March 7, 2021

Productivity and Ecommerce

Dr Peter Mowforth

Productivity is defined as "A measure of the efficiency of a person, machine, factory, system, etc., in converting inputs into useful outputs. Productivity is computed by dividing average output per period by the total costs incurred or resources (capital, energy, material, personnel) consumed in that period. Productivity is a critical determinant of cost efficiency."The two main items in a business where productivity improvements can contribute are around:

  1. Making or acquiring things that can then, potentially, be sold.
  2. Selling things.

These are the two essential topics for almost any business and it's only the two working together that creates the wealth and profits for business success. One without the other leads to poor productivity or, at worst, business failure. The same principles apply to businesses of all sizes and in all markets.The UK currently languishes near the bottom of the list on international comparisons of productivity.It’s claimed that productivity is Scotland is even worse than productivity elsewhere in the UK. Consequently, over the last couple of years, there have been a number of initiatives aimed at improving our national productivity. Almost without exception, these initiatives have taken an exclusive focus on productivity around manufacturing while virtually ignoring productivity around selling. Logically, this is supporting one half the subject while ignoring the other half. Productivity in manufacture alone fills the warehouse but empties the bank. You only make money when you sell what you have made.Ecommerce is the automation of selling things. It lays the basis for scaling a business and relies heavily on digital online techniques. The website(s) or app where your products get sold need continuously updating on the basis of what stock is available. Within very dynamic markets (e.g. fashion) the products sold change regularly. Each item of stock needs to be named correctly so that customers can find it. You need detailed descriptions so that people understand what they are buying, you need marketing channels that are inventory led and pricing that optimises your chance of making profitable sales. Each and every one of these things can be automated using ecommerce.Some ecommerce businesses may have a catalogue of many thousands of products that they sell all around the world. When the till goes "ka-ching" in Australia, you are asleep. If you make several sales a minute then who would be there to pick, pack and dispatch the items? How could you optimise the margin for each and every product you sell in every country? Doing all of these things automatically lies at the core of business productivity.

Many traditional manufacturers sell to wholesalers who sell to exporters who sell to importers who may sell to consolidators who sell to retailers who sell to customers. Each takes their cut and most of the profits disappear into the supply chain. The traditional supply chain involves a lot of manual processes and a lot of low-paid and mostly low-skilled jobs.When the traditional supply chain can no longer compete, traditional trade slows down and stops. One of the most visible consequences of this is that our high streets close down.Many traditional shops on the Scottish highstreet can no-longer compete. Low productivity throughout traditional supply chains means that customers move away. Customers change to buying from high-productivity channels on the internet because they are cheaper.With ecommerce, you sell direct. This repatriates all the profits back to the manufacturer or ecommerce consolidator. If you can automate the process with smart software and modern business processes then you have a double win. The result is that the UK Government states that UK ecommerce is worth over £560 billion and is growing at 21%.

A growing Scottish e-trade deficit

The challenge in Scotland is that the high-productivity online channels that we increasingly buy from are mostly outside Scotland. Not only are customers moving online, but they are also moving to supply chains where the jobs and resulting wealth is not in Scotland. The traditional high-street Scottish shop would have employed local people, paid local taxes and created local wealth. If the ecommerce shop that replaces it is in England then we have exported jobs, exported wealth, lost tax revenue and contributed to what I would guess to be an ever-worsening Scottish e-trade deficit.As discussed, there are several initiatives in Scotland looking at productivity and how we might improve it. While improving our productivity around manufacturing is laudable, efforts should also be directed to the productivity around the selling of what we make. The key message is that anyone discussing, managing or implementing business productivity should allocate at least 50% of their resources and time to ecommerce.Not doing ecommerce means that you have only addressed half the productivity problem.

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