If Bulgaria continues to lag behind the European Union member states in terms of the productivity, technological progress and innovativeness of its economy, it will stay for good at the periphery of Europe”, said the report commissioned by the Bulgarian President to outline the challenges ahead of Bulgaria’s economy until 2010.
The alarming conclusion of this report has been confirmed by the latest report of the International Labor association in its “Key Indicators of the Labor Market, 5th edition”. Bulgaria is ranked last in term of labor productivity compared to other developed countries.
These two statements do not only reflect the macroeconomic situation of the country (which would be problematic enough anyway), they also address the situation of very specific companies, your companies, which are the backbone of the Bulgarian economy.
There are two major reasons why the productivity is low. The first one is the number of hour worked, the second and more important one is the “productivity” of the hours worked. Indeed it is not sufficient for the employees to spend the requested number of hours in the factory (this would be a first necessary step in many Bulgarian companies), the hours spent should also generate added value for the company.
A recent international study about productivity has shown that, in the highly productive countries, on average 20% of the time is spent not generating any added value[1]. This means that a typical employee spends more than 90 minutes per day unproductively. If you extrapolate, based on the 500 employees in your company, you could consider that you have 100 employees too many[2].
The situation in Bulgaria is much more extreme. Since January 2006, Trust & Value OOD has analysed among others more than 10 large Bulgarian companies. The result of more than 60 detailed analyses shows that the average lost time (unproductive time) is above 40%. This translates in employees not generating value about 3 hours per day on average. In some extreme cases, the unproductive time approaches 90%.
We do not say that your employees are doing nothing. This could be one of the explanations. No, in most cases they are just working inefficiently, being trapped in a complex organisation and in unsatisfactory processes. They work a lot, but do not generate enough added value. Sometimes the situation is so bad, that they create negative added value by generating more work for their colleagues.
The situation may still be quite painless. Indeed the salaries are for the time being relatively low. But be careful, with the inevitable salary increases during the next years, it will be more and more difficult to finance such organisations. We hear many customers in Bulgaria complaining that the German customers negotiate prices that are way too low. Indeed, due to the poor productivity in Bulgaria, it is possible that they can produce cheaper in Germany than in Bulgaria.
The average salary in Bulgaria is about 30% of the average salary in Austria, for instance, and the average productivity is also about 30%. This means that it does not matter if I produce in Austria or in Bulgaria as far as the labor production costs are concerned. Due to other factors, the probability is then quite high, that I will chose to produce in Austria, rather to outsource to some partners I do not know yet.
Your choice is simple: you do something about it, or you don’t. If you don’t then the probability is quite high that your company will be acquired by some foreign competitors or will suffer heavily under their pressure and finally be liquidated. Fine you will say, I will just look for a joint-venture partner. That is what a number of companies have already decided. The result is a total impoverishment of the economical tissue of Bulgaria. Most of these international companies are not interested in investing in the long term. They are attracted by tax exemptions and low wages. If these two levers disappear, they will move to the next low wage country.
Why not redesign your organisation and processes first and enjoy the benefits of the productivity improvements. You can always think about selling your company later, a company that has a proven track record.
Trust & Value OOD is the first Bulgarian consulting company aimed at addressing the productivity gap between Bulgarian companies and companies in highly productive countries. We do not use fancy tools. We use a methodology which positive results have been proven over and over in the last 20 years in many counties around the world. This methodology has allowed your competition to move ahead.
During the next months, we will address the following subjects:
Organisation
How should I structure my company to make it more productive and accountable?
Case study:
All the decision making power and the responsibilities were delegated to the CEO of the company. This led to wrong decisions. Moreover the CEO had no commitment from his subordinates to improve the situation of the company. The proposed new organisation dramatically improved the decision processes and helped the top management concentrate on key issues.
Production function
How to measure productivity in the production department? Which indicators do I need? How can I improve my production layout?
Case study:
Due to the wrong sorting of the raw materials, the machine had a productivity of only about 50% (the machine was functioning properly only half of the time). The investment in a new production line could be successfully postponed due to the optimisation of the production processes.
Supporting functions
How can I restructure the supporting function to efficiently support the production department? Indeed the supporting function only generate added value as long as it generate value for the production department.
Case study:
The laboratory was not organised to support the production, but to act as a separate entity responsible of the analysis. Due to this situation, the results of the analyses were often too late for the production to intervene.
Quality management
How to organise my quality department? What is the role of the quality department?
Case study:
The quality management department was responsible for sorting the good products from the bad ones at the end of the production process and not for timely informing the production about the quality situation. As a result a high percentage of the production was lost as waste or re-entered the production process from the start, generating higher production costs.
Sales
How to organise my sales department to proactively generate sales? How can I improve the relationship between sales and production?
Case study:
The sales employees were not responsible for selling. They were just responsible for answering phone calls from the customers and for giving them a delivery deadline. They had no sales goals. Training and an adapted motivation system was introduced to help increase sales.
Purchasing
How should I organise the purchasing department?
Case study:
The purchasing function is basically inexistent in most company at a professional level. What is needed is just being bought without negotiating or looking for the best sourcing opportunity as a result the purchasing costs are way to high.
Employee motivation
How should I motivate my employees?
Case study:
In a number of companies the production employees are paid partially on a variable basis and get a higher salary than their managers. The managers who receive fixed loans are not interested in managing them and increasing productivity. They just fill a number of unnecessary reports.
Information technology
IT systems should only be implemented after the optimisation of the processes has taken place. By starting with the IT implementation, one just generate bad processes and bad IT systems. The IT implementation companies have no interest in optimising your processes. In most cases they just want to adapt them to their standards to reduce your costs.
Case study:
As SAP was only implemented in one company in the group, the internal paperwork could not be eliminated and the processes and organisation optimised.
Costing issues
How to define precisely the production costs of my products and services?
Case study:
As a consequence of the miscalculation of the production costs, most of the offers of the company for complex parts were too high (the company did not get the orders) and too low for simple parts generating financial losses.
The environment (relationship with customers, suppliers and the competition).
Most Bulgarian companies are still competing against their competitors in Bulgaria without seeing that the real danger comes from abroad. The lesson of the watch industry in Switzerland should be applied and collaboration strategies between Bulgarian companies developed before it is too late. Bulgaria needs a strong Bulgarian economy to successfully develop in the future. As Joseph Stiglitz mentioned in his book[3]"Countries often need time to develop in order to compete with foreign companies; to get this time, they may have to protect their nascent industries temporarily".
These are the 10 broad directions in which we can support you.
We would be delighted to get your feedback. Please do not hesitate to send us your examples, suggestions and questions so that we can grow together.
Since January 2006, we have identified an optimisation potential of about 12 Mio BGN in the 7 largest companies we have supported. Do not hesitate to call us for a free assessment of your company. You will not be disappointed.
[1] This calculation already takes into account that the maximum productive time cannot exceed 85%.
[2] (500 employees * 96 minutes)/480 worked minutes per day per employee
[3] Making globalisation work, Josehp Stiglitz, Penguin Books, 2006
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