Value-added production

and productivity
relationships

Faculty of Engineering and Architecture

Department of Industry Engineering
2023-2024 Michaelmas Term/ IENL329 / Productivity
Management Course

Name/student No.: Ayşegül Hilal Seyhan/210302006,

and Hamadeh Abu Taha/200302805
Lesson Advisor: Prof. Dr. İsmail Melih BAŞ
Table of Contents
Introduction: ................................................................................................................................................. 1

What is productivity? .................................................................................................................................... 1

Personal Productivity ................................................................................................................................ 2
Business Productivity ................................................................................................................................ 2
Organizational Productivity ...................................................................................................................... 2
National Productivity ................................................................................................................................ 2
4 Types of Productivity Measures ............................................................................................................. 2

What’s value-added product? ...................................................................................................................... 4

Value-added in the economy .................................................................................................................... 4

What is GDP? ................................................................................................................................................ 5

Types of GDP ............................................................................................................................................. 5

Productivity and GDP .................................................................................................................................... 6

Value Added Ratios in Productivity Measurement ....................................................................................... 6

Case studies about Value-added production:............................................................................................... 7

Coffee Farm............................................................................................................................................... 7
Bike Crafters .............................................................................................................................................. 8

Conclusion: .................................................................................................................................................. 10

References: ................................................................................................................................................. 11
Introduction:
The study of the relationship between value-added production and productivity is a vital task in
economics and business management. Value-added production, which represents the additional
value gained during the translation of inputs into final goods and services, is crucial to economic
growth. Productivity, on the other hand, examines how effectively and efficiently resources are
used in the manufacturing process. These two concepts are intrinsically linked, as a greater
understanding of their relationship provides insight into a company's competitiveness, the success
of an industry, and even the economic well-being of a nation. In this investigation, we will look
into the complex relationship between value-added output and productivity, identifying the
elements that influence this relationship and elucidating the broader consequences for businesses
and economies.

What is productivity?
Productivity is measured by the output generated by a production or service system in relation to
the resources given to create it. It is therefore the effective utilization of resources such as labor,
capital, land, materials, energy, and information when producing goods and services.
Accomplishing more with the same resources or accomplishing higher output in terms of volume
and quality using the same input is referred to as higher productivity.
Output/Input=Productivity
In general, productivity may be viewed as a comprehensive assessment of how well organizations
meet the following criteria:
 Objectives: the extent to which they are met.
 Efficiency is the effectiveness with which resources are employed to create beneficial
output.
 Effectiveness: what is accomplished in comparison to what is possