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Critical Analysis of Different Productivity Measuring Approaches
Muhammad Mushtaq Mangat

Abstract
Productivity growth is the endurance point for any firm at micro level and for any
economy at macro level. Even its significance cannot be uncared at individual
levels. Productivity Measurement is the most complex phenomenon. There are lot
of multiplicity in the methods to evaluate productivity. In Productivity Measurement
process the most important factors are, who measure productivity and at what level
the productivity is measured. There are number of ways suggested by different
authors to measure productivity. Many approaches were used to assess productivity
of different firms and industries. There are many factors, which participate in
selection of productivity measurement technique. The range of measurement
approaches and measurement tools is quite large. The choice of an appropriate tool
depends on the nature, scale, level and phase of the investigation. There are even
‘political’ considerations in the selection of Productivity Measurement technique.
Ddifferent people are interested in Productivity Measurement i.e. Economists,
Industrial Engineers, Environmental Engineers and Accountants. Every one has his
own reasons to study productivity. They have diverse purposes in studying
productivity. Due to such diversification in their objectives they cannot use a
common tool to assess the productivity. So every group defines its own tools to
measure productivity. Furthermore, in the same group different authors proposed
different approaches to measure the productivity. This is mainly due to the changes
in business practices with the passage of time, and this is also due to difference of
opinion. This opinion difference is basically because of the academic approaches,
which are based upon variation in their Productivity Measurement objectives. The
subject matter of this paper is to have a critical analysis of different Productivity
Measurement approaches and models. It is found that there is no consensus on
any model rather there is a lot of variation in the models and every model is
suitable in a particular state of affairs. It is mandatory that model assortment should
be given due importance since productivity measurement objectives can only be
achieved by using a most apposite model.
 2

Classification of Productivity Measuring Approaches

It is a popular game among the researchers to find a suitable measure for denoting
the effectiveness of a set of manufacturing circumstances and using this measure
to monitor the changes (Stark & Bottoms, 1980, p. 100). From the above statement,
it is clear that selection of method in productivity measurement is the most crucial
step. This problem has been explained well by McKee (2003, p. 138) in the following
words, “The range of measurement approaches and measurement tools is quite
large. As with other productivity tools, the choice of an appropriate tool depends on
the nature, scale, level and phase of the investigation. There are even ‘political’
considerations”.

As it has been discussed in previous pages that there are number of ways to
measure productivity. Varity of opinions is a proof that many people are concerned
to this topic due to its significant nature in current business scenario. There are
number of factors affecting selection of any Productivity Measurement
approaches. Theses may include, objective of Productivity Measurement, level of
Productivity Measurement, data available for Productivity Measurement etc.
However, it is a fact that there is no consensus on any approach. In the following
pages there is a detailed discussion about the Productivity Measurement
approaches and models proposed by different authors. These models, approaches
and methods will be studied analytically.

Summary of Models by Singh et al

Singh; Motwani & Kumar (2000, p. 238) have collected different models used for
Productivity Measurement from literature and summarised all collected models in
the following table, which tells about the review of researches by various authors to
measure productivity in diverse times of dissimilar industries.

Table: 1
Summary of the Empirical Research on Productivity Measurement
Author(s) (year) Approach Industry/applicati Findings
 3

on setting
Fuller (1988) Index Computer Shows how using a
measurement manufacturing productivity loss index
helps in enhancement of
productivity and quality
Sengupta (1988) Linear Manufacturing A robust minimax
programming approach is used to
measure productive
efficiency
Conrad (1989) Econometric Manufacturing An extended framework
models was developed to reflect
the efficiency aspect of
productivity gaps in
terms of cost
disadvantages
Pritchard et al. Index Manufacturing A new approach to the
(1989) measurement measurement an
enhancement of
organizational
productivity is described
and evaluated.
Omachonu et al. Index Technical A methodology for
(1990) measurement installation measuring the
productivity of
Engineering and
Technical Organizations
is developed
Yousif and Dale Index Hardware Total and partial
(1990) measurement manufacturing productivities are similar
when calculated using
fixed and current prices.
Pritchard and Econometric Manufacturing Inclusion of non-
Roth (1991) models linearity’s result in more
valid productivity
composites
Brown and Gobell Index Research centres An R&D measurement
 4

(1992) measurement manufacturing system can be as

complex or as
streamlined as the
manager’s wish.
Mady (1992) Index Manufacturing An integrated, easy-to-
measurement implement model for
presented.
Ray and Sahu Index Manufacturing Suggests a combination
(1992) measurement of production factors
with which management
would b able to increase
the productivity of the
products.
Radovilsky and Econometric Electronic The main loss factors in
Gotcher (1992) models equipment terms of productivity
improvement are
ineffective technology
design, overstocked
inventory, poor product
quality, and wrong work
standards.
Prasad (1993) Index Aircraft industry Uses the M-type
measurement interactive procedure (a
time series method) to
monitor the labour
productivity index over
time.
Bogetoft (1994) Linear Manufacturing An illustration of how to
programming design optimal incentive
schemes based on DEA
frontiers is provide.
Eimuti and Index Production planning The traditional
Kathawala (1994) measurement and control productivity index
measurement show a
positive impact of
 5

participation in the
employee productivity
Saha (1994) Index Chemical Describes the
measurement application of TOPROD,
a software for total
productivity
measurement in a
chemical processing
plant
 6

Sueyoshi Linear Telecommunicatio A new DEA application to

(1995) programming ns production analysis in different
time periods is illustrated
Balvers and Economic OECD countries Offers insight into the robust
Bergstrand models and US cross-sectional relationship
(1997) between relative per capita GDP
and relative national price levels.
Birechee and Economic Corn, processing, Increasingly
Konzelmann models steel, paper and aggressive/adversarial labour
(1997) coal relations characterize firms that
have chosen to follow the low-
wage path
Ford and Economic Technical institute Created a unique program and
Pittman models CI mode that has significantly
(1997) increased productivity and
profitability
Wilson (1994) Linear Manufacturing Presents an improved goal-
programming oriented method for Productivity
Measurement and monitoring
of performance of manufacturing
firms

