PRODUCTIVITY

The Economic System Transforms

Inputs to Outputs
Inputs Process Outputs

Land, Labor, The economic system Goods and

Capital, transforms inputs to outputs Services
Management at about an annual 2.5%
increase in productivity
(capital 38% of 2.5%), labor
(10% of 2.5%), management
(52% of 2.5%)

Feedback loop
 Measures of Competitiveness

Productivity

GDP (Gross domestic product) growth

Market capitalization

Technological infrastructure

Quality of education

Efficiency of government
 What is Productivity?
Productivity is a common measure of how well
resources are being used or a measure of the effective
use of resources usually expressed as the ratio of
output to input

Output
Productivity =
Input
Productivity measures are useful for
• Tracking an operating unit’s performance over time
• Judging the performance of an entire industry or
country
 Why Productivity Matters

High productivity is linked to higher standards of
living

As an economy replaces manufacturing jobs with lower
productivity service jobs, it is more difficult to maintain high
standards of living

Higher productivity relative to the competition leads to
competitive advantage in the marketplace

Pricing and profit effects

For an industry, high relative productivity makes it
less likely it will be supplanted by foreign industry
 Typical Impacts
Impacts of Productivity
Improvement

As productivity improved Costs were decreased Wages increased

Parts per man hour Cost per unit decreased Average worker's annual cash
compensation increased
$2.25
115

110 $2.00 27000

105 26000
$1.75
100 25000
95 $1.50 24000
Year A Year B Year C Year A Year B Year C Year A Year B Year C
 Measures of Productivity

Partial Output Output Output Output

measures Labor Machine Capital Energy

Multifactor Output Output

measures Labor + Machine Labor + Capital + Energy

Total Goods or Services Produced

measure All inputs used to produce them
 Examples of Partial Productivity Measures
Labor Productivity Units of output per labor hour
Units of output per shift
Value-added per labor hour

Machine Units of output per machine hour

Productivity Value-added per machine hour

Capital Units of output per dollar input

Productivity Dollar value of output per dollar input

Energy Units of output per kilowatt-hour

Productivity Dollar value of output per kilowatt-hour
Typical Measures of Productivity in Different
Organizations
Restaurant Customers (meals) per
labor hour
Retail store Sales per square foot

Chicken farm Lbs of meat per lb. of feed

Utility plant Kilowatts per ton of coal

Paper mill Tons of paper per cord of

wood
 Example 1
7040 Units Produced
Which productivity
Sold for Rs1.10/unit measures can be
calculated?
Cost of labor : Rs1,000
What is the
Cost of materials: Rs 520 multifactor
productivity?
Cost of overhead: Rs2,000
 Solution 1

MFP = Output
Labor + Materials + Overhead

MFP = (7040 units)*(1.10)

1000 + 520 + 2000

MFP = 2.20
 Example 2
5,500 Units Produced
Sold for Rs35/unit
500 labor hours are used
Cost of labor: Rs25/hr
Cost of raw material: Rs5,000
Cost of overhead: 2 x labor cost
What is the labor productivity?
What is the multifactor productivity?
 Solution 2: Labor Productivity

5,500 units/500 hours = 11 units/hour

Or we can arrive at a unitless figure:

(5,500 units*Rs35/unit)/(500 hours * Rs25/hr) =15.4

 Solution 2: Multifactor Productivity
MFP = Output
Labor + Materials + Overhead

MFP = (5,500 units)*(35)

(500hrs.)*25/hr. + (5000) + 2*(500hrs.)*25/hr.

MFP = 4.52
 Example 3

You have just determined that your service
employees have used a total of 2400 hours of labor
this week to process 560 insurance forms. Last week
the same crew used only 2000 hours of labor to
process 480 forms.

Which productivity measure should be used?

Answer: Could be classified as a Partial Measure.

Is productivity increasing or decreasing?

Answer: Last week’s productivity = 480/2000 =
0.24, and this week’s productivity is = 560/2400 =
0.23. So, productivity has decreased slightly.
 U.S. Multifactor Productivity

U.S. Multifactor Productivity

(1975 - 2007)
MFP (Index, 2000 = 100)

115
110
105
100
95
90
85
80
75
77
79
81
83
85
87
89
91
93
95
97
99
01
03
05
07
19
19
19
19
19
19
19
19
19
19
19
19
19
20
20
20
20
Year
 Productivity Growth

Current productivity - Previous productivity

Productivity Growth = ×100%
Previous productivity

Productivity Growth is a key factor in a country’s rate

of inflation and the standard of living of its people
 Example 4

Labour productivity on the ABC assembly line was 25

units per hour in 2013. In 2014, labour productivity was
23 units per hour. What was the productivity growth
from 2013 to 2014?

