PRODUCTIVITY GAINS

PRODUCTIVITY GAINS

By extending the benefits of computers to the exchange of information between suppliers, manufacturers and retailers, business-to-business electronic commerce will enable companies to achieve measurable productivity gains.

The electronic flow of information between businesses could grow rapidly if the Internet becomes the primary low-cost network for such transactions, according to a study by John Wenninger, an assistant vice president at the Federal Reserve Bank of New York.The use of business-to-business electronic commerce will help companies to better direct the production, inventory, and distribution of goods and to adjust prices and production strategies more quickly, Wenninger noted. The main advantage of the electronic exchange of information between individual companies that are linked along the supply chain is improved speed and accuracy, which can lead to greater efficiency, Wenninger found.

Productivity gains will be crucial if the U.S. economy is to remain healthy and continue to expand in a non-inflationary environment. Federal Reserve Chairman Alan Greenspan told Congress last month that half of the growth in the economy in the past three years could be attributed to productivity, which has been increasing at a rate of 2 percent a year. The big question is whether productivity growth of this magnitude can be sustained.

Strong economic growth, led by productivity, and falling unemployment need not be inflationary. Edward Yardeni, chief economist at Deutsche Bank in New York, was one of the first to forecast the rebound in productivity based on a number of factors, including the aging of the baby boomers, increasing competition in global markets, computer technology and outsourcing.

He reasoned that as the baby boomers aged, the supply of relatively cheap, younger workers would decline. Consequently, employers would have to find ways to increase the productivity of their more-experienced, maturing workers.

Another driving force behind the rebound in productivity, Yardeni said, has been the increasing competition in most markets around the world, resulting from political and economic deregulation. Facing increased competition, business managers realized they had to restructure their operations to increase productivity, and to offset the loss of their power to raise prices.

In competitive markets, companies must innovate or suffer poor earnings performance. Only innovations can command high profit margins. The fastest-growing sector of the economy is technology, and Yardeni suggested the second fastest is take-out. As baby boomers have become more committed to their jobs, they have started to outsource their dinners.

Outsourcing was a concept that was first promoted by Adam Smith in The Wealth of Nations, Yardeni noted. Let the butcher, the baker and the candlestick maker produce what they do best. Globalization maximizes the opportunities for the division of labor. The Internet enhances this process because any producer can find customers anywhere in the world. The Internet, therefore, promises to fuel the rebound in productivity well into the foreseeable future, Yardeni concluded.

As supply chains are integrated, increased efficiencies will allow companies to boost profit and shareholder value. The benefits already have been significant and there are more substantial gains to come. Logistics operations are not only a way to save money by reducing costs, but a key to growing a business by getting its goods to market faster than the competition.

Meanwhile, since it is easier to check prices on the Internet, there is less variability in pricing. It is easier to spot a bargain. These developments are helping to keep inflation in check, which will keep interest rates low and the economy humming.