Jablonski Index Broadwoven Technological change was the

(1995) measurement fabrics most important factor underlying
multi-factor productivity growth
in the period
Kieiner et al. Economic Manufacturing Production-related residual
(1995) models grievances was correlated to
increased managerial monitoring
(that had a positive impact on
productivity)
Nohria and Econometric Production An inverse u-shaped relationship
Gulati (1995) models planning and exists between organizational
control slack and innovation in
multinational firms
Sueyoshi Linear Telecommunicatio A new DEA application to
(1995) programming ns production analysis in different
time periods is illustrated
7
 8

It is clear from the above table that different researchers used different models to
assess productivity. Selection of the most appropriate tool is the most difficult step
in measuring productivity. It depends upon many factors, such as, type of industry,
objective, data available etc.

Salinger and Productivity Measurement Models

Salinger (2001, p. 09) has divided Productivity Measurement models into three
following categories:
 Growth models attribute increased economic growth either to accumulation
of physical or human capital or to increase efficiency of their use
 Neoclassical growth models view technical progress as exogenously
determined
 Endogenous models consider a range of structural and policy variables which
contributes to differences in technology endowment, investment, and
knowledge accumulation among countries

As it has been said in previous pages that productivity increase is possible in many
ways, even war is a tested way to have more than others. It gives prosperity to the
nations. In addition, in some cases sudden availability of some natural resources
like oil can increase income of the nation. But it will not increase labour productivity
of the nation. Even then this will give prosperity to the nation, which is one of the
desired outcomes in improving productivity.

Parsons Approaches
Parsons (2001, p. 21) has given following seven different methods/approaches to
measure productivity, applicable to service sector and white collar/knowledge
worker environment:
o Control panels
o The objective matrix-OMAX
o The balance scorecard
 9

o Economic value Added-EVA

o Productivity Accounting
o Integrated Business Control

Parsons has also proposed the following model, which is similar to Sumanth model.

Total Factor Productivity (TFP) = Gross Output_________________________

Labour+ capital+ Materials+ Energy+ Others

Lawlor Classification
Lawlor (1985, p. 10) has put forward two main classes of productivity measuring,
macro and micro. According to Lawlor (1985, p. 10), “macro is used for comparison
between countries while micro is used for individual organisations, units or for
employees”. Lawlor (1985, p. 10) has further given more kinds of productivity
measuring. Summary of Lawlor’s (1985, p. 10) work is given as under:

1-Simple and compound measuring

Where outputs and inputs are stated in the same terms will be called simple
measuring and where output and input are stated in different terms is called
compound measuring e.g. sale per employee

2-First and second order indices

First order measurement involves only one index and second order involves two
where connected indices are used. GDP divided by Number of Employees (NE) is
called first order and GDP/NE of one divided by other country’s index is called
second order.

Mawson, Carlaw & McLellan Classification

Mawson; Carlaw & McLellan (2003, p. 06) have classified productivity measurement
approaches into four categories:
• The growth accounting approach
• The index number approach
• A distance function approach
• Econometric approach
 10

Here is a brief discussion on these approaches.

1-Growth accounting
Growth accounting enables output growth to be decomposed into the growth of
different inputs (typically capital and labour) and changes in total factor productivity
are marked. Growth accounting requires the specification of a production function
that defines what level of output can be produced at some particular time given the
availability of a certain level of different inputs and total factor productivity.
This growth accounting approach is based upon following four assumptions:

 The technology or total factor productivity term, At is separable

 The production function exhibits constant returns to scale
 Producers behave efficiently in that they attempt to maximise profits
 Markets are perfectly competitive with all participants being price-takers who
can only adjust quantities while having no individual impact on prices

2-Index number approaches to measuring productivity

The majority of statistical agencies that produce regular productivity statistics use
the index number approach. For example, the Australian Bureau of Statistics
calculates market sector multifactor productivity using the index number approach
based on a Törnqvist index, as does the US Bureau of Labor Statistics.
The index number approach to calculate productivity involves dividing an output
quantity index by an input quantity index to get a productivity index.

3-A distance function based approach

The distance function based approach to measure TFP seeks to separate TFP into
two components using an output distance function. More generally, the distance
function (which is the dual of the cost function) is discussed in the consumer and
production literature where duality concepts are used. In principle, this technique
enables a change in TFP to be decomposed into changes resulting from a
movement towards the production frontier and shifts in the frontier. The output
distance function measures how close a particular level of output is to the
 11

maximum attainable level of output that could be obtained from the same level of
inputs if production is technically efficient. In other words, it represents how close a
particular output vector is to the production frontier given a particular input vector.

The Econometric Approach to Productivity Measurement

The econometric approach to productivity measurement involves the estimation of
parameters of a specified production function (or cost, revenue, or profit function,
etc).
Often the production function is expressed in growth rate and then estimated to
yield an estimate of the parameter that reflects the growth in technological
progress, which is typically interpreted as a measure of productivity growth.
One major advantage of the econometric approach is ability to gain information on
the full representation of the specified production technology. In addition to
estimates for productivity, information is about other parameters of the production
technology is also obtained.
It is not possible to generate this additional information using the growth accounting
or index number approaches. Moreover, because the econometric approach is
based on information of outputs and inputs, so there is a greater flexibility in
specifying the production technology. For example, it is possible to introduce other
forms of factor-augmenting technological change other than the Hicks-neutral
formulation implied by the growth accounting and index number approaches, and to
make allowance for adjustment cost and variation in input utilisation. Within the
econometric framework it is possible to test the validity of assumptions that
underpin the growth accounting and index number approaches because of the
sampling properties of the production technology. For example, it is possible to test
the assumption of constant returns to scale that is often used in the growth
accounting approach to productivity measurement.

