Productivity

By WILL KENTON

 Updated Jul 14, 2019

TABLE OF CONTENTS

 What Is Productivity?
 Understanding Productivity
 Labor Productivity
 The Solow Residual
 Productivity Investment

What Is Productivity?
Productivity, in economics, measures output per unit of input, such as labor, capital or
any other resource – and is typically calculated for the economy as a whole, as a ratio
of gross domestic product (GDP) to hours worked. Labor productivity may be further
broken down by sector to examine trends in labor growth, wage levels and
technological improvement. Corporate profits and shareholder returns are directly
linked to productivity growth.

At the corporate level, where productivity is a measure of the efficiency of a company's

production process, it is calculated by measuring the number of units produced relative
to employee labor hours or by measuring a company's net sales relative to employee
labor hours.

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Productivity
Understanding Productivity
Productivity is the key source of economic growth and competitiveness. A country’s
ability to improve its standard of living depends almost entirely on its ability to raise its
output per worker, i.e., producing more goods and services for a given number of hours
of work. Economists use productivity growth to model the productive capacity of
economies and determine their capacity utilization rates. This, in turn, is used to
forecast business cycles and predict future levels of GDP growth. In addition,
production capacity and utilization are used to assess demand and inflationary
pressures.

Labor Productivity
The most commonly reported productivity measure is labor productivity published by
the Bureau of Labor Statistics. This is based on the ratio of GDP to total hours worked
in the economy. Labor productivity growth comes from increases in the amount of
capital available to each worker (capital deepening), the education and experience of
the workforce (labor composition) and improvements in technology (multi-factor
productivity growth).

However, productivity is not necessarily an indicator of the health of an economy at a

given point in time. For example, in the 2009 recession in the United States, output and
hours worked were both falling while productivity was growing — because hours
worked were falling faster than output. Because gains in productivity can occur both in
recessions and in expansions — as it did in the late 1990s — one needs to take the
economic context into account when analyzing productivity data

abour productivity[edit]

Labour productivity levels in 2012 in Europe. OECD

Comparison of average labour productivity levels between the OECD member states. Productivity is measured as GDP
per hour worked. Blue bars = higher than OECD-average productivity. Yellow bars = lower than average.

In macroeconomics, a common partial productivity measure is labour productivity. Labour productivity is a

revealing indicator of several economic indicators as it offers a dynamic measure of economic growth,
competitiveness, and living standards within an economy. It is the measure of labour productivity (and all
that this measure takes into account) which helps explain the principal economic foundations that are
necessary for both economic growth and social development. In general labour productivity is equal to the
ratio between a measure of output volume (gross domestic product or gross value added) and a measure of
input use (the total number of hours worked or total employment).

What is productivity?
Productivity is a measure of the efficiency with which a country combines capital and labour to
produce more with the same level of factor inputs

Productivity is essentially the efficiency in which a company or economy can transform

resources into goods, potentially creating more from less. Increased productivity means
greater output from the same amount of input. This is a value-added process that can
effectively raise living standards through decreasing the required monetary investment in
everyday necessities (and luxuries), making consumers wealthier (in a relative sense) and
businesses more profitable.

From a broader perspective, increased productivity increases the power of an economy

through driving economic growth and satisfying more human needs with the same resources.
Increased gross domestic product (GDP) and overall economic outputs will drive economic
growth, improving the economy and the participants within the economy. As a result,
economies will benefit from a deeper pool of tax revenue to draw on in generating necessary
social services such as health care, education, welfare, public transportation and funding for
critical research. The benefits of increasing productivity are extremely far-reaching, benefiting
participants within the system alongside the system itself

Productivity Beneficiaries

To expand upon this, there are three useful perspectives in which to frame the value in
improving productivity within a system from an economic standpoint:

 Consumers/Workers: At the most micro level we have improvements in the standard

of living for everyday consumers and workers as a result of increased productivity. The
more efficiency captured within a system, the lower the required inputs (labor, land and
capital ) will be required to generate goods. This can potentially reduce price points and
minimize the necessary working hours for the participants within an economy while
retaining high levels of consumption.
 Businesses: Businesses that can derive higher productivity from a system also benefit
from creating more outputs with the same or fewer inputs. Simply put, higher efficiency
equates to better margins through lower costs. This allows for better compensation for
employees, more working capital and an improved competitive capacity.
 Governments: Higher economic growth will also generate larger tax payments for
governments. This allows governments to invest more towards infrastructure and social
services (as noted above).

