Chicago Boyz

                 
 
 
What Are Chicago Boyz Readers Reading?
 

 
  •   Enter your email to be notified of new posts:
  •   Problem? Question?
  •   Contact Authors:

  • CB Twitter Feed
  • Blog Posts (RSS 2.0)
  • Blog Posts (Atom 0.3)
  • Incoming Links
  • Recent Comments

    • Loading...
  • Authors

  • Notable Discussions

  • Recent Posts

  • Blogroll

  • Categories

  • Archives

  • Service Sector Productivity

    Posted by Carl from Chicago on June 28th, 2015 (All posts by )

    Recently I went on a diet and began ordering specific drinks ordered a specific way – generally gin with a “splash” of tonic (because tonic has carbs and I want to minimize carbs, but need something to cut against the alcohol). This order, however, has become a running joke among my friends because no matter what I order I usually get the same drink every time – which is a “standard” gin and tonic (see below, the wrong order per usual).

    Unlike most people who would shrug it off or get angry, to me this is really an economics issue and not just a “bad order”. When you work with bars and restaurants and other similar industries, if you do anything “outside the norm” your odds of getting it “right” are often less than 50/50. Which leads us to the title of this post…

    One of the most critical and least discussed economic problems today is “service sector productivity”. The world has made immense progress in manufacturing productivity – we expect zero defects or “six sigma” which is 3.4 defects per million. Entire facilities are “lights out” meaning production is automated end-to-end and delivers consistent results (generally with robots).

    Not only have expectations of quality risen immensely, prices of manufactured goods have plummeted. The cost of flat screen TVs has moved from the thousands of dollars to hundreds of dollars, while features and capabilities have improved. My recent 2011 Jetta cost $17,000 and it includes safety features and technology that would have cost tens of thousands, if they had been available at all, 10-15 years prior. Except for bespoke or luxury goods (which intentionally trade at a high price for exclusivity), the cost of manufactured goods has plummeted while the value of those goods in terms of features and capabilities has risen spectacularly.

    The service economy makes up 80% (give or take) of the US economy and workforce. While manufacturing and the farm sector have enjoyed immense productivity gains over recent decades, the service sector remains woefully inefficient and ineffective. A one-in-four chance of getting my order right compares abysmally with 3.4 defects per million.

    If you have a service work force, you expect to pay more each year, likely for the same or less productivity. The entire discussion of raising the minimum wage falls squarely onto the service sector productivity issue – how can businesses grow their profits while paying more for the same quality and quantity of output? They can’t. The businesses are going to have to find another way to compete.

    From my perspective, one of the key elements to improving service sector productivity is the assignment of metrics to measure outcomes, quality of outcomes, and profitability. The service sector industry components with the slimmest profit margins are generally the first to invest in these sorts of concepts (technology and processes), because they are on the razor’s edge of staying in or going out of business. If you go to a restaurant where you can see the kitchen operate, a well-run restaurant is a whirl of well-laid-out and thoughtful productivity. Orders are received and worked on in an efficient manner, and when the meals are completed they are inspected before being rapidly delivered out to customers. I’m certain that they are also looking at scrap and leftover food at the end of the day and working to incorporate this into their menu selections and to optimize what they purchase daily. These restaurants also usually embrace some sort of online ordering system and track their customers through a reward system to lure them back for future specials.

    The secret to “improving” a service sector work force, sadly, is often to automate and eliminate it entirely. Just try to reach a human at a company like Google, Amazon, or Apple. There is a large and automated set of questions to answer and then they direct you to a support forum often which are manned by non-company employees who explain to users how to get around problems with the service or product. Where possible, the scaling of humans and efficiency cannot be matched by algorithms and processes that are created “from scratch” to enable machine learning through capturing core data that can be tracked and aligned with future buying patterns.

    While elements of the service sector may improve in productivity, like tax preparers who utilize online tools to process returns, they also may be overwhelmed by the increasing complexity and sometimes outright insanity of government rules which continue to grow in size and impact each year. The government does not value simplicity, nor does it view its taxpayers and citizens as “customers”, more like willful charges to be monitored, and thus the government influence on the service sector is often malign and increases costs, complexity, and crushes overall productivity.