Gharneh Classification
Gharneh (1997, p. 31) has classified Productivity Measurement in two main
categories:

1-Production function and index numbers

2-Accounting models
 12

In next lines there is a brief discussion about the classification proposed by Gharneh
(1997, p. 31)

1-Production function and index numbers

Production function is one way to assess productivity and is widely used by
economists. Many models are available to assess the productivity of any production
function.

2-Accounting models
According to Gharneh (1997, p. 31) accounts models are used to assess
productivity. As it has been discussed in previous pages that accountants are more
concerned about different financial ratios.

Ali Classification
Ali (1978, p. 48) has classified different Productivity Measurement approaches on
the basis of different measuring levels. According to him productivity is measured at
four different levels:
• International
• National
• Industry (one sector of economy)
• Firm or organisation

As it has been discussed in previous pages that in Productivity Measurement

process the most important is who measures productivity and at what level it is
measured. Ali (1978, p. 41) has proposed four levels of Productivity Measurement
and at every level different model is used since productivity-measuring objectives
are different.

Mahadevan Classification
As discussed by Mahadevan (2002, p. 05) the concept of Total Factor Productivity
(TFP) growth dates back to the work of Tinbergen, Abramovtiz, Solow, and
Jorgenson Griliches among many others. A significant number of studies thereafter
 13

have often focused on the non-frontier approach to calculate TFP growth; Farrell (as
cited in Mahadevan, 2002, p. 05) first initiated the frontier approach to TFP
measurement. However, it was not so until the late 1970s that this approach was
formalized and used for empirical investigation.
Mahadevan (2002, p. 06) has classified measuring of TFP into two main approaches:
• Frontier approach
• Non-Frontier approach

Figure 1
Classification Productivity Measuring approaches
 14

Source: Mahadevan, 2002, p. 06

In the above-mentioned figure the main categorization is on the basis of frontier

and non-frontier approach. It is imperative to discuss these two terms used by
Mahadevan (2002, p. 07). According to Mahadevan (2002, p. 07),
frontier refers to a bounding function, or more appropriately, a set of best
obtainable positions. Thus a production frontier traces the set of maximum outputs
obtainable from a given set of inputs and technology, and a cost frontier traces the
 15

minimum achievable cost given input prices and output. The production frontier is
an unobservable function that is said to represent the 'best practice' function, as it
is a function bounding or enveloping the sample data. The frontier and non-frontier
categorization is of methodological importance since the frontier approach identifies
the role of technical efficiency in overall firm’s performance whereas the non-
frontier approach assumes that firms are technically efficient.

Figure 2
Technical Progress
 16

Above figure shows that F1 and F2 are production frontiers. Movement from A to B is
referred to the accumulation of knowledge due to the learning-by-doing process,
diffusion of new technology. AB represents technical inefficiency. Shift B to C represents
technical progress and TFP growth.
Non- Frontier TFP Growth = Technical Progress
Frontier TFP growth = Technical progress + Gains in technical efficiency
(Shifts of the production frontier) + (Shifts towards Frontier)

The Non Frontier Approach

Output Growth = Input Growth + TFP Growth
TFP Growth = Output Growth - Input Growth
In this model the non-frontier approach uses the standard growth accounting framework.
According to the model the output growth is equal to the sum of input growth and the
TFP growth, while TFP growth is the difference between output growth and input growth.

Average Response Function

According to Mahadevan (2002, p. 10):
The non-frontier parametric estimation takes the form of the average response function
using data from the production or cost side. By far the most important aspect of this
method is the selection of an appropriate functional form that ranges from the simple
Cobb-Douglas to the more flexible Tran slog form.
In this regard following example can be taken:
Log Y = a + b Log K + c Log L
Where Y = valued added output
K = capital used
L = labour employed
b = capital share and c = labour share.
In this equation Cobb-Douglas production function has constant returns to scale
technology and thus b + C = 1 alternatively,
Equation can be expressed as:
Log (Y/L) = a 1 + b 1 Log (K/L)

Figure 3
Average Response Function
 17

The Frontier Approach

According to Mahadevan (2002, p.09):
Unlike the non-frontier approach, the frontier approach is able to decompose output
growth not just into input growth and TFP growth; it goes a step further to decompose
TFP growth into various efficiency components such as technical progress and gains in
technical efficiency.

It can be expressed in the following way:

Output Growth = Input Growth + TFP Growth

= Input Growth + Technical Progress + Gains in Technical Efficiency

In this equation the horizontal axis represents a typical industry's inputs and the vertical
axis represents its output. More explanations are required to use the figure for
 18

explanation. Mahadevan (2002, p. 13) has expressed his views and the summary of his
observation is as under.

Assume that the industry faces two production frontiers, F1 and F2, the ‘efficient
production technologies' for periods 1 and 2, respectively. In period 1, if the industry is
producing with full technical efficiency by following the best-practice techniques, its
realized output will be y1* at the x1 input level. However, because of various
organizational constraints, such as the lack of a proper incentive structure for workers,
the industry may not be following the best-practice techniques and therefore may be
producing at less than its full technical efficiency. This means that the realized output y1
is smaller than the maximum possible output y1*. Technical Efficiency, TE1, measures
this gap by the vertical distance between y1 and y1*. Now, suppose there is technical
progress due to the improved quality of human and physical capital induced by policy
changes, then an industry's potential frontier shifts to F2 in period 2. If the given industry
keeps up with technical progress, more output is produced from the same level of input.
Therefore, the industry's output will be y1** from the x1 input level, as shown in the
Figure 1.4. Technical progress is measured by the distance between two frontiers (F2-F1)
evaluated at x1. Now the industry is generally induced to increase its levels of input in
period 2. Its maximum possible output is y2** for new levels of input x2, and its realized
output is y2. The vertical distance between y2 and y2* is measured as TE2. Therefore,
the contribution of the change in technical efficiency to output growth between the two
periods is measured by the difference between TE2 and TE1. When this difference is
positive, it means that there is improvement in the industry's technical efficiency and
vice versa. Positive difference shows improvement in the industry’s technical efficiency
and negative difference shows otherwise.
 19

