Measuring and Improving Productivity

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MEASURING PRODUCTIVITY

The simple formula for measuring productivity can be: Productivity = Units of output / Units of inputs. The formula reflects how any business can get more units of output as per inputs such as labour, capital or raw materials and can be accordingly termed as units of output per labour or per machine or per kilogram of raw materials, etc. The formula however, does not consider the time or hours involved to producing the required output that represents a large percentage of total costs[1].This measure can be used as a guide to improvements. Similarly, productivity measured as output per costs of inputs can be considered to compare the workings of a business with reference to the industry workings. Accordingly, productivity can be measured in terms of volume or units of production as and in terms of market or cost prices depending upon relevant factors that influence the workings of a business. (Please refer to the powerpoint slides for the numerical examples calculated in class). The formula on productivity also reflects output in unit terms though output could mean gross income or sales proceeds of a business[2].

There are broadly three types of productivity measurements and these are explained below:

1.      Partial Productivity

Partial productivity is measured as a ratio of output and a single input is known as partial productivity. Mostly, partial productivity is calculated using inputs such as labour, raw material, capital separately in order to examine changes in every input coefficient to that of output. For example, labour productivity equals output/labour input that enables understanding the effect of increase or decrease in hiring labour and analyse the labour performance over a period of time. Similarly, material productivity is the ratio of output and material productivity that assists in material management, capital productivity is the ratio of output and capital as input that measures the financing requirements of a business and marketing productivity is the ratio of output and marketing activities as input for managing the marketing requirements of a business.

Advantages

  • Ease in obtaining relevant data and easy to comprehend
  • Acts as a good diagnostic measure to identify areas of improvement by evaluating inputs separately across the output
  • Ease in comparing with other businesses in the industry

Disadvantages

  • Does not reflect the overall performance of the business
  • Misinterpreted as technical change or efficiency / effectiveness of labour
  • Management may identify wrong areas of improvements if the focus areas of a business are not examined accurately

2.      Total Productivity

Total productivity equals Output/ combined input of labour and capital. The total productivity definition indicates how productively combined inputs of labour and capital are used to generate output for a business. Total productivity is the indicator of an industry’s capacity to contribute to economy-wide growth of income per unit of primary input.

Advantages

  • Ease in obtaining data
  • Ease in understanding
  • Ease of aggregation across industries

Disadvantages

  • Not a good measure for technological change
  • Other inputs are ignored
  • Net output does not clearly reflect efficiency in the production system

3.      Multi-Factor Productivity

Multi-factor productivity is the ratio of output and combination of all inputs considered by a business. The productivity measured is reflective of overall changes in the firm and/or industry. This productivity captures, technical change[3], economies of scale[4], efficiency and effectiveness of all inputs and tools considered in a business.

Advantages

  • Considers intermediate inputs of a business
  • Measures technical change in an industry

Disadvantages

  • Difficulty in obtaining all the inputs
  • Difficulty in communicating inter-industry linkages and aggregation

IMPROVING PRODUCTIVITY

The results derived from calculating partial, total or multi-factor productivity are either in the form of labour hours or monetary value that may not necessarily be reflective of the actual workings of a business. The productivity values described in monetary terms may change with fluctuations in market (demand/supply) trends and may not imply productive methods of producing or distributing goods and services. Also, productivity measured in the form of labour hours cannot be compared and aggregated industries because of the differences in time spent across industries. The productivity measurement could indicate all or any one of the following[5]:

  • The results can lead to confusion between efficiency and efforts. Efficiency means producing goods or services that require minimal time, money or efforts. Less time and efforts of labour can be considered productive though it cannot justify when few employees shirk work or when few employees do others’ work
  • Productivity results assume quality is constant. Quality of products and services is mostly perceived differently by management in a business, labour, suppliers and end-customers. The numerical values are not reflective of the quality of products and services and are subjective.
  • Diversity in products/services. For example, Britannia Industries produces, biscuits, dairy products, etc that require different processes and the productivity across each product varies within the business
  • Productivity measurement is not reflective of managerial ability and plant layout, product mix, percentage of capacity utilization, age, skill and morale of employees

The aforementioned discussion aims at critically evaluating the formula and measurement for productivity. The measurement of productivity can be useful if the workings of a business are carefully evaluated on the basis of some of the following aspects:

  1. Examining the industry and the workings of the industry, a business represents
  2. Studying the product/service mix of a business
  3. Identifying stakeholders of a business. Stakeholders are any individuals or group of individuals who can affect or are affected by the actions, decisions, policies, practises or goals of a business. Stakeholders can be primary stakeholders that directly influence the operations of a business and include owners, creditors, employees, suppliers, and customers. Stakeholder can also be secondary stakeholders such as media, governments, competitors, lobbyists, courts, public and society that can influence a business though the involvement and interests of these stakeholders depends upon the nature of the industry the business represents[6].
  4. Exploring innovative ideas and activities within a business that leads to creation of better products, processes, technologies or ideas
  5. Identifying risks or uncertainties that could accordingly influence the workings of a business
  6. Determining the financing and investment structure of a business
  7. Evaluating the working conditions and environment of a business

Please refer to the case studies provided in the powerpoint slides for understanding the above mentioned points.



[1] Non-Nonsense Guide to Measuring Productivity, by W. Bruce Chen, Harvard Business Review, January-February 1988

[2] Measuring Productivity, Organisation for Economic Co-operation and Development (OECD), 2001

[3] Technical change describes the extent of change in the amount of output produced from the same amount of inputs

[4] Economies of scale refers to increase in production efficiency that leads to increase in number of goods produced and lowers the average cost of production

[5] The Significance of Productivity Data, by John Diebold, Harvard Business Review, May 2009

[6] Business Ethics: A Stakeholder and Issues Management Approach by Joseph W. Weiss