    The topic of service sector productivity is gigantic and can only be touched in the barest outline by this blog post. However, I would posit a few fundamental assumptions and insights:

    1. Manufacturing productivity has soared over the last 3 decades. However, manufacturing makes up a small component of our overall economy
    2. Service sector productivity lags far behind manufacturing, and makes up 80% of our economy
    3. One common approach to increasing service sector productivity is to automate the process entirely, eliminating human contact. While this resolves the productivity issue, it will have a significant impact on employment
    4. Attempts to raise wages and the cost of staffing (through laws and regulations) will increase the use of automation, exacerbating the problem of #3 above

    Cross posted at LITGM

     

    20 Responses to “Service Sector Productivity”

    1. Mike K Says:

      I remember a Wall Street Journal story from 10 or 15 years ago about this very topic. The example was a corporation travel department which neglected to arrange a visa for an executive who flew to Japan and then, as I recall the story, was supposed to go to Taiwan for meeting but the visa had not been arranged. He could not fix it from Japan. Disaster.

    2. David Foster Says:

      “3. One common approach to increasing service sector productivity is to automate the process entirely, eliminating human contact. While this resolves the productivity issue, it will have a significant impact on employment”

      This is equally true of automation in manufacturing: replacing a batch of manual milling machines with NC or CNC milling machines also reduced employment, everything else (specifically output) remaining the same. Ditto for process improvement changes. Productivity improvement in any segment of the economy will reduce employment if output does not rise or hours worked per employee fall.

    3. Grurray Says:

      Vodka and club soda is completely sugar free and a nice summer mixer. Clean and crisp and free of any unintended consequences.

    4. TMLutas Says:

      The service sector comprises 80% of the economy. The government sector comprises somewhere around 40% of the economy. The vast majority of the government sector is in service jobs. If there is anything I would disagree with in the article, it is in the artificial separation of the government sector from the service sector. The government sector offers the biggest opportunity for service sector productivity enhancement because there is so much low hanging fruit that has not been picked. Here are a few examples:
      There is no comprehensive list of governments
      There is no comprehensive maps of all government jurisdictions
      There is no list of services that each government provides

      Create any one of these and productivity goes way up because we are much better able to navigate and successfully get service from this large piece of the economy.

      David Foster – The cure to reduced employment due to automation is to do more things and drive up labor demand while respecting the price signals of labor and encouraging people to move over from the role of labor to the role of capitalist as much as is practicable.

    5. Robert Schwartz Says:

      It is called Baumol’s Cost Disease. https://en.wikipedia.org/wiki/Baumol's_cost_disease

      His paradigmatic example was that it still takes four musicians 20 minutes to play a string quartet. There has been no increase in the productivity of string quartets, unlike producers of tangible things, like cloth and metal.

      One might ask what about recordings? Well recordings do substitute for musicians at the margin, but it isn’t the same. On the other hand sometimes technology can be a superior substitute for services. Remember exploratory surgery? Fortunately, it has all but disappeared, replaced by CAT, MRI, cardiac catheterization, and other medical innovations.

      Sometimes, the constraint on improving productivity is institutional. Why do colleges still offer lecture courses? Damned, if I know. It may be connected to tenure.

      Often regulation gets in the way. HIPPA has single-handedly kept fax machine manufacturers in business.

    6. dearieme Says:

      “Well recordings do substitute for musicians at the margin, but it isn’t the same.” To my taste it’s better, except for opera and jazz.

    7. IGotBupkis, "Si tacuisses, philosophus mansisses." Says:

      }}} This is equally true of automation in manufacturing: replacing a batch of manual milling machines with NC or CNC milling machines also reduced employment, everything else (specifically output) remaining the same. Ditto for process improvement changes. Productivity improvement in any segment of the economy will reduce employment if output does not rise or hours worked per employee fall.

      The real relevant fact is, if a machine can do it, it’s stupid to have a human do it. Humans have things they do really, really well, which a machine cannot do. We should focus on optimizing this interactive symbiosis/synergy.

      Of course, we’re too busy with our edumacashinal system training new factory worker-drones.

      Since that symbiosis relies on human intelligence, reasoning, and critical thinking, this is a problem. Drones are not fully human.

      If anything is going to be our downfall, it would be that.

    8. CapitalistRoader Says:

      Probably not available in bars: Diet tonic water.

    9. ErisGuy Says:

      In the service sector (and in athletics, oddly enough), companies hire employees without knowing the productivity of the employee. A good employee is underpaid at the start, producing more and better quality output while receiving wages incommensurate with ability. As time passes the wages [i]may[/i] rise until a ceiling is reached or the employee is dismissed as too expensive.

      The incentive is for employers to hire quality employees then fire them before the employee is paid commensurate wages. The incentive for employees is to assert quality, then demand more at the beginning.