Factors Affecting Productivity

The final important consideration in assessing productivity potential is the production-

possibility frontier (PPF), which essentially outlines the maximum production quantity of two
goods (in the scope of our current technological capacity and supply). This demonstrates the
confinement of productivity, and thus is well captured in the Leontief production function. The
critical takeaway here is that the production function will generally be affected by two things:
overall supply and technological capabilities. Note that demand does not come into account in
altering the production function or overall productivity potential. The illustration in the following
figure demonstrates an increase in PPF, thus affecting the production function.
Production-Possibility Frontier Expansion: In this graph, the prospective production-possibility frontier shifts to the
right, implying a higher supply or improved technological production ability of the two goods being discussed (in this
case guns and butter).

Measuring Productivity

Productivity is represented by production functions, and is the amount of output that can be
generated from a set of inputs.

different ways to measure productivity and productivity growt

Key Points

 From an economic standpoint, the production function demonstrates the tangible output created
as a result of a production process including all tangible inputs.
 The objective in employing this perspective is to pursue allocative efficiency within the process
(as opposed to technical or logistical efficiency, as engineers or supply chain managers may be
pursuing).
 Generally speaking, the factors of production include land, labor and capital.
 There are a variety of ways to approach the measuring of productivity in the context of
production functions, including the functional form, the linear form, the Cobb-Douglas production
Function and the Leontief Production Function.
Productivity, in economic terms, measures inputs and outputs to derive overall production
efficiency within a system. Simply put, it measures how much can you get out of what you put
into a given system. Increased productivity means more output is produced from the same
amount of inputs. In order to generate meaningful information about the productivity of a given
system, production functions are used to measure it. Understanding the way in which
productivity metrics function, one can more comprehensively grasp the concept and employ it
in a meaningful way.

Production Function

From an economic standpoint, the production function demonstrates the tangible output
created as a result of a production process including all tangible inputs. The objective in
employing this perspective is to pursue allocative efficiency within the process (as opposed to
technical or logistical efficiency, as engineers or supply chain managers may be pursuing).
This means that the production function identifies optimal inputs (and consequent outputs) to
satisfy the needs of a given population via a particular production process. While different
economic perspectives often identify different factors of production (i.e. inputs in the system), it
is useful to identify the following:

 Land/Natural Resources: Products of nature that have economic value, including

metals/agriculture/livestock/land/etc.
 Capital: This is a broad term, capturing more than just financing and investment. Capital can
also be fixed capital (i.e. machinery, equipment, buildings, computers, etc.) or working capital
(i.e. goods, inventory and liquid assets). Concepts of human, intellectual and social capital is also
highlighted, separate from the concept of labor below, which can affect the efficiency of a
process.
 Labor: The human skills, time and efforts necessary to add value to the production process.
This can range from highly tangible inputs (working hours, products assembled) to highly
intangible inputs (entrepreneurship, experience, technology skills, etc.).

Conceptually, the production function makes certain assumptions of the maximum potential
production, availability of inputs and demand for outputs to create a boundary of potential
production. This will include the derivation of a marginal product for each factor (see ), or
essentially the extra output that can be created for each additional unit of input. Naturally, this
is theoretically subjected to the concept of diminishing marginal returns, where the marginal
product of a given input (in the figure we are illustrating labor) will fall as the starting points for
quantity rise.
Product Function: This graph illustrates the way in which a production function identifies the relationship between a
quantity of inputs and the resulting output of a given product. This takes into account marginal and average product,
which are indicative of the change in efficiency based upon inputs.

