I.

OBJECTIVES AND SCOPE

Our group aims to address the case study on the Norwegian Salmon Processing Facility in
Trondheim. It also aims to apply concepts and techniques on multifactor productivity measurement
to show how changes in both input and output variables affect the overall productivity, and how
these changes in productivity can be interpreted and used as basis for the companys decision to
upgrade its facility.
Specifically, the group will address the following concerns:
1. Determine the productivity of the processing facility using current equipment.
2. Determine productivity of the plant if the new system were purchased and implemented.
3. Determine the amount of additional expense on equipment that would make productivity of the
two systems equal.
4. Identify the effect of increasing energy costs.
The case study will be limited only to the analysis of NorSal Trondheims salmon processing facility.
Hence, purchase of fish from local sources along the North Sea and selling to customers for
distribution which is beyond the scope of the case analysis will not be considered.
In addition, the following plant process operating conditions will be taken into consideration:
1. The plant operates for five (5) days a week in two shifts only since adding a 3 rd shift is not
possible because the plant is cleaned every 3rd shift.
2. The plant has 30 workers per shift which are paid $10 per hour.
3. The energy costs of the plant are presently $10 per unit.
Under these operating conditions, NorSal Trondheim is considering upgrading its current facility to
increase plant productivity since the factory has enough demand to cover capacity. Although an
equipment upgrade would mean additional cost, a modernized plant would, on the contrary, reduce
energy consumption. It is therefore necessary to compute for the productivity of the current
equipment and the proposed new system. Moreover, the amount of additional expense on the
equipment that would make productivity of the two systems equal, as well as the effect of increasing
energy costs, will also be identified to aid in the evaluation of the case which will be the bases for the
groups recommendation.
The following data are given for the current equipment and proposed upgrade:
1. With the current equipment:
(a) 1,500 pounds of salmon can be processed each hour, and
(b) 1,000 units of energy is used per week
2. With the modernized plant (upgraded facility):
(a) 2,000 pounds of salmon can be processed each hour,
(b) cost to train personnel are assumed to be negligible (since with the updated equipment
being made by the same manufacturer, the production personnel feel that they will be
able to learn to use the new equipment quickly),
(c) cost for purchase of the new equipment will be $10,000 per week (already includes
principal, interest and manufacturers installation of the new equipment), and
(d) energy consumption would by 50%
All computations will be based on the data and operating conditions indicated above.

II. ANALYSES AND DISCUSSIONS

Computations and analysis of the specified objectives are addressed in the succeeding sections:
A. Productivity of the Processing Facility using Current Equipment

Multifactor Productivity =

Output
Labor + Material + Energy + Capital + Miscellaneous

Compute for each component of the multifactor productivity equation:

Output =

Labor =

Energy=

pounds salmon
8 hours
2 shift
5 days
120,000 pounds of salmon
x(
x(
x(
=
(1,500
)
)
)
)
hour
shift
day
week
week

8 hours
30 workers
days
x
($10
) x ( 2dayshift ) x (5week
) = $24,000/week
hour )( worker ) (shift

energy units
$10
= $10,000/week
(1,000
)(
week
energy unit )

Material = 0 (since purchase of fish from local sources along the North Sea is not part of the scope)
Capital = 0 (since the older equipment is already paid for)
Miscellaneous = 0 (since no other additional expenses were indicated other than capital and energy)
Substitute each of the computed components in the given multifactor productivity equation:

Multifactor Productivity of Current Equipment =

Multifactor Productivity of Current Equipment =

120,000 pounds of salmon/week

$24,000
$10,000
+
week
week

)(

3.53 pounds of salmon

dollar

B. Productivity of the Plant if the New System were Purchased and Implemented

Multifactor Productivity =

Output
Labor + Material + Energy + Capital + Miscellaneous

Compute for each component of the multifactor productivity equation:

Output =

pounds salmon
8 hours
2 shift
5 days
160,000 pounds of salmon
x(
x(
x(
=
( 2,000
)
)
)
)
hour
shift
day
week
week

Note that labor is the same for the current equipment and the new system.

Labor =

8 hours
30 workers
2 shift
5 days
x(
x(
x(
= $24,000/week
($10
)(
)
)
)
hour worker
shift
day
week )

Since energy is reduced by 50%:

Energy =

energy units $10

(1,000
)(energy unit )(0.50) = $5,000/week
week

Material = 0 (since purchase of fish from local sources along the North Sea is not part of the scope)
Capital = $10,000/week
Capital for purchase of new equipment already includes principal, interest and manufacturers
installation fee.
Miscellaneous = 0 (since no other additional expenses were indicated other than capital and energy)
Substitute each of the computed components in the given multifactor productivity equation:

Multifactor Productivity of New System =

Multifactor Productivity of New System =

160,000 pounds of salmon/week

$24,000
$5,000
$10,000
+
+
week
week
week

)(

)(

4.10 pounds of salmon

dollar

Taking all indicated factors into consideration, productivity for the new system (4.10 pounds of
salmon/dollar) is higher compared to that of the current system (3.53 pounds of salmon/dollar). This
can be attributed to the combination of increase in salmon processing capacity and decrease in
energy consumption with the introduction of the new equipment. Hence, even though it would cost
the plant roughly $10,000/week for the new system, the productivity is still higher compared to that
of the current system which makes the option of using the new system strategic and sound.
C. Additional Expense on Equipment that makes Productivity of the Two Systems Equal
To determine the amount of additional expense on the new equipment that would make the
productivity of the two systems equal, equate the multifactor productivity of the current equipment to
that of the new system while taking the additional expense or miscellaneous component of the new
system variable.

Multifactor Productivity (Current Equipment) = Multifactor Productivity of New System

120,000 pounds of salmon/week 160,000 pounds of salmon/week

=
$24,000
$10,000
$24,000
$5,000
$10,000
+
+
+
+Additional Expense
week
week
week
week
week

)(

)(

)(

Additional Expense on New Equipment = $6,333.33/week

It can be observed that the amount of additional expense that must be incurred to the new system
($6,333.33/week) for it to equal the current system is approximately more than half (63.33%) of what
it would cost the plant to use the new system ($10,000/week). This proves even more that the new
system is more productive than that of the current system since 63.33% can similarly translate to a
cost advantage.
D. Effect of Increasing Energy Costs
If energy costs doubles:
New Energy Cost: $10/unit x 2 = $20/unit
D.1 Current Equipment:

Energy =

energy units $20

(1,000
)(energy unit ) = $20,000/week
week

Multifactor Productivity of Current Equipment =

Multifactor Productivity of Current Equipment =

120,000 pounds of salmon/week

$24,000
$20,000
+
week
week

)(

2.73 pounds of salmon

dollar

D.2 New System:

Energy =

energy units $20

(1,000
)(energy unit )(0.5) = $10,000/week
week

Multifactor Productivity of New System =

160,000 pounds of salmon/week

$24,000
$10,000
$10,000
+
+
week
week
week

)(

)(

Multifactor Productivity of New System =

3.64 pounds of salmon

dollar

Based on the computations carried out above with the current and new system, even if energy costs
increase in the future, productivity will still be higher with new system compared to that of the current
system. This can be attributed to the 50% energy consumption reduction that will be experienced
should the new system be introduced.