Nov. 24 (Bloomberg) -- Not far from where Federal Reserve Chairman Ben S. Bernanke grew up, a revolution inside a Campbell Soup Co. plant explains why U.S. corporations are piling up profits -- with little need to hire more people.
Workers such as “Big John” Filmore, a 28-year Campbell veteran, huddle every day with management in situation rooms before their shifts to find ways to save money for the company. Rising productivity is helping boost profit margins here in Maxton, North Carolina, where 858 workers turn out a billion meals a year, and at most of the 243 non-financial companies in the Standard & Poor’s 500 Index with rising profit margins.
Companies slashed 8.5 million jobs during the worst recession since the Great Depression, while also slowing capital investment plans. Campbell, the world’s largest soup maker, DuPont Co., the third-biggest U.S. chemical maker, and United Parcel Service Inc., the world’s largest package-delivery business, are asking workers to help save cash by working smarter with existing technology. A potential cost: Efficiency gains reduce the chances recession-casualty jobs will come back.
“When the productivity growth comes, then watch out because that is when companies start not needing so much labor,” Edmund Phelps, a Columbia University economist and Nobel laureate, said in an interview.
Some 142 non-financial companies in the S&P 500 had improvements in operating margins of three percentage points or more from the final three months of 2007, when the previous expansion peaked, compared with the most recent quarter, according to data compiled by Bloomberg as of yesterday.
Among them were Miami-based Lennar Corp., the third-largest U.S. homebuilder, Discovery Communications Inc., the owner of cable television’s Discovery Channel, based in Silver Spring, Maryland, and Teradyne Inc., a maker of chip testing products in North Reading, Massachusetts.
Growth in productivity, or output produced in an hour of work, averaged an annualized 3.4 percent rate in the five quarters since the 18-month recession ended in June 2009. That is similar to the 3.7 percent gain in the first five quarters after the 2001-2003 so-called jobless recovery.
The efficiency gains have paid off in corporate profits. Earnings from continuing operations of companies in the Standard and Poor’s 500 Index on a trailing 12-month basis as of Nov. 10 have rebounded 23 percent since the fourth quarter of 2007. Sales have declined 9 percent over the same period.
Research by San Francisco Fed Vice President John Fernald and Senior Economist Daniel Wilson shows a striking difference in the sources of today’s productivity gains from those during the recovery at the beginning of the decade.
Wilson concluded that so-called total factor productivity, which may capture gains from innovations in the way workers perform tasks and a more intense use of capital, rose at a 2.9 percent annual rate in this recovery, almost a percentage point more than in the last recovery. The data suggests companies are using the equipment they have more intensively and intelligently, Wilson said in an interview.
“There is a big story in why we in the U.S. have been so innovative,” former Fed Chairman Alan Greenspan said in an interview. “American business for generations has sought ideas from the shop floor. We learn from everybody in the operation, not only from the plant hierarchy.”
Phelps says productivity growth works in long waves. In boom times, companies stock up on equipment. In lean times, they find ways to maximize performance of that equipment.
That’s a headwind for Bernanke, who grew up in Dillon, South Carolina, about 26 miles (42 kilometers) from the Maxton plant. The economy’s 3.7 percent annual rate of expansion in the first quarter was the second-strongest of the recovery so far.
Firing and Hiring
Yet data released Nov. 18 by the Bureau of Labor Statistics shows that while firing has slowed, hiring hasn’t picked up. Job gains from new or expanding businesses were 6.1 million in the first quarter, the lowest quarterly increase since the recession ended. Job losses from closing or shrinking businesses fell to 6.4 million, the smallest on BLS records going back to 1992.
“We’ve seen remarkable productivity gains in the last year or so in the U.S. economy,” Bernanke told Congress’s Joint Economic Committee on April 14. “We don’t anticipate productivity growth will continue at that rate going forward, but if it does, then that may reduce the number of workers that firms need to bring back in order to meet demand.”
Bernanke and fellow Fed policy makers launched a $600-billion second round of Treasury bond purchases November 3 to boost growth and lower unemployment, which has remained above 9 percent throughout the recovery. The jobless rate held at 9.6 percent in October, a sign that companies still have little need to absorb workers who need a job.
The economy grew at a 2.5 percent annual rate in the third quarter. That’s the minimum needed to keep unemployment from rising further, according to estimates by Fed officials this month.
U.S. corporations “live in a perpetual state of recession” because of fierce global competition, said Tom Schneider, chief executive officer of Washington-based consultant Restructuring Associates Inc., which helps boost efficiency at such companies as London and Rotterdam-based Unilever, the world’s second-largest consumer-goods maker. They have “no expectation that this is a short-term blip.”
Unemployment in Robeson County, which hosts the Maxton plant, was 11.1 percent in September. The factory sat near a town center with a dry fountain last month and a clock on the town hall told the wrong time.