Forms of the Production Function

There are a variety of ways to approach the measuring of productivity in the context of
production functions:

 Functional Form: One way a production function can be illustrated is through the following
equationQ=f(X1,X2,X3,…,Xn)Q=f(X1,X2,X3,…,Xn). In this circumstance ‘Q’ is the quantity
of output while each ‘x’ is a factor input.
 Linear Form: While this is generally not practical in practice, it is also possible to represent this
in a linear mathematical fashion if parameters (a, b, c, and d below) are
identified: Q=a+bX1+cX2+dX3+…Q=a+bX1+cX2+dX3+…
 Cobb-Douglas Production Function: One of the most useful frameworks, that allow for a
technological relationship to be illustrated between the amount of two (or more) inputs is the
Cobb-Douglas model. This is most often used to illustrate how physical capital and labor effect
one another (see ). In the equation, ‘Y’ is total production while ‘L’ is labor, ‘K’ is capital, ‘A’ is
 total factor productivity and the alpha and beta are the elasticity of the two
inputs. Y=ALβKαY=ALβKα
 Leontief Production Function: The Leontief Production Function assumes a technologically
pre-determined set of proportions for the factors of production (i.e. no ability to substitute
between factors. This is specifically designed to capture minimums or limiting cases of
production. The ‘z’s in the equation are inputs of specific goods while the a and b represent the
technological determined constants and ‘q’ being the overall
output: q=Min(z1a,z2b)q=Min(z1a,z2b)

Cobb-Douglas Production Function: This is an illustration of a two-input Cobb-Douglas Production Function, where
the ability to benchmark an output in comparison to two separate quantities of inputs is feasible.

Impacts of Technological Change on Productivity

Technological advances play a crucial role in improving productivity, and thus the standard of
living in a system.

LEARNING OBJECTIVES

Analyze how changes in technology affect productivity and productivity growth

KEY TAKEAWAYS

Key Points

 Productivity growth is bound by what is called the production-possibility frontier (PPF), which
essentially stipulates a series of maximum amounts of two commodities that can be generated
using a fixed amount the relevant factors of production.
 The variance in technological advances that have driven productivity upwards is remarkable,
underlining the ongoing importance of focusing on technology as a primary change agent.
 Advances in energy systems, transportation, communication, logistics, and a variety of other
technological trajectories have greatly enabled an increased standard of living through advancing
productivity.
  Measuring the affects of technology on productivity is a difficult pursuit. It is generally
approached through metrics such as Gross Domestic Product ( GDP ), GDP per capita, and
Total Factor Productivity (TFP).

Key Terms

 Production-Possibility Frontier (PPF): A graph that shows the various combinations of

amounts of two commodities that could be produced using the same fixed total amount of each
of the factors of production.
 productivity: A ratio of production output to what is required to produce it (inputs).

Productivity measures the way in which an economic system or business can leverage
available functional inputs to generate meaningful outputs. This concept drives economies
towards higher degrees of efficiency in production and thus higher economic growth and
standards of living. As a result, improving productivity is a critical objective for societies to
increase their relative wealth. Technological advances play a crucial role in improving
productivity, and thus the standard of living in a system.

Production-Possibility Frontier

Productivity growth is bound by what is called the production-possibility frontier (PPF), which
essentially stipulates a series of maximum amounts of two commodities that can be generated
using a fixed amount the relevant factors of production. In the context of a given PPF, only an
increase in overall supply of inputs or a technological advancement will allow for the PPF to
shift out and allow for an increase in potential outputs of both goods simultaneously
(represented by point ‘X’ in the figure). The shift due to changes in technology represents
increased productivity. This is a critical component in understanding the role of technology in
productivity, as it is a primary influence on increasing the prospective production possibilities.
Production-Possibility Frontier (PPF): This graph illustrates the varying theoretical takeaways from a PPF chart. On
this, points B, C, and D all lie on a maximum output level, while A is representative of a realistic but inefficient amount.
X is beyond the scope of the PPF graph, and thus requires a technological improvement or increase in supply.

Technological Advances: Past, Present, and Future

The variance in technological advances that have driven productivity upwards is remarkable,
underlining the ongoing importance of focusing on technology as a primary change agent.
Innovative advances in technologies can be either leaps or increments, although the larger
technological advances tend to take the limelight. In general, there are a particularly notable
categories:

 Energy: Historically, animals and humans were the primary energy input for the generation of
products. This was extremely expensive and time-consuming relative to more modern ways to
power things, and has been improved upon dramatically over time. Electricity, heat, steam,
water, solar, and a wide variety of other energy capturing methodologies have dramatically
increased efficiency while freeing up man hours.
 Transportation and Industrial Machinery: Trade has been a part of human history for nearly
as long as civilizations knew of one another, bartering being the a central component of human
interaction. The improvement of trade venues, such as boats, cars, planes, trains, etc. have
enabled rapid increases in trade quantity and efficiency. Similarly, industrial machinery utilizing
similar vehicles have enabled mass increases in scale and efficiency, particularly agriculture.
 Communication: Needless to say, the internet and mobile communications have rapidly
expedited the transmission of knowledge, data, information, and networking. This has resulted in
a massive increase in synergy across the world, alongside the development of economic
learning and development.
  Logistics: Increases in technological systems is generally considered to be a tangible
innovation, but is not limited to such. Improvements in the ways in which we do things is often
just as useful. Henry Ford is a classic example of this, innovating the assembly line to maximize
the efficiency the production process through strategic implementation of labor roles.

