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2003 Annual Report—Federal Reserve Bank of Dallas

A Better Way
Productivity and Reorganization in the American Economy

Working Smarter, Not Harder

For Burlington Northern and Santa Fe Railway Co., productivity means hauling more freight per worker. Thousand gross ton miles—the tons of grain, coal and other cargo transported 1,000 miles—reached 24,875 in 2003, up 9 percent in just three years.
The productivity increases come from a range of initiatives, many of them applying new technologies to the old-line business of running a railroad. The Internet-based iPower tool, for example, saves countless hours of paperwork by putting scheduling, tracking, billing and other services at customers' fingertips.
For BNSF, it all comes together at the Network Operations Center in Fort Worth, a cavernous control room from which the railroad's dispatchers direct traffic, maintenance and staffing on the 32,500-mile, 36,500-worker system. Centralizing operations reduces delays, improves safety and saves fuel.

Day in and day out, markets encourage companies to push for greater output per hour. Do the job faster. Reduce inputs. Improve quality. Trim a few cents off the cost of production. The relentless march of productivity comes in myriad ways, limited only by technology and human ingenuity.

Burlington Northern and Santa Fe Railway Co. raised freight-hauling productivity with a computerized command center in Fort Worth. At Wal-Mart Stores Inc., the next leap forward in productivity will feature miniature tracking devices that simplify keeping tabs on inventory. Continental Airlines Inc. increased productivity with hundreds of airport kiosks that allow passengers to get boarding passes without going to ticket agents. Dr Pepper/Seven Up Bottling Group Inc. grew more productive with huge machines that fill and package 800 bottles or 1,500 cans a minute.

Over the past few decades, America's farms, steel mills, automobile factories, power plants, banks and telecommunications firms have all shown strong gains in productivity. These industries and countless others are getting the payoff from a willingness to invest in new plant and equipment that embodies the latest technology. In real terms, nonresidential fixed investment has topped 10 percent of GDP every year since 1996, reaching 13 percent in 2000 before slipping to 11 percent in 2003. Between 1980 and 1995, nonresidential investment exceeded 9 percent of GDP only twice.

Wal-Mart Stores Inc., the nation's largest retailer, sees the next round of productivity gains in radio-frequency identification tags—silicon chips that emit signals for electronic readers to receive and decode.
RFID tags can store information on a product's origin, location, expiration date and cost. New-generation RFID tags are small enough to embed in products and packaging and use frequencies that allow readers to identify individual items assembled in no particular order.
Wal-Mart will require RFID tags on shipments from its top 100 vendors in 2005 and all suppliers by year-end 2006. As a step up from bar codes, RFID technology will make Wal-Mart's inventory management more efficient. With incoming pallets and cases carrying the tags, the retailer will be able to track the exact location and condition of every item in stock.

Companies are getting more bang for their investment buck. Some productivity-enhancing tools—most notably, computing power—keep getting cheaper. Each dollar of investment has greater weight because of new technologies. Handheld devices, wireless communications, faster Internet connections, satellite tracking, virtual reality software and other innovations are becoming more common.

Although strong investment spending coincided with the productivity surge in recent years, more output per hour isn't just a matter of money. Firms bolster productivity through business strategies, both simple and sophisticated, to improve operations and take a bite out of costs.

Mergers eliminate duplication and capture economies of scale. Outsourcing saves money by transferring peripheral functions to more efficient suppliers, allowing companies to focus on what they do best—their core business. By tightening supply chains, companies improve the process of getting inputs from suppliers, tracking inventories and delivering products to customers.

One emerging industry centers on selling productivity solutions. Teleportec Inc. has developed a technology that projects a three-dimensional image, making teleconferencing more attractive as an alternative to business trips. Adrenaline Inc. simplifies outsourcing through its 00Voice service, which allows busy professionals to input data, make notes and arrange schedules via cell phone calls to transcribers.

Following the September 11 terrorist attacks, U.S. airlines scrambled to find ways to reduce costs and make flying more convenient for passengers facing tighter security.
For Continental Airlines Inc. and other carriers, one answer was check-in kiosks that allow passengers with electronic tickets to bypass lines at the counters. Continental installed the industry's first kiosk in 1995 and greatly expanded its program in the past two years. With an industry-leading 779 kiosks in 130 U.S. airports, Continental saw usage double in 2002 and set a record of 650,000 kiosk check-ins that December.
Kiosks mean airlines need fewer ticket agents to load their planes. Forrester Research Inc., which tracks technology industries, found that self-service check-ins cost airlines 16 cents a passenger, compared with $3.68 for ticket counter agents.

In the end, productivity depends on people. America's economy benefits from a highly skilled labor force—well-educated at the top, experienced throughout and highly motivated even at the bottom. Workers with more education and experience are usually more productive, and it shows up in the higher pay they receive.

High wages mean companies need to get the most out of their human capital by improving skills and incentives. Soviet-style central planning used fear and propaganda to push workers to produce more. Early industrialists employed time and motion experts in their quest to raise output per hour. The tyranny of state and stopwatch both proved unsuccessful. Today's managers stress motivation and communication to encourage productivity in an increasingly adaptable and educated workforce. They engage employees in improving quality and production processes. New and better ideas often move from the bottom up.

Beyond improvements in basic education, the United States faces the challenge of retraining workers for new employment opportunities. Rapid productivity growth puts a premium on retraining because progress entails job losses. The faster workers recycle into new employment, the better.

In our highly competitive economy, companies can't afford to relent in their quest to find a better way. More often than not, productivity gains result from working smarter rather than simply working harder.

Sometimes it takes big machines to deliver big productivity. To meet the growing demand for its Deja Blue water, Dr Pepper/Seven Up Inc. invested $7 million two years ago in a mammoth, state-of-the-art bottling line at its Irving, Texas, facility.
Computer-controlled, the line automates the entire process—feeding empty bottles, filling, capping, packaging into cases and loading on pallets. Three or four workers, operating a U-shaped line that stretches nearly two foot-ball fields in length, oversee a process that turns out 800 12-ounce bottles a minute, about double the previous gen-eration of machinery.
The key to faster bottling lies in increasing the number of spouts that inject water or soft drinks into containers. The Deja Blue line contains 96 of them on a rotating drum, up from 60 on less advanced machines.

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