Enhancing Productivity:

Key to Organizational Success

Productivity

• Why Productivity Matters

• Kinds of Productivity

Why Productivity Matters

Higher

Productivity

Lower

Costs

Lower

Prices

Higher

Market

Share

Higher

Profits

Higher

Standard

of

Living

Objectives

1. Define productivity.

2. Describe how productivity is the key to an increase in standard of living.

3. Discuss how the relationship between productivity and the nature of work has changed over time.

4. Explain labor, capital, and material productivity.

5. Calculate productivity in single and multiple factor cases.

6. Discuss important trade-offs among the factors of productivity.

7. Explain the relationship between wage rate and productivity.

8. Discuss ways to enhance productivity.

What is Productivity?

Defined

Productivity is a common measure on how well

resources are being used. In the broadest sense,

it can be defined as the following ratio:

Outputs

Inputs

In other words Early Definition of

Productivity was

output

Productivity = ————

input

• Understanding Productivity

• Assessing Productivity

• The inputs of Productivity

• Enhancing Productivity

• Technology and Productivity

Improvements

Productivity and Related Issues

Understanding Productivity :

• Different Types of Productivities

• Is Money More Important than

Productivity?

• Productivity and the Nature of Work

• Productivity in Manufacturing versus

Service Firms

• The Quality Condition

Different Types of Productivity

Measurements

Partial Measure Productivity

Multifactor Measure Productivity

Total Measure Productivity

Partial Measure Productivity

Partial measures of productivity =

Output or Output or Output or Output

Labor Capital Materials Energy

Multifactor Measure Productivity

• Multifactor measures of productivity =

• Output .

Labor + Capital + Energy

or

• Output .

Labor + Capital + Materials

Total Measure Productivity

Total Measure Productivity = Outputs

Inputs

or

= Goods and services produced

All resources used

Sinks model of productivity based on

Unit cost

L + C + M + Q

• Total unit cost = O

where L / O = Labour unit cost

C / O = Capital unit cost

M / O = Material unit cost

Q / O = Other input unit cost

Sumanth’s total productivity model,

based on Product oriented indices

• It is based on total productivity of the firm

• TPF = OF/IF

where

OF = Total tangible output of the firm and

I F = Total tangible input of the firm

Sumanth’s total productivity model based on

Product oriented indices cont…

• N N

TPF = OF/IF = Oi Ii

i i

where

OF = Total tangible output of the firm

Oi = Total tangible output corresponding to product i of

the firm and

IF = Total tangible input of the firm

Ii = Total tangible input corresponding to Product i=Sigma j of Iij

Sumanth’s total productivity model based on

Product oriented indices cont…

• ( j ) = ( H, M, C, E, X )

where H = Human input

M = material input

C = Capital input

E = Energy input

X = Other expenses input

N = Total number of products produced

Is Money More Important than

Productivity?

In improving the standard of living,

productivity is more important than

money because productivity determines the

output while money measures the value of

the output.

Productivity and the Nature of Work

Worker Activity Measure Method of Improvement

University

faculty

Educate students

and/or

educate them

better

Student credit hours taught. Problems

with this measure are that it does

not take into account what

students have learned or other

duties of faculty, including

curriculum design, research, and

service.

Increasing class size leads to

more student credit hours

Assigning more sections per

faculty leads to more student

credit hours

Distance learning provides

access to education that might

not otherwise be available

Innovative teaching methods

can improve the quality and/or

the quantity of what is learned

Postal

worker

Oversee the

operation of an

automatic

sorting

machine

Number of pieces of mail sorted in an

hour

Equipment improvements that

speed up the sorting process

Job training

Case

worker

for

children

services

Manages the care

of children in

foster homes

Number of cases under management.

Problems with this measure are not

consider the degree of difficulty

of the cases or the quality of the

service provided.

Information systems,

Communication technology

that gives access to foster

parents, service providers, and

support services

Productivity in Manufacturing

versus Service Firms

The reasons that productivity gains in the

service sector have lagged behind the

manufacturing sector :

•Fear of job loss by manufacturing workers,

pressurises them to work harder and smarter.

•Macroeconomic factors, such as the low

savings rate.

The Quality Condition

• If an organization produces more output with the same level of resources, but the quality of the output is lower, productivity may not increase.

• If firms find ways to make a product with higher quality using the same or fewer resources, productivity may increase.

Assessing Productivity

If the automatic machine can make 200,000

roofing nails in 40 hours, then

200,000 roofing nails

Machine Productivity = —————————

40 machine hours

= 5,000 roofing nails per machine hour

Now, the machine is able to produce 210,000 nails in the same

40-hour period. Productivity has increased from 5,000 nails

per hour to 5,250.

Change in Productivity

Percent Increase in Productivity = —————————

(100)

Productivity Prior to Change

5,250 - 5,000

Percent Increase in Productivity = —————— (100)

5,000

= 5 percent

Assessing Productivity--Continued

The Inputs of Productivity

In an economic sense, the inputs are:

• Managers

• Workers

• Externally purchased services,

Productivity measurement should

also include:

(1) Multiple inputs with different economic

values.