Figure: 4
Decomposition of output growth and TFP growth

.4
 20

This is an important model for more accurate policy formulation based on two different
sources i.e. technical progress and technical efficiency. For More details see Mahadevan
(2002).
Boussemart; Briec; Kerstens & Poutineau (2003, p. 391) have made a comparison in TFP
of different countries. Their main focus is on the use of input variables. They have
expressed their views in the following words:

For many years productivity growth measures have identical total factor
productivity growth with a shift in technology. Productivity growth measure have
been evaluated via continuous time production functions on macro or micro
economic data, whereby output variations that are left unexplained by input
variations—the famous Solow residual ----are interpreted as technological
change. In last two decades there is growing awareness that ignoring inefficiency
in input usage or output production yield a biased measure of productivity
growth.

Borger & Kerstens (2002, p. 304) have assessed Malmquist productivity index with
different angle. They have concern about the technical efficiency and plant utilization.
According to them, “one potentially issue ignored in Malmquist productivity index is that
change in technical efficiency may be partially due to change in utilization of production
capacity”.

Bayesian Approach
 21

The Bayesian approach, which is a relatively recent development in productivity growth

analysis, provides robustness to model and parameter uncertainty, thus guarding against
drawing strong conclusions from weak evidence (as cited in Mahadevan, 2002, p. 16).

Figure: 5
Types of parametric production frontiers

This is one of the latest methods that have been suggested in the literature to determine
the growth. The result of this approach has a degree of 95% accuracy.

Sink classification
Sink (1985, pp. 94, 138, 189) has given three types of Productivity Measurement.
Summary of Sink (1985, pp. 94, 138, 189) ideas is as under:
 Measurement is a natural part of analysis, control, evaluation and management
process.

 There are three basic techniques to measure productivity:

I. Normative productivity measurement methodology (NPMM)
II. Multifactor productivity Measurement Model
 22

III. Multicriteria Performance/productivity measurement Techniques

Parsons Approach
Parsons (1980, p. 60) has given a new kind of approach called, “Profitability analysis in
inter-firm comparison: a new approach”. Parsons (1980, p. 60) developed new system
with the help of National Productivity Institute. This measuring model is called “Resource
Allocation Strategists” (REALST).

REALST adopts standard costing approach by using information drawn from income
statements and production record. The results are presented in a variance matrix, which
measures the contribution to profit variance of differences in a capacity utilisation,
efficiency and price recovery. REALST is significantly different from the standard costing
approach. REALST correctly identifies the additional benefit flowing from the firm’s higher
labour productivity, which in standard costing remains buried in the measurement of
resource price variance.

REALST also disaggregates the bottom line profit impact of capacity utilisation, efficiency
and price recovery to show the contribution per resource element. By contrast, standard
costing decomposes only efficiency variance into the contribution per resource element.
This approach was used by the Parsons (1980, p. 06) to assess the productivity of South
African Sugar Mills Industry.

It is quite clear from the above discussion that it is hard to reach a consensus on the
classification of productivity. Different authors classified Productivity Measurement
approaches into different categories. This variation is just because of different objectives
of measuring productivity. Numbers of models are available in the literature to assess
productivity. Every model is suitable depending upon the measuring objectives and
availability of data. Also it depends upon nature of the industry and level of productivity
measuring. Some models have been selected from the host of models for critical
analysis.

Critical Examination of Selected Productivity Measurement Approaches and

Models
 23

In previous pages main discussion was to elaborate different classification of Productivity

Measurement approaches. In this part of chapter main topic of discussion is the critical
analysis of some approaches. It is not possible to discuss all approaches; however most
common approaches or models will be viewed analytically. In previous pages, it has been
discussed in detail that there is a high diversification in Productivity Measurement
approaches and there are many reasons of such diversification. In this part of the chapter
main focus is to view different approaches only proposed for Productivity Measurement
at company level.

Sink Model
Sink (1985, pp. 94, 138, 189) suggested three different methods/techniques to assess
productivity. Sink (1985, pp. 94, 138, 189) has discussed each one in detail (as discussed
in previous pages). In the following paragraphs there is a brief discussion on Sink modes.
1- The Normative Productivity Measurement Methodology (NPMM)
2- Multifactor Productivity Measurement Model (MPM)
3- Multicriteria Performance/Productivity Measurement Technique (MCP/PMT)

1-Normative Productivity Measurement Methodology (NPMM)

Drs. William Morris and George Smith at The Ohio State University (as cited in Sink, 1985,
p. 94) first studied this methodology in 1975. These two researchers headed a project
sponsored by the National Science Foundation in which they tried to develop innovative
productivity measurement systems for administrative computing and information
system. Two important processes used in NPMM are the nominal group technique and
the Delphi technique, both were used to develop synchronised measures of productivity
for a given organisation system.

2-Multifactor Productivity Measurement Model

This model does not incorporate involvement in any major form in the collection of data.
It is more a macroscopic measurement approach. It also structures the input data in such
a way, as to adhere, automatically, to strict general definition of productivity.
 24

3-Multicriteria Performance/Productivity Measurement Techniques

Multicriteria Performance/Productivity Measurement Techniques (also called the
objective) allows for measurement and valuation of performance (the broader issue) or
productivity and most importantly, it provides a mechanism to developing an aggregate
performance or productivity index.

