors between India and China
from 10% in TV assembly to 360% in footwear.

Steel industry:
Each year, the Indian prime minister announces labor awards to workers employed in government departments or
public sector undertakings. In 2003, the most prestigious of these was awarded to a team of 5 from the Rail and
Structural Mill of the Bhilai Steel Plant in recognition of their outstanding contribution in the field of productivity".
The Bhilai Steel Plant (BSP) is one of the five integrated steel plants of the Steel Authority of India Limited (SAIL),
the company that has dominated the Indian steel sector since it was set up in the 1960s. SAIL is largely state-owned
with 86% of equity and voting rights held by the Indian government. Until the early nineties strict licensing rules
restricted entry into Indian industry and SAIL, and many other manufacturing companies, survived with limited
changes in technology and negative total factor productivity growth.

Automobile industry:
Sharma (2006) analyses the performance of the Indian auto industry with respect to the productivity growth. Partial
and total factor productivity of the Indian automobile industry have been calculated for the period from 1990-91 to
2003-04, using the Divisia -Tornquist index for the estimation of the total factor productivity growth. It was found
that the domestic auto industry has registered a negative and insignificant productivity growth during the last one
and a half decade. Among the partial factor productivity indices only labour productivity has seen a significant
improvement, while the productivity of other three inputs (capital, energy and materials) haven’t shown any
significant improvement. Labour productivity has increased mainly due to the increase in the capital intensity, which
has grown at a rate of 0.14 per cent per annum from 1990-91 to 2003-04.
Mining, construction and capital goods industry:
As per the capital goods industry report, The employee productivity is fairly low as compared to international
companies. Sales per employee on an average for the industry was found to be Rs.35 lakhs but for the manufacturing
companies it was found to be Rs.32.5 lakhs. This is the reason why though the cost of wages per employee is very
low at Rs.4 lakhs, the lower productivity of the employee offsets the advantage. The value added per employee was
only Rs.11 lakhs. The global standards for employee productivity i.e. sales per employee is in the range of Rs.160-
175 lakhs. There are certain advantages which Indian companies have in terms of lower cost for labour and design
engineering. This can be leveraged to provide cost efficiencies and support strategies aimed at selling comparable
equipment at lower prices. Hence productivity will have to improve significantly.

The cost of production needs to be further reduced and hence companies need to work upon human resources
management to improve employee productivity. This can be tackled by proper training of manpower, proper
utilization of the right talent in the right place which is presently lacking in the manufacturing industry. However the
percentage of workers who received company sponsored training on quality concepts in the past two years varied
from 20% to 100% in some companies. The average number of hours per person of training provided was
approximately 16 hours per person varying from 6 hours to 35 hours per person per annum. This is also evident
from the fact that all the companies spent on training and the majority of them (60%) spent more than Rs.1 lakh per
month. Only 40% of the companies spent less than Rs.10 lakh per annum on employee training.

Textile and jute industry:

The labour productivity in the Indian clothing sector is one of the lowest. The labour law provisions retain the
potential for last minute disruption of export orders fulfillment. The labour laws need to be restructured to create a
productive and productivity – conducive environment to ensure smooth production. The 11th five year plan projects
an expected 15 percent rise in productivity level which will result in the requirement of man days per metric tons of
jute products to come down to 35. The plan also proposes that the Government needs to consider the demand of
labour intensive sections of the textiles industry, such as the made-ups and garmenting industry, to increase the
hours in a shift to twelve from nine at present, and also increase the working hours in a week to sixty hours from
forty eight, in order to cater to peak season requirements of customers as well as to compensate for lower labour
productivity.

The Working Group has estimated the incremental manpower requirement at 17.37 million, comprising of 12.02
million direct and 5.35 million indirect in the ancillary industry. The maximum requirement is estimated in the
clothing and apparel sector. The current training infrastructure in the country consists of engineering colleges,
polytechnics, IITs, and agencies like Apparel Training & Development Centers (ATDCs), Powerlooms Service
Centers (PSCs), Weaving Service Centers (WSCs), Textiles Research Associations (TRAs), ITIs, Private Vocational
Training institutes etc. The working group has proposed the infrastructure upgradation in the existing ITIs and
Polytechnics, Setting up training centers on Public Private Partnership (PPP) mode and a Permanent Training-cum-
Monitoring Council.

Conclusion:
The manufacturing industry has been in considerable fluctuations in the turbulence of the global recession. It is
concluded that providing training to the employees in the manufacturing sector has considerable impact on the
productivity and performance of manufacturing sector.

References:
1. Escribano, Alvaro., and J. Luis Guasch (2005), “Assessing the Impact of the Investment Climate on Productivity
Using Firm-Level Data: Methodology and the Case of Guatemala, Honduras and Nicaragua”, World Bank Policy
Research Working Paper, WPS3621, World Bank, June
2. Enablers of Productivity- Small Business Service (2004)
3. Fostering Excellence: Challenges for productivity growth in Europe - McKinsey & Company (2004)
4. Leplagne, Patrick and Leonie Bersted (1999) The Role of Training and Innovation in Workplace Performance,
Staff Research Paper Australian Productivity Commission
5. Alan Barrett and Philip O'Connell. Does training generally work? The returns to in-company training. Technical
Report 99{51, Institute for the Study of Labor (IZA), August 1999.
6. Dearden, L., Reed, H., & Reenen, J. V. (2006). "The Impact of Training on Productivity and Wages: Evidence
from British Panel Data." Oxford Bulletin of Economics and Statistics 68(4): 397-421.