(2) Multiple outputs with different

economic values

The Key Factors of Productivity

• Capital Productivity

• Material Productivity

• Important Trade-Offs

• Trading Capital for Labor

• Trading Capital for Material or Energy

• Substituting Materials for Labor

Examples of productivity measurement

• Labour productivity

• Multifactor productivity

Labor Productivity

units produced

Labor Productivity = ————————————

labor hours (or labor cost)

Example -1 of Labour Productivity

Measurement

• Determine 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 Total Measure or Partial Measure. ( Labour productivity Measurement)

• 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.

Example-2

A travel agency processed 240 customers on

Day 1 with a staff of 12, and 360 customers on Day 2 with a staff of

15. What can be said about the productivity shift from Day 1 to Day

2?

a. An increase in productivity from Day 1 to Day 2

b. A decrease in productivity from Day 1 to Day 2

c. The same productivity from Day 1 to Day 2

d. Can not be computed from data above

e. None of the above

• Answer: a. An increase in productivity from

Day 1 to Day 2 (Day 1 productivity = 240/12=20

Day 2 productivity = 360/15=24)

Multiple Factor Productivity

Multiple Factor Productivity=

output (units produced or the value of those units)

—————————————————————————

labor + capital + materials + energy + other

Performance Measures

• Productivity : Outputs/Inputs

• Capacity:

– Utilized capacity/Available capacity

• Speed of Delivery

– Lead time.

– Variability of due date

Performance Measures…Cont..

• Flexibility

– Set up costs for a switchover.

– Volume Flexibility

– Set up time

– Product Mix Flexibility

Summary of productivity

• Productivity=Outputs/Inputs

• Partial Measures

– Output/Single Input

• Multi Factor Measure

– Output/(Multiple inputs)

• Total Measure

– Output/(Total Inputs)

Some Partial Measures

• Restaurant

• Retail Store

• Power Plant

Customers/labour hours

Sales/Square foot

Kilowatts/ton of coal

A Numerical Example

• Output

• Finished Goods : 10,000

• Dividends : 2500

• Bonds : 1000

• Total Output : 13500

• Input

• 1.Human : 3000

• 2.Capital : 10000

• 3.Energy : 693

• 4.Misc. Expenses : 1500

• Total Input : 15193

• Total Measure=13500/15193

• =.89

• Some Multi-Factor Measures:

• Total w.r.t Human and Energy=13500/693

• =19.48

• Some Partial Measures:

• Finished goods w.r.t

• Capital= 10000/10000=1.00

Capacity Measures

• Fast Food Restaurant

• Brewery

• Ford

• Call Centers

Customers/Hour

Barrels/Year

Cars/Hour

Number of calls/Hour

Examples

Multiple Factor Productivity =

600 applications

———————————————————

(6 employees)(40 hrs./wk.)($18/hr) + 1,200

Multiple Factor Productivity = 600 applications/$5,520

= 0.109 applications/dollar of input

example

Multiple Factor Productivity =

650 applications

———————————————————

(5 employees)(40 hrs./wk.)($18/hr) + 1,800

= 650 applications/$5,400

= 0.120 applications/dollar of input

Example

example

Percent Increase in Productivity =

Change in Productivity

—————————————— (100)

Productivity Prior to Change

=

0.120 − 0.109

———————— (100)

0.109

= 10.1 percent

Example-- Continued

Impact of Productivity

Improvements on the Workforce

• Productivity improvements are essential

for designing and building more goods

and services at a lower cost.

• Jobs are created to sell and service the

equipment.

Enhancing Productivity

Productivity is affected by:

• Issues related to the structure of

operations.

• The equipment and methods used in the

activities.

• The detailed analysis of the individual

jobs and activities.

Ways for Improving Productivity

Develop productivity measure for all opn’s

Determine Critical operations (bottlenecks)

Develop Methods for productivity improvements

Establish reasonable productivity Goals

Get management Support and employee Involvement

Measure and Publicize improvements

Some Reasons For Poor Productivity

Underestimating foreign competition

Viewing labor as cost not as an investment

Too much focus on short-term financial

results, lack of operations strategy

Lack of coordination between organizations

and between different departments (e.g.

marketing and production)

Service Productivity

• Typically labor intensive

• Frequently individually processed

• Often an intellectual task performed

by professionals

• Often difficult to mechanize

• Often difficult to evaluate for quality

Several approaches used to

increase productivity:

• Technology Innovation

• Automation

• Economies of Scale

• Business Process Redesign

• Learning and Experience

• Human Resources

• Job Design and Work Measurement

Technology and Productivity

Improvements:

• Organizations can reduce time in the system, expand options, and reduce costs.

• Decision making need gather, organize, analyze, and present data effectively.

• Makes it possible for suppliers and manufacturers to share data and coordinate design and operating decisions.

• Allows retail customers to place orders quickly and to verify that suppliers have the product on hand.