Lawlor’s approach
Lawlor (1985, p. 76) has classified the Productivity Measurement into three categories:
 Micro and Macro: Macro is used for comparison among the countries and
Micro is used for individual organisations.
 Simple and Compound analysis: In Simple Analysis output and inputs are
stated in the same terms while in Compound Analysis other ratios are
used which do not have common terms, like sales per employee etc.
 First and Second order indices: in first order measurement involves only
one index while in second order two connected indices are used.

Lawlor (1985, p. 76) has divided his Productivity Measurement approach into primary
and secondary categories.

Primary Productivity Measurement

As cited by Lawlor (1985, p.76) late Harold Martin studied over many years to develop a
primary measurement of productivity to satisfy the following requirements:
o Attainment of primary objectives
o Explanation of output/input ratio which relates to the primary objectives
Lawlor (1985, p. 77) has specified the earning as primary objective. Lawlor (1985, p. 77)
believes that the earning is the ultimate objective of the firm. More earning means high
productivity. Lawlor (1985, p. 77) has suggested the following formula:
Earning Productivity = Total earning
Conversion Cost

Profit Productivity Index = Total earning – Conversion Cost

Conversion Cost
 25

This model is a simple representation of the total earning and the total expenses incurred
for this earning. Lawlor (1985, p. 77) has further explained that earning is a difference
between sales and cost of sales.

Lawlor (1985, p. 77) has further proposed as expression to make a relationship between
total earning and added value concept. According to him:

T = S-M
AV = S-X
AV= T-PS
Where:
T = Total Earning
AV = Added value
S = Sales
M= Total Material
PS = Purchase Services
X = total outside purchases, including through material “M” and purchased services “PS”
Lawlor (1985, p. 81) has focused on financial performance of the organisation and has
suggested some productivity indicators based upon the financial ratios like, Conversion
Utilisation Productivity as the ratio of the total time or cost incurred on production

Secondary Productivity Measurement

In Lawlor’s Productivity Measurement approach primary measurement rate and quantity

is discussed and in the secondary measurement the potential that can be achieved is
highlighted. The Lawlor suggests this in the following way:
Resource or conversion utilisation = Cd__
C
Where:
Cd = time or cost incurred on productivity and ancillary work
C = Total time available or total conversion cost, which includes idle time He has further
explained that:
Resource Productivity = Ce /C
Where:
Ce = time or cost incurred on purely productive work
 26

C = total time available or total conversion cost, which includes ancillary work and idle
time
Lawlor (1985) has discussed calculation of the potential productivity in detail, which
other authors have not discussed. This approach looks more comprehensive than
previous approaches. The main difficulty with this approach is the availability of the
required information. Collection of such information needs in depth study of the
organisation.

Financial Ratios

Financial Ratios approach is one of the most common, simple and easy ways to assess
the performance of any organisation. Every organisation prepares its annual account
statements and on the basis of these statements its performance is measured. These
ratios are the basic criteria for its share value in stock exchange. One should be clear
that such ratios are indicators of performance and productivity. However this approach is
widely used in the industry and very easy to understand.

Centre for Inter Firm Comparison UK (CIFC) has developed 103 different ratios to assess
the performance. CIFC also publishes Inter Firm Comparison (IFC) of its members. This
IFC helps the individual organisation assess its position in the market. But as it has been
said it does not depict the productivity of the organisation.

Following factors are used to assess the performance of the firms:

1. Total Capital Employed (Fixed assets, Sales Profits)

2. Different Ratios (Current Ratios, Quick Ratios etc)

The main theme of these ratios is to make a relation between different out comes of the
firms. This is a valid way to check the performance of any firm. In account these ratio are
used to assess the present health as well as the future of the firms.
Chen; Liaw Shu-Yi & Chen (2001, p. 379) have proposed following 15 financial ratios to
assess productivity of any firm:

1- After-tax return on net worth

2- Before-tax return on net worth
 27

3- Return on total assets

4- Total assets turnover
5- Inventory turnover
6- Days-inventory turn
7- Fixed assets turnover
8- Net worth turnover
9- Net operating cycle
10- Fixed assets growth ratio
11- Operating income per share
12- Sales per share
13- Pre-tax income per share
14- Earnings per share
15- Effective tax ratio

The above-mentioned 15 ratios cover maximum financial activities; by using these ratios
one can assess productivity of any firm. But note such approaches do not show the real
picture about resource utilisation, rather these ratios tell about the financial health of the
firms.

Unit Cost Approach

As cited by Sumanth (1990, p. 119) this approach was advocated by Adam et al in 1981.
It covers the unit cost of processing and re-works separately. Such measurement is
called Quality- Productivity Ratio (QPR).
It is clear from the above expression that this approach is more concerned with quality
rather than quantity. Firms to assess the quality level not productivity can use it.

Sumanth’s Model, 1990

Sumanth (1990, p. 153) developed Total Productivity Model and defines model as under:

Total Factor Productivity = Total tangible output

Total tangible input
 28

This model is similar to that of Craig and Harris ( as cited by Sumanth, 1990, p. 101).
The only major difference is more clarity about the input and out put. According to
Sumanth (1990, p. 153) there are following five major outputs:
o Value of finished unit produced
o Value of partial units produced (work in process)
o Dividend from securities
o Interest from bonds
o Other income

Sumanth (1990, p. 153) has further explained following five major inputs:
• Human (labour cost)
• Material
• Capital
• Energy
• Other expense
This model is more comprehensive as compared to previously discussed models, and
looks more applicable. Carlaw & Lipsey (2003, p.457) have criticised TFP approach in
another way. They express their views in the following words:
We argue that TFP is not a measure of technological change and only under ideal
conditions does it measure the super normal profits associated with technological
change. The critical driving force of economic growth is not the super normal
profits that technological change generates rather the continuous creation of
opportunities for further technological development.