Dave Biegger, Campbell vice president of North America supply chain, says the reward for workers’ contributions to efficiency is a stable job and more business.
On a new Swanson Broth line at the Maxton plant, equipment operators, working with the line’s mechanics, have numbered each gasket to avoid confusion and speed up repairs. They’ve cut windows into machinery covers so they can see wear on the belts and replace them before they break, as well as color-coding valve handles to avoid confusion in settings.
Operating efficiency at the Maxton plant has climbed to 85 percent of potential, up from 75 percent three years ago. A one percent increase in plant efficiency in North America equals a $3 million gain for the company. Headcount at the plant has risen to 858 from 812 in 2006, principally because of the new broth line, said Campbell spokesman Anthony Sanzio in Camden, New Jersey.
The 1.7 million square feet of kettles, cookers and pipes process 260 million pounds of ingredients such as chicken, potatoes and carrots every year, turning it into Campbell’s condensed, Chunky, and Select Harvest soups. The plant floor is spotless.
Innovation and Savings
To help offset inflation, Campbell must come up with $80 million in annual savings. Even after that, Biegger says, the company has to find “significant” innovations every year to keep costs flat to declining.
Campbell workers beat the $80-million goal last year, reducing costs by $86 million in the U.S. soup, sauce and beverage businesses, which had sales of $3.7 billion in the fiscal year ending in August.
Biegger’s team is working with Campbell researchers on a project to reinvent the way the company makes soup. In the past, Campbell began with unique recipes, differentiating at the beginning. Now, they start with a common base, such as chicken broth, and differentiate with seasonings, meat and vegetables. The process is similar to the way some automakers use the same chassis for a car and then differentiate with body styles and features later.
“We have to collaborate at the highest levels of the organization right down to the plant floor,” said Biegger, who built a 20-person team whose sole aim is to find cost improvements. “You explain, you teach, you coach, and then you allow the work to evolve through the creativity and commitment of the team. And then we push ourselves to stretch beyond what we believe is possible.”
Before every shift, the Campbell staff steps out of the whine of machinery and the ever-present odor of chicken broth and huddles with management in 11 situation rooms. Performance metrics and repair issues are written on whiteboards and teams discuss how to get fixes done quicker or how to improve a process.
The daily huddles are about “getting everybody involved,” said Filmore, who stands six feet four inches (193 centimeters) tall, as he walked out of the kettles of a soup-blending operation wearing a hair net. “Instead of being told what to do, we get to tell people about our problems.”
Seafood and Beef
Making soup involves constant cleaning and changeover as production responds to shifting demand for everything from clam chowder to vegetable beef. Because seafood can be an allergen, switching from clams to beef can involve more rigorous cleaning. Filmore helped streamline the production sequence to better fit cleaning schedules. Once managers saw how much time it saved, they let operators such as Filmore review all line schedules.
Quarterly earnings reports from other U.S. companies cited productivity gains similar to Campbell’s.
UPS in Atlanta began a faster deployment of systems in its 67,000-truck U.S. delivery fleet. Trucks carry devices that track everything from how many left turns against traffic drivers had to make to how many times a day they started their trucks.
Drivers embraced the system, which helps optimize their routes and deliver more packages per day, while saving 1.4 million gallons of fuel per year when fully operational, said company spokesman Norman Black. While the decision to deploy the system came from management, UPS executives spend time as drivers and with drivers no matter their ultimate career destination.
The company’s third-quarter operating margin increased five percentage points “due to volume growth, yield gains and significant productivity improvements,” Chief Financial Officer Kurt Kuehn told investors in an Oct. 21 conference call. The cost of shipping packages in the U.S. fell 2.5 percent per piece in the quarter, he said.
About one-third of Wilmington-based Dupont’s $1 billion in cost savings last year came from shop floor employees finding ways to make the same products more efficiently, said Donald Wirth, vice president of corporate supply chains and operations.
Production at a Richmond, Virginia, plant that makes Kevlar pulp, used in automotive brakes, rose 25 percent over the last six months as operators set up communication boards that focused teams on solving multiple issues limiting capacity. Wednesday meetings between operators and managers at a paint plant in Brazil resulted in a 70 percent capacity gain as production teams focused on getting batch color right the first time.
“You have to engage the operators and let them take ownership,” said Wirth. “This is a journey. You don’t just jump in and expect everybody to start doing it.”
Greenspan, the former Fed chairman, said the companies need to keep innovating or the current burst of cost-saving will run its course and profit margins will shrink.
“When markets shut down, and capacity expansion comes to a halt, companies direct all of their capabilities toward harvesting untapped cost-saving innovations accumulated during the previous boom,” said Greenspan, who now works as a private consultant in Washington. “We have been experiencing this harvesting for a year or so. You have to ask the question: Are we running out of backlog?”
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