Implications on Productivity

Measuring the effects of technology on productivity is a difficult pursuit. It is generally

approached through metrics such as Gross Domestic Product (GDP), GDP per capita, and
Total Factor Productivity (TFP). The former two attempt to capture the overall output of a given
economy from a macro-environmental perspective. The latter is slightly more interesting,
attempting to measure technologically driven advancement through noting increases in overall
output without increases in inputs. This is done through utilizing production function equations
and identifying when the output is greater than the supposed input, implying an advance in the
external technological environment. This system is more specifically tailored for technological
change than GDP.

Why is productivity important?

Productivity is an important determinant of living standards – it quantifies how an economy

uses the resources it has available, by relating the quantity of inputs to output. As the adage
goes, productivity isn't everything, but in the long run it's almost everything.

Higher productivity can lead to:

 Lower unit costs: These cost savings might be passed onto consumers in lower prices,
encouraging higher demand, more output and an increase in employment.
 Improved competitiveness and trade performance: Productivity growth and lower unit
costs are key determinants of the competitiveness of firms in global markets.
 Higher profits: Efficiency gains are a source of larger profits for companies which might
be re-invested to support the long term growth of the business.
 Higher wages: Businesses can afford higher wages when their workers are more
efficient.
 Economic growth: If an economy can raise the rate of growth of productivity then the
trend growth of national output can pick up.
 Productivity improvements mean that labour can be released from one industry and be
made available for another – for example, rising efficiency in farming will increase
production yields and provide more food either to export or to supply a growing urban
population.
 If the size of the economy is bigger, higher wages will boost consumption, generate more
tax revenue to pay for public goods and perhaps give freedom for tax cuts on people
and businesses.

The Productivity Gap

What are the main determinants of productivity in a country?

 Access to Hard Technology

 Skills of Labour Force
 Quality of Management
 Training and Education Standards
 Competition within markets
  Cultural Factors such as attitudes and aspirations

Benefits of productivity growth[edit]

Labour productivity growth in Australia since 1978, measured by GDP per hour worked (indexed)

Productivity growth is a crucial source of growth in living standards. Productivity growth means more value
is added in production and this means more income is available to be distributed.
At a firm or industry level, the benefits of productivity growth can be distributed in a number of different
ways:

 to the workforce through better wages and conditions;

 to shareholders and superannuation funds through increased profits and dividend distributions;
 to customers through lower prices;
 to the environment through more stringent environmental protection; and
 to governments through increases in tax payments (which can be used to fund social and
environmental programs).
Productivity growth is important to the firm because it means that it can meet its (perhaps growing)
obligations to workers, shareholders, and governments (taxes and regulation), and still remain competitive
or even improve its competitiveness in the market place. Adding more inputs will not increase the income
earned per unit of input (unless there are increasing returns to scale). In fact, it is likely to mean lower
average wages and lower rates of profit. But, when there is productivity growth, even the existing
commitment of resources generates more output and income. Income generated per unit of input increases.
Additional resources are also attracted into production and can be profitably employed.