In the above statement it is obvious that TFP is not a right approach to assess
productivity rather it becomes a base for further technological development. Many
authors have appreciated this model, like Ali (1978, p. 43). But there is one deficiency in
this model and that is the value of intangible output in not accounted for. There is a
common observation that the intangible outputs are also the result of productivity of the
organisation, like, brand value, creditworthiness of the organisation etc.

Färe et al (1994)
 29

Färe & Grosskopf (1994, p. 83) introduced their model to calculate productivity of two
different firms. Summary of their work is mentioned here:

The model introduced by Färe et al (as cited by Färe & Grosskopf, 1994, p. 83)
only requires data on inputs (factors of production) and outputs in the
measurement of productivity. The model allows for multiple inputs as well as
multiple outputs. These inputs and outputs are assumed to be measured for each
firm and for each period. There may be any number of firms and any number of
periods.

In order to give a simple introduction to their model, it is assumed that there are
two firms A and B, which use one input (x) to produce one output (y). Inputs and
outputs are observed at each of two periods t = 0, 1. Thus (x0A, y0A) denotes
firm A’s input and output in period 0. Similar notation is used for the other period
and firm.

In period t = 0, firm A’s average productivity y 0A /x 0A equals 2/3, which is

higher than firm B’s which equals y 0B x/x 0B = 3/5. Although B produces more
output than A, its average productivity is lower, thus B is inefficient when
compared with A. The question is how much inefficient is B? They calculate it by
asking how much more output should B produce to equalize its productivity with
that of A. They have answered this question by proposing a quite complicated
model.

ProMES Measuring Model

Tuijl (1997, p. 295) has put forward ProMES (Productivity Measurement and
Enhancement System) a method by which the essence of group performance can be
made measurable. Pritchard et al. (as cited by Tuijl, 1997, p. 295) developed this method
in the late 1980s for the US Air Force. According to Pritchard (as cited by Tuijl, 1997, p.
295) it has been applied to numerous other countries and other organizational settings.
The measurable group performance serves as an input for regulatory activities of a group
aimed at the continuous improvement of its performance. Therefore, the method is
extremely suitable in providing self-managing teams with necessary control instruments.
 30

The above-mentioned model is most suitable for self-management teams. However this
model cannot be used just to measure productivity of any organisation without fulfilling
its pre–requisites of the model. The main pre-requisite is the level of team skill and
commitment of them.

Diverse Productivity Measurement Models

Afzal (2004, p. 14) has discussed following productivity measuring models in detail:
• Norman and Bahiri’s approach
• Kendrick & Creamer Model, 1965, 1973
• Craig and Harris Model
• Hines Model
• The American Productivity Centre (APC) Model
• Mundel Model
• Taylor – Davis model
• Production Function approach
• Farrell Model
• Bhatia Model (Similar to Kendrick and creamer).
• Ramsay Model
• Tsujimura Model
• Cobb-Douglas Production Function
• CES Production Function or Arrow Model
• Ernst Model

• Bitran and Chang Model

• Faraday’s approach
• Kadota Model
• Husban & Ghobadian Model
• Adam Model
• Mali Model
• Kurosawa Model
• Hershaure and Ruch Model
 31

• IFC Model
• Inter-Factory (Firm) Comparison Dewitt Model

In next lines there is a brief discussion about some of these models. Models will be
viewed critically. Main focus is to elaborate their advantages and disadvantages.

1-Norman and Bahiri Approach

Norman & Bahiri have suggested the following two models/methods to measure
productivity at organisational level:

• Accountant method
• Industrial Engineer method

According to these methods, accountants are mainly concerned with the ratios and their
main focus is to measure the performance of the organisation by using different financial
ratios. These ratios are principally derived from the financial statements. Industrial
Engineers, on the other hand, are mainly dealing with system analysis, resource
utilisation, waste control etc. The main objection to this model is that these are just
performance indicators. Management can use these indicators to make decisions and
they can also help to understand the strengths and weaknesses of the organisation. In
fact these ratios are not the productivity of the organisation. These ratios can be
considered as performance and efficiency of the organisation.

Norman and Bahiri have used these methods to measure partial productivity and ignored
the concern of other people who are also interested in measuring productivity. Also no
solid recommendation can be proposed on the basis of these ratios since these are only
indicators. To conclude, Norman and Bahiri failed to evaluate and criticise productivity
and made no recommendation to improve the productivity.

2-Kendrick & Creamer Model

According to Kendrick & Creamer Model company’s productivity can be measured with
the help of three types of productivity indices.
 32

Total Productivity Index= Total output

All associated inputs
Total factor productivity Index =Net output_____
Labour + Capital

Partial productivity Index = Output_________

One factor of input

Kendrick & Creamer have defined the output as intermediate goods and services. They
have taken labour and capital in total input factors and disregarded other factors like
material etc. They have properly guided about the calculation of TFP and Partial Factor
Productivity (PFP) of material, labour and capital. Their emphasis is that TFP and PFP can
be helpful in improving the productivity after being properly analysed. The main
objection to this model is the method of calculation of TFP and PFP. In both cases they
have used net output as numerator, which is confusing.

3-Craig and Harris Model

Craig and Harris have suggested the following Total Productivity model.

TP= OT_______
L + C+ R +Q
Where:

TP= Total productivity

OT= Total Output
L= Labour input factor
C=Capital input factor
R= Raw material input factor
Q= other miscellaneous goods and services input factor

In the above-mentioned model the authors have taken all input factors. This looks one of
the best or the best applicable model. Husband and Ghobadian (as cited in Afzal, 2004,
p. 33) have used this model. This model is particularly useful for medium size
organisations. There are some deficiencies in this model, like, it does not consider any
technological change or change in the human resource skill. Also notable is that there
are some intangible gains for every organisation and surprisingly no models consider the
intangible factors. Every brand has its value. Furthermore, this value is based upon the
 33

productivity, performance and effectiveness of the organisation. This is in fact an

outcome of all inputs. However this model is the most suitable among all the available
models to assess productivity of a small organisation.