23 - 25
Productivity Growth = ×100% = −8%
25
 MFP Growth - Non
Non--Farm
MFP Growth in the Private Non-Farm Business Sector

5
Average Annual Percent Change

3
1,9
2
1,1 1,3
1 0,4 0,6

0
1948-1973 1973-1990 1990-1995 1995-2000 2000-2007
MFP Growth - Manufacturing
 Measurement Problems

Quality differences may distort productivity

measurements

External elements may cause an increase or
decrease in productivity

Precise units of measure may be lacking

Technological differences may lead to
misleading results.
Productivity improves when firms:

Become more efficient

Downsize

Expand

Retrench

Achieve breakthroughs
 Factors Affecting Productivity (1 of 3)

Standardization

Technology

Use of Internet, fax machines, e-mail, computerized
billing, software - Technology

Searching for lost or misplaced items

Scrap rates

Labor turnover, layoffs, new workers

Safety

Bottlenecks
 Factors Affecting Productivity (2 of 3)

Methods

Design of the workspace

Incentive plans that reward productivity

Capacity utilization

Location Methods Quality

Layout

Inventory
Technology Management

Scheduling
 Factors Affecting Productivity (3 of 3)

Shortage of general workers and other

technical workers

Equipment breakdowns

Part and material shortages

Inadequate investment in training & education
of the employees
 Key Steps for Improving
Improving Productivity

Develop productivity measures for all operations

Determine critical (bottleneck) operations

Develop methods for productivity improvements

Establish reasonable goals

Get management support (make it clear that management
supports and encourages productivity improvements.)

Measure and publicize improvements

Invest on labor force by training and education
(Don’t confuse productivity with efficiency)
 Quality Vs Productivity
♦Businesses often measure productivity by output
during comparable time periods. For example, if
you produce 1,000 units one week and 1,100
units the next, you are more productive the
second week.
♦Efficiency relates to the quality of your work,
which might include creating output with less
waste, using fewer resources or spending less
money.
 Quality Vs Productivity
♦If Vikram sold Rs 10,000 worth in May but spent
Rs3,000 on travel expenses,
♦ While Raj sold Rs9,000 in May but did so over
the phone,
♦Raj is more efficient and creates a larger profit.
♦ This is a case in which increased efficiency
justifies decreased productivity.
 Bottleneck Operation

10/hr
Machine #1

10/hr
Machine #2
Bottleneck 30/hr
Operation
Machine #3
10/hr

Machine #4 10/hr
 Service Productivity

Typically labor-intensive as in teaching

Frequently individually processed (doctors)

Often an intellectual task is performed by
professionals (medical diagnosis)

Often difficult to mechanize or automate
(haircut)
 Service Sector Productivity
Service sector productivity is difficult to measure
and manage because

It involves intellectual activities

It has a high degree of variability

A useful measure related to productivity is process

yield
 Productivity in the ‘90s
–
7– US
6– Germany
5– Japan

4–
3–
2–
1–
0–
-1 –
-2 –
-3 – | | | | | | | | | | | |
‘90 ‘91 ‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘99 ‘00 2001
 Improving Productivity at
Starbucks
A team of 10 analysts
continually look for ways to
shave time. Some
improvements:
Stop requiring Saved 8 seconds
signatures on credit card per transaction
purchases under $25
Change the size of the Saved 14 seconds
ice scoop per drink
New espresso machines Saved 12 seconds
per shot
 Improving Productivity at
Starbucks
A team of 10 analysts
continually
Operationslookimprovements
for ways to have helped
Starbucks
shave increase yearly revenue per
time. Some
outlet by $200,000 to $940,000 in six years.
improvements:
Productivity
Stop requiring has improved Saved
by 27%, or
8 seconds
about 4.5%
signatures per year.
on credit card per transaction
purchases under $25
Change the size of the Saved 14 seconds
ice scoop per drink
New espresso machines Saved 12 seconds
per shot