Drivers of productivity growth[edit]

See also: Productivity improving technologies

In the most immediate sense, productivity is determined by the available technology or know-how for
converting resources into outputs, and the way in which resources are organized to produce goods and
services. Historically, productivity has improved through evolution as processes with poor productivity
performance are abandoned and newer forms are exploited. Process improvements may include
organizational structures (e.g. core functions and supplier relationships), management systems, work
arrangements, manufacturing techniques, and changing market structure. A famous example is
the assembly line and the process of mass production that appeared in the decade following commercial
introduction of the automobile.[9]
Mass production dramatically reduced the labor in producing parts for and assembling the automobile, but
after its widespread adoption productivity gains in automobile production were much lower. A similar pattern
was observed with electrification, which saw the highest productivity gains in the early decades after
introduction. Many other industries show similar patterns. The pattern was again followed by the computer,
information and communications industries in the late 1990s when much of the national productivity gains
occurred in these industries.[10]
There is a general understanding of the main determinants or drivers of productivity growth. Certain factors
are critical for determining productivity growth. The Office for National Statistics (UK) identifies five drivers
that interact to underlie long-term productivity performance: investment, innovation, skills, enterprise and
competition. (ONS 3, 20)

 Investment is in physical capital — machinery, equipment and buildings. The more capital workers
have at their disposal, generally the better they are able to do their jobs, producing more and better
quality output.
 Innovation is the successful exploitation of new ideas. New ideas can take the form of new
technologies, new products or new corporate structures and ways of working. Speeding up the diffusion
of innovations can boost productivity.
 Skills are defined as the quantity and quality of labour of different types available in an economy.
Skills complement physical capital, and are needed to take advantage of investment in new
technologies and organisational structures.
 Enterprise is defined as the seizing of new business opportunities by both start-ups and existing
firms. New enterprises compete with existing firms by new ideas and technologies increasing
competition. Entrepreneurs are able to combine factors of production and new technologies forcing
existing firms to adapt or exit the market.
 Competition improves productivity by creating incentives to innovate and ensures that resources are
allocated to the most efficient firms. It also forces existing firms to organise work more effectively
through imitations of organisational structures and technology.

Individual and team productivity[edit]

See also: Programming productivity

Technology has enabled massive personal productivity gains—computers, spreadsheets, email, and other
advances have made it possible for a knowledge worker to seemingly produce more in a day than was
previously possible in a year.[11] Environmental factors such as sleep and leisure play a significant role in
work productivity and received wage.[12] Drivers of productivity growth for creative and knowledge workers
include improved or intensified exchange with peers or co-workers, as more productive peers have a
stimulating effect on one's own productivity. [13][14] Productivity is influenced by effective supervision and job
satisfaction. An effective or knowledgeable supervisor (for example a supervisor who uses the Management
by objectives method) has an easier time motivating their employees to produce more in quantity and
quality. An employee who has an effective supervisor, motivating them to be more productive is likely to
experience a new level of job satisfaction thereby becoming a driver of productivity itself. [15] There is also
considerable evidence to support improved productivity through operant conditioning reinforcement,
[16]
 successful gamification engagement, [17] research-based recommendations on principles and
implementation guidelines for using monetary rewards effectively, [18] and recognition, based in social
cognitive theory, which builds upon self-efficacy.[19]

Detrimental impact of bullying, incivility, toxicity and psychopathy[edit]

Workplace bullying results in a loss of productivity, as measured by self-rated job performance.[20] Over time,
targets of bullying will spend more time protecting themselves against harassment by bullies and less time
fulfilling their duties.[21] Workplace incivility has also been associated with diminished productivity in terms of
quality and quantity of work.[22]
A toxic workplace is a workplace that is marked by significant drama and infighting, where personal battles
often harm productivity.[23] While employees are distracted by this, they cannot devote time and attention to
the achievement of business goals.[24] When toxic employees leave the workplace, it can improve
the culture overall because the remaining staff become more engaged and productive. [25] The presence of
a workplace psychopath may have a serious detrimental impact on productivity in an organisation. [26]
In companies in where the traditional hierarchy has been removed in favor of an egalitarian, team-based
setup, the employees are often happier, and individual productivity is improved (as they themselves are
better placed to increase the efficiency of the workfloor). Companies that have these hierarchy removed and
have their employees work more in teams are called Liberated companies or "Freedom inc.'s".[27][28][29][30][31] See
also: The Toyota Way