4-Hines Model
Hines (as cited in Afzal, 2004, p. 21) has proposed the following model. It looks modified
shape of the Craig and Harris model. In this model Hines has taken all outputs as
numerator and all inputs as denominator. But the major difference of this model from
Craig and Harris model is definition of inputs and outputs. Hines has defined the inputs in
the following manner:

Oi = ∑ Pj Ui j
Where:
Oi = output for period i (the current period)
Pj = price/ unit for item j in the base period
Ui, j = Number of production units of item type “j” produced in period “i”.

Input has been defined as follows:

Labour input:
Li = ∑ ni, k, Wk,

Where

Li= Labour input measured in period i

ni, k = number of employees in category “k” in period i
Wk = base period wage for category k include fringe benefits
Capital Input:

Ci= ∑ Ci, j where

Ci, j = uniform annual cost for item “j” in period “i”.

This type of capital cost concept is quite different from the book value concept.
 34

There are lots of similarities between Craig and Harris and Hines model except the
formula used and disregard of the miscellaneous inputs by Hines, which is the main
weakness of this model.

5-The American Productivity Centre (APC) Model

APC model is based upon the relationship of profitability with productivity and the price
recovery factor. This model is presented as under:

Profitability = Sales
Cost

= Productivity * price recovery factor

This model makes a link among productivity, profitability and price recovery factor. This
is the most suitable model for the managers who are interested to know about the profits
of the organisation rather than productivity. This model is most suitable for the investors
of the organisation. Due to its comprehensive approach it is much applicable and most
commonly used. This model also helps in reducing the resistance created by the
managers in Productivity Measurement.

6-Mundel Model
Mundel proposed two productivity indices to measure productivity and those are as
under:
PI = OMP/IMP * 100

= Current performance index/ base performance index * 100

PI = OMP/OBP * 100 = Output Index/ Input Index * 100

IMP/IBP

Where:
PI = Productivity Index
OMP = aggregate output of measured period
 35

BOP = aggregate outputs of base period

IMP = Inputs of measured period
IBP = inputs of base period

This model is based upon the growth of productivity with reference to base period. The
main weakness of this model is the method of calculation of productivity and breakdown
of the input and output factors. Also Mundel has not taken into account the intangible
output which has been discussed in case of Sumanth model.

7-Taylor – Davis model

Taylor and Davis have proposed Total Factor Productivity (TFP) model to assess the
productivity of any organisation. According to their model;

TFP = (S + C + MP) - E
[(W + B) + (Kw +Kf). Fb. df]
Where:
S = net adjusted sales
C = Inventory change
MP = manufacturing plant (internal maintenance and repair, internally produced
machinery and R&D)
E = Exclusion and depreciations
W = wages and salaries
B = all benefits
Kw = working capital
Kf = Fixed capital
Fb = investor contribution, expressed as a percentage
df = price deflator

Taylor and Davis have ignored the significance of material as input on the premise by
saying that it is the “fruit” of someone else’s labour. Taylor and Davis have recognized
the significance of raw material, supplies, depreciation and rentals, so they add them to
both outputs and inputs to obtain what they call an “Inclusive Model”, which is a real
total productivity.
 36

8-Production Function Approach

This model can be explained with a simple case in which a production system produces a
single output from two inputs. In this case production of a single product with the
combination of two inputs is called “efficient production function”.

If a curve is drawn then it can be observed that at different points the efficiency is
different. On some points the combination is different since the ratio of these two inputs
varies along the line. At different points efficiency of one input is different from the other
one. Some one can find a point on the curve where the efficiency of these two inputs is
maximum. This approach can be considered as quantitative measurement of the
efficiency of the same output.

This approach is difficult in case of multiple inputs and multiple out puts which are quite
common in the industry. And furthermore this approach cannot be taken as a total
measurement of firm’s productivity.

9-Bhatia Model (Similar to Kendrick and creamer)

Q
P=
W1I1 ,+ W2 I 2 + ...... + Wn I n
Where:
P=Productivity
Q=Weighted index of output of products
I1, I2, …. In =are the indices of various production inputs

W1, W2, W, =weights attached to each input.

In this model productivity is not calculated simply by dividing output with input, rather
every input and output is given a proper weight. There is no set method to give weigh to
any input or output. It is arbitrary and can create much confusion. Different values can
give different results. This is the main weakness of this model.

10-Tsujimura Labour Productivity Model

 37

This model mainly deals with the labour output. It is much useful to assess partial
productivity of labour.

Physical productivity = Q
L
Where:
Q = Quantity of production
L = Labour expenses

11-Cobb-Douglas Production Function Model

Q = ALα K β e λ t

Where
Q = Output
L = Labour
K = Capital

t = Time

e = Exponential rate of technological progress

A, α, β and λ = parameters to be estimated

This is one of the most popular models available in the literature. Many authors have
given their comments on this model. This model is used where time series data is
available. This model cannot be used for this study due to non-availability of time series
data.

12-Bitran and Chang Model

 38

 j  i 
PI =∑w jQ t   ∑ w q
i t
j & J  i & I 
Where:
PI = Productivity index
I = Set of all input indices
j = Set of all output indices
qti = Quantity of input i employed in period t.

Qtj = Quantity of output j produced in period t.

wi = Conversion factor (or weight) of input i.

wj = Conversion factor (or weight) of output j.

i = A subset of I
j = a subset of J

This model provides an index of productivity. In previous model the main concern was to
calculate a ratio of output to input. But in this model the main concern is to get a ratio of
two productivity values of two different periods. This index will tell the real growth in two
different periods. This model is more useful to assess long term tends in productivity
change.