      A minimum wage is an attempt to remedy this problem (among other uses).

    10. pouncer Says:

      “Why do colleges still offer lecture courses? Damned, if I know. It may be connected to tenure.”

      From pre-K thru elementary and secondary, the “lecture” mode persists with little productivity gain. The Kahn Academy model is only beginning to make inroads.

      Postal delivery (to include FedEx and UPS) is still labor intensive, though UPS in particular is famed for attempting continuous productivity improvement. (engineers carrying stopwatches running alongside delivery drivers carrying packages to door steps… “knock, don’t waste time looking for the bell…”)

      Public schools and post offices are the largest employers in the nation.

    11. David Foster Says:

      For reference, the sectors that are classified as Service, with the employment in each, can be found here:

      http://www.ftpress.com/articles/article.aspx?p=2095734&seqNum=3

    12. David Foster Says:

      Note that what is considered “service” is a function of the way business activities are structured, as well as the kind of work done. If I’m a manufacturer and have a large internal legal staff (for patent work, etc), I’m pretty sure those employees would be counted as Manufacturing. But if I decide to outsource most of this work, then the employees will go into the Professional and Business Services bucket.

      Similarly, if I operate a network of warehouses to support my manufacturing business, those people will be counted under Manufacturing. But if I decide to sell through wholesalers instead, then the people are either Wholesale Trade or Transportation & Warehousing.

    13. dearieme Says:

      “Why do colleges still offer lecture courses?” It was always a mystery to me, and I was good at it. But again and again some students assured me that they gained far more from lectures than I realised. Of course, if they were paying instead of Mummy and Daddy ……

      The tradition in Arts at Oxford is largely to ignore lectures, and just read lots before you write your essays. Since you will be writing two, or perhaps three, essays a week, that’s a lot of reading.

    14. James the lesser Says:

      I don’t quite understand why, but sometimes I understood something better after a lecture, even though I’d read ahead. Generally in math, and I’m pretty good at that.

    15. Mike K Says:

      “Fortunately, it has all but disappeared, replaced by CAT, MRI, cardiac catheterization, and other medical innovations.”

      The service that has disappeared is autopsies. Nobody will pay for them and so they are just not done. It is a problem teaching medical students. I should add it is also a problem learning about your mistakes but no one wants that.

      Exploratory laps now have a mortality rate of 33% because they are almost all done in major trauma cases where there is no time.

      Lectures are very operator dependent and video courses are siphoning up the really good lecturers. As soon as they figure out how to handle questions, universities will collapse.

    16. Michael Hiteshew Says:

      >> Lectures are very operator dependent and video courses are siphoning up the really good lecturers. As soon as they figure out how to handle questions, universities will collapse.

      I listen to lectures online. My favorites are by David Rogers, who has a PhD in geology and a PhD in civil engineering with a minor in structural engineering. And he’s an ex USMC pilot to boot. He was in private consultancy for about 25 years in California. He’s got fourteen two hour Engineering Geology lectures online which were recorded at Missouri University of Science and Technology for distance learning. He does great lectures, a real natural. I have no doubt I could order the textbook, do the homework and pass the course. I have no doubt 25 years from now there will be interactive labs, online simulations, all sorts of learning tools. You’ll be able to do an entire degree from home, if you so chose.

    17. dearieme Says:

      “I have no doubt 25 years from now there will be interactive labs”: and, if you mean on-line pretend labs, they will be rubbish. You need real experience in lab work. I was always prepared to skip undergraduate lectures, but not labs. My instinct was sound. There’s no reason, though, why there shouldn’t be a few lab centres that different students can circulate through across the year.

    18. Mike K Says:

      I was startled to learn how many lectures my medical students skip. The lecturers put the lectures online as Powerpoint presentations and the students watch them. Why go to class ?

    19. David Foster Says:

      PowerPoint….it is astonishing to me how many people whose jobs are largely *all about* speaking/presenting who are pretty terrible at it, and have obviously never seriously worked at it. This includes much of the professoriate, but it also includes many managers & executives in business. I’ve even known *commissioned salespeople* in B-to-B environments who weren’t very good at presenting, even though they did it all the time and had a strong direct incentive to improve.

      I think it is time to bring Rhetoric back as a fundamental Liberal Arts subject for all college undergrads, the class to include not only speaking/presenting, but also debating, logic, metaphors, logical errors, etc.

    20. Mike K Says:

      “Rhetoric back as a fundamental Liberal Arts subject”

      Sorry but deconstructionism does not permit that.

      Racist !