Assume labor costs are 17.5% of revenue per vehicle for General Motors. In union negotiations during the late 1990s, GM attempted to cut its workforce to increase productivity. Together with the job reductions they planned, GM officials hoped to make the company's North American operations fully competitive with its U.S. and Japanese rivals with respect to total costs. Why are productivity gains so important to GM?
With increasing competition from its business rivals in U.S and Japan, the profit margin for GM is reducing. When there is a squeeze in the margin, the only way to stay float in the long run is to reduce cost of operations. With labor cost being about 17.5% of the sales revenue, it is a significant portion of the total cost. Even a reduction of 1% on the labor cost would increase the profit of GM by millions of dollars. Therefore it is ...
With the assumption that labor costs are 17.5% of revenue per vehicle, this solution explains why productivity gains are so important to GM.