13-Faraday’s approach
Faraday had made a distinction between two different measurements of productivity at
organisation level:

Total productivity: the ratio of output to the total inputs of labour, material and capital
Partial productivity: the ratio of output to any of input such as labour or capital

The major problem with this approach is the ambiguity about the prescribed output and
the method to measure the output. Though he has specifically defined the input like
labour or capital. Yet he has missed the other input factors like energy, rentals, and
many other expenses. In conclusion there is no proper guidance in this approach to
measure the productivity.
 39

14-Kadota Model Where:

P = Productivity of Labour

T −t S
P =U.η= .
T T −t
U = Utilization of Labour time (in man-hours)
η = Efficiency of Labour (in man-hours)
T = elapsed time
t = Idle and unproductive time
S = Standard time accomplished (in man-hour

This model provides labour productivity with reference to their time utilisation against
standard required time to do a certain job. This model also provides the efficiency of the
labour. This is most suitable model in case of a job where much work is done manually,
like loading, un-loading and even in garment manufacturing.

15-Adam Model

P= Actual Pay
Standard Pay

This model gives a true picture of the labour expenses for a certain job. This model is
most useful to assess the labour expenses share in the total cost. In every process
labour cost is estimated and on the basis of all estimations final cost is calculated and
prices are set. This model provides a ratio of actual pay and the standard pay. In
conclusion it can be said that this model is useful to assess partial productivity of
wages/salary.

16-IFC Model
Inter-Factory (Firm) Comparison Dewitt Model
This model helps us estimate the contribution of capital, facilities and personnel.
1. Personnel Productivity
a. Revenue per employees
b. Operating income per employee
c. Net earning per employee
 40

2. Capital Productivity
Following Ratios are suggested
a. Revenue per stockholder’s equity dollar
b. Operating income per stockholder’s equity dollar
c. Net earnings per stockholders’ equity dollar
3. Facilities Productivity
a. Revenue per plant and equipment dollar (invested)
b. Operating income per plant and equipment dollar (invested)
c. Net earning per plant and equipment dollar (invested)

This model is much useful for benchmarking. As it has been said earlier that productivity
is a phenomenon for comparison. There is a need of benchmark for comparison. This
model suggests that comparison is made with other firms in the market. This model is
much useful in finalising the position of the firm in the market. This model provides many
indicators to be compared. With the help of this model one can assess the position of the
firm and consequently this comparison can help management to formulate strategy to
improve its position among the competitors.
 41

Summary of Productivity Measurement Approaches

It is obvious from all above-mentioned approaches that a lot of divergence exists in
different Productivity Measurement approaches. Brummer; Glauben & Thijssen (2002, p.
628) have expressed their views about productivity growth measurement in the following
ways, “in last twenty years, the literature on productivity growth measurement has been
extended from standard calculation of TFP towards more refined decomposition
methods”. No one can be
considered as competent enough to be used for all conditions. Selection of the most
suitable approach mainly depends upon the following factors:
• The purpose of Productivity Measurement
• The resources available for the Productivity Measurement
• Capabilities of the people involved in Productivity Measurement
• Organisational set up
• Types of product and composition of market segments
• Available Data
This was further advocated by Singh et al (2000, p. 240). They have given their
conclusion in the following words:
The theoretical and empirical sections of this paper clearly point out that there is no one
method for every company. However, in general, productivity measurement, as well as
indexes and comparisons, can provide an objective source of information about long
term operating trends, draw attention towards the problems of performance and inspire
a useful exchange of ideas”.

Dwyer (1996, p. 13) has used 12 different Productivity Measurement methods to assess
productivity at plant level. According to him Dwyer (1996, p. 13), “ all measures of
productivity considered are credible in the sense that highly productive plants,
regardless of measure, are clearly more profitable, less likely to close, and grow faster”.
The main point in the above discussion is that if plants were highly productive, no matter
in which way you measure its productivity, results would be same. Every measure will
prove that this plant is making profit, which is the ultimate goal of the plant owners. But
there is a need of careful selection of the tool to assess productivity. And this all depend
upon objectives, capability, and data/resources available. Dwyer (1996, p.53) has
 42

favoured regression models application as a better predictor of plant growth and survival
than factor shared-based measure of TFP.

Malley; Muscatelli & Woitek (2003, p. 98) have done an international comparison
taking TFP into account. They have compared TFP across the G7 countries. According to
them:
This paper has produced new international comparative data on total factor
(multiple-input) productivity measures, comparing various manufacturing sectors
across the G-7 economies. By collecting sectoral data on the use of intermediate
inputs, we can calculate gross output measures of TFP growth, and of TFP levels.
This provides a more accurate view of underlying TFP growth across the G-7
economies. Existing value-added and cyclically unadjusted measures tend to
overestimate TFP growth, and hence the effect of underlying technical progress.
Given the importance of the accurate measurement of underlying productivity
growth for economic policy (see Her Majesty’s Treasury (2000), this emphasizes
the need to obtain more robust measures of TFP, by using the techniques
outlined in this paper.
From the above statement it is clear that TFP model has been used for assessing
TFP level across the different economies and finally TFP of different economies
was compared. In this report same model has been used to asses TFP of the
PKGI. But comparison is not possible since there is no TFP data available of any
other industry.

Conclusion
Productivity Measurement is one of the most important functions in any
organization. This function is carried out in different ways in different firms. There
is a strong need of accurate, suitable and most appropriate method for accurate
results. Selection of tool to assess Productivity Measurement is the most sensitive
and crucial step. There is no single or agreed method to measure productivity. It
depends upon the objectives, data available, and circumstances that which tool
or method can give better results. But this is sure that firms fail in selection of an
appropriate model cannot measure productivity in a better way and finally they
 43

cannot improve since improvement is based upon the accurate measuring of the
current position. However, firms can use different models at same time to assess
productivity from different angles.
 44

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