Business productivity[edit]
Productivity is one of the main concerns of business management and engineering. Many companies have
formal programs for continuously improving productivity, such as a production assurance program. Whether
they have a formal program or not, companies are constantly looking for ways to improve quality, reduce
downtime and inputs of labor, materials, energy and purchased services. Often simple changes to operating
methods or processes increase productivity, but the biggest gains are normally from adopting new
technologies, which may require capital expenditures for new equipment, computers or software. Modern
productivity science owes much to formal investigations that are associated with scientific management.
[32]
 Although from an individual management perspective, employees may be doing their jobs well and with
high levels of individual productivity, from an organizational perspective their productivity may in fact be zero
or effectively negative if they are dedicated to redundant or value destroying activities. [11] In office buildings
and service-centred companies, productivity is largely influenced and affected by operational byproducts -
meetings.[33] The past few years have seen a positive uptick in the number of software solutions focused on
improving office productivity such as Microsoft Office.[34] In truth, proper planning and procedures are more
likely to help than anything else.[35]
Productivity paradox[edit]
Main article: Productivity paradox

Overall productivity growth was relatively slow from the 1970s through the early 1990s. [36] Although several
possible causes for the slowdown have been proposed there is no consensus. The matter is subject to a
continuing debate that has grown beyond questioning whether just computers can significantly increase
productivity to whether the potential to increase productivity is becoming exhausted. [37]

National productivity[edit]
In order to measure productivity of a nation or an industry, it is necessary to operationalize the same
concept of productivity as in a production unit or a company, yet, the object of modelling is substantially
wider and the information more aggregate. The calculations of productivity of a nation or an industry are
based on the time series of the SNA, System of National Accounts. National accounting is a system based
on the recommendations of the UN (SNA 93) to measure total production and total income of a nation and
how they are used. (Saari 2006, 9)
International or national productivity growth stems from a complex interaction of factors. Some of the most
important immediate factors include technological change, organizational change, industry restructuring and
resource reallocation, as well as economies of scale and scope. A nation's average productivity level can
also be affected by the movement of resources from low-productivity to high-productivity industries and
activities. Over time, other factors such as research and development and innovative effort, the
development of human capital through education, and incentives from stronger competition promote the
search for productivity improvements and the ability to achieve them. Ultimately, many policy, institutional
and cultural factors determine a nation's success in improving productivity.
At the national level, productivity growth raises living standards because more real income improves
people's ability to purchase goods and services (whether they are necessities or luxuries), enjoy leisure,
improve housing and education and contribute to social and environmental programs. Some have
suggested that the UK's 'productivity puzzle' is an urgent issue for policy makers and businesses to address
in order to sustain growth.[38] Over long periods of time, small differences in rates of productivity growth
compound, like interest in a bank account, and can make an enormous difference to a society's prosperity.
Nothing contributes more to reduction of poverty, to increases in leisure, and to the country's ability to
finance education, public health, environment and the arts’.[39]

Productivity is the state of being able to create, particularly at a high quality and quick speed.
An example of productivity is being able to make top notch school projects in a limited amount of
time. An example of productivity is how quickly a toy factory is able to produce toys.

DEFINING AND MEASURING PRODUCTIVITY Productivity isn’t everything, but in the long run it is almost
everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to
raise its output per worker. Paul Krugman, The Age of Diminishing Expectations (1994) Productivity is commonly
defined as a ratio between the output volume and the volume of inputs. In other words, it measures how
efficiently production inputs, such as labour and capital, are being used in an economy to produce a given level
of output. Productivity is considered a key source of economic growth and competitiveness and, as such, is basic
statistical information for many international comparisons and country performance assessments. For example,
productivity data are used to investigate the impact of product and labour market regulations on economic
performance. Productivity growth constitutes an important element for modelling the productive capacity of
economies. It also allows analysts to determine capacity utilisation, which in turn allows one to gauge the
position of economies in the business cycle and to forecast economic growth. In addition, production capacity is
used to assess demand and inflationary pressures. There are different measures of productivity and the choice
between them depends either on the purpose of the productivity measurement and/or data availability. One of
the most widely used measures of productivity is Gross Domestic Product (GDP) per hour worked. This measure
captures the use of labour inputs better than just output per employee. Generally, the default source for total
hours worked is the OECD Annual National Accounts database, though for a number of countries other sources
have to be used. Despite the progress and efforts in this area, the measurement of hours worked still suffers
from a number of statistical problems. Namely, different concepts and basic statistical sources are used across
countries, which can hinder international comparability. In principle, the measurement of labour inputs should
also take into account differences in workers’ educational attainment, skills and experience. Accordingly, the
OECD has started to develop adjusted labour input measures. To take account of the role of capital inputs, an
appropriate measure is the flow of productive services that can be drawn from the cumulative stock of past
investments (such as machinery and equipment). These services are estimated by the OECD using the rate of
change of the ‘productive capital stock’, which takes into account wear and tear, retirements and other sources
of reduction in the productive capacity of fixed capital assets. The price of capital services per asset is measured
as their rental price. In principle, the latter could be directly observed if markets existed for all capital services.
In practice, however, rental prices have to be imputed for most assets, using the implicit rent that capital goods’
owners ‘pay’ to themselves (or the ‘user costs of capital’). After computing the contributions of labour and
capital to output, the so-called multi-factor productivity (MFP) can be derived. It measures the residual growth
that cannot be explained by the rate of change in the services of labour, capital and intermediate outputs, and is
often interpreted as the contribution to economic growth made by factors such as technical and organisational
innovation. Against this background, a broad overview of productivity indicators is presented in four areas.
International comparisons of economy-wide indicators of productivity growth are first presented followed by
international comparisons of income and productivity levels, including a measure of productivity heterogeneity
by enterprise size classes. Thirdly, productivity growth indicators by industry and services are examined. Finally,
the impact of labour productivity on unit labour costs is discussed. Unless noted otherwise, GDP refers to the
total economy.
What is supply chain productivity?
For a supply chain, as for other functions, productivity is the ratio of what you get out to
what you put in. This “output versus input” definition covers achievements of the workforce,
results from the use of equipment, time spent (as in the hours needed to manufacture a
product) and return on capita

Here are the five vital factors which need to be taken into consideration for a more
productive logistics operation:

1. Communication.
Communication with employees is a crucial element to any organization. It’s
imperative to have the right tactics and tools in order to ensure efficient internal
communication.

Weekly meetings that include collaborative problem-solving and brainstorming can

also be very beneficial because logistics employees will be able to enhance their
critical reasoning ability.

Also, fostering open and transparent communication  between employees and

business leaders via regular meetings ensures that everyone has the same
viewpoint about productivity.

2. Clear Procedure Standards.

Establishing clear process controls is important to achieve operational efficiency and
avoid unforeseen expenditures due to misaligned procedures and output.

Customer satisfaction should drive all key personnel associated to supply chain and
logistics. Thus they should always ensure full-adherence to quality codes and
standards to optimize productivity and deliver value to their clients.

Typical logistic functions requiring strong compliance in relation to quality include:

 receiving and shipping schedule;

 inventory;
 picking and packing;
 shift scheduling;
 quality control;
 facilities management;
 and tracking.
3. Key Performance Indicators.
Knowing the key areas of improvement is crucial to maximising logistics productivity.
When the management focuses on things that matter the most, it will be able to
avoid wasting of valuable resources.

For those new in the business, identify and focus on 5-7 most critical areas that
drive the business , and directly assign a Key Performance Indicator for each so it
can be tracked and measured .
Some of the top Key performance indicators surrounding logistics and supply chain
businesses include, but not limited to:

 Safety,
 Service Delivery
 Inventory Accuracy/Turns,
 Employee Productivity
 Cost per Unit/ Total Landed Cost
 Product Damage/Claims
 Customer Satisfaction

4. Workforce Motivation.
A motivated workforce is the backbone of a successful organization . To ensure that
every employee is engaged, their core skills should be identified and aligned with the
tasks where they can excel the most. Doing so helps maximize the potential of each
employee and result in a continuous increase of productivity.
Here are other considerations to ensure a motivated workforce:

 Equip them with the right tools and systems they need for their day-to-day job.
This will help complete their tasks at hand much faster and more effectively, thus
boosting their morale.
 Create rewards and recognition system.
 Add variety to work schedules and shifts. By enabling your staff to revolve
tasks periodically, you also gain the benefit of a multi-skilled workforce, allowing
you to adjust your workforce level if someone gets sick or demand-specific
activity hits a peak.
5. Employee Training Program.
Implementing a robust training program will keep your workforce updated with the
latest tactics and tools used in the logistics operations, which is important if you
want to stay relevant in your competition.

Here are the guidelines for establishing a training program for your employees:

 Create a comprehensive plan which details specific business goals.

 Identify the most important skills required to improve efficiency and
effectiveness of each of the team member in your logistics operation.
 Use an external training company or hire certified professional as in-house
trainers.
 Consider online training courses and packs so that your employees can still
access them whilst on the go or offsite.
 Create a schedule that enables all relevant employees to benefit as soon as
possible, without affecting the workforce level of your operations.
 Make sure to gather feedback from employees  regularly via employee surveys.
 Create an action plan with goals and measurements indicating how well they
apply the skills in which they have been trained on their actual jobs.
These are the five secrets to achieving maximum productivity in your logistics
operations. Check out the infographic below from Alba Logistics to learn more about
the secrets of productivity in logistics .

As a productivity metric, cost savings could be expressed as “average cost savings

per procurement employee” or “cost savings as a percentage of procurement operating costs.” So, if
a procurement team achieved $10 million in annual cost savings and had 20 employees, the “average
cost savings per procurement employee” ...

10 Procurement Process
Improvements
1) Centralize Your Information
First things first: procurement cannot be efficient if you collect information about the process in
multiple places. If you don’t have a centralized process of information collection, from accounts
payable to vendor information, it should be your first priority. Centralizing all information
related to procurement helps you and your team more easily store relevant data, and access it
when making crucial procurement decisions.
2) Build a Standard Procurement Policy
Standardization is just as important as centralization. The more established your procurement
process, the easier it becomes to purchase materials and products for your company. Rather than
having to customize each process depending on its unique features, you can follow an
established set of steps designed to complete the purchase. Standardization lends itself to
consistency when all team members are following the same set of policies and procedures.
3) Establish a Feedback System
Continuous procurement process improvements are key. Each purchase should be an opportunity
to help you optimize your process, learn from mistakes, and build on successes. A system of
feedback mechanisms can help you accomplish that goal. This system can include both informal
surveys of both your internal and external stakeholders involved in the process and more
standardized methods based on established KPIs. Through this feedback, you can improve your
policies and processes over time.
4) Take a Close Look at Your Strategic Sourcing
Compared to the above, this is a bit of a long play. Still,   strategic sourcing  could be the key to
success in your procurement process. You probably already use a generic version of this concept
in your existing workflow; however, it might be time to make some improvements.
For instance, consider new and more extensive ways of giving your potential suppliers all the
information they need to submit a bid. Standardize bids for easier evaluation, and be more open
about the process itself. Use business intelligence  to make more informed procurement
decisions.
5) Invest in Professional Development
Whether you are your company’s only procurement agent or at the head of a team, professional
development can provide immense value. In fact, one study found that  74 percent of our
workforce  don’t feel like they’re unlocking their full potential due to a lack of development.
Develop your procurement team to empower them in making better decisions, using data to
guide their work, and using new technology to automate the procurement process.
6) Establish a Supplier Directory
If you work with multiple suppliers, choosing the right one for an individual purchase can be
complex. In that case, it makes sense to established a centralized supplier directory with all
relevant information in a standardized format. This type of directory allows you to quickly
determine which supplier might be right for an individual job, and also build better relationships
across the supply chain over time.
7) Think Beyond Established Relationships
On the flip side of the above point, there comes a time when you can benefit from going beyond
your current supplier list. In recent years, going global has become more cost-effective even for
smaller businesses. Even as you build relationships with your suppliers, consider looking
outside the box to find new options that might allow you to procure materials more quickly,
cost-effectively, and reliably.
8) Embrace Lean Procurement Techniques
The lean  philosophy has taken over business in the past decade, and procurement should be no
exception. Adopting lean practices in your purchasing process can help you eliminate waste,
saving valuable resources and time while still improving the quality of the purchase. The
nuances of lean management in procurement  go beyond the scope of this blog post, but they’re
vital to understand when looking to make improvements to your process.
9) Open Yourself to Information Sharing
When it comes to optimizing your procurement efforts, information sharing is key. Both internal
and external stakeholders should be in constant communication to make sure that everyone is on
the same page regarding policies, expectations, and processes. Strategically share information
with both suppliers and indirect stakeholders to improve the process and maximize your
procurement opportunities.
10) Invest in Procurement Automation
Finally, but certainly not least importantly, take a close look at the software you use to manage
the procurement process. Many of the workflows involved can be automated, which results in
instant savings of time and resources. This type of automation also reduces the potential for
human error and results in more consistency throughout the procure to pay cycle. CTOs across
the spectrum expect automation to play a central role  in the procurement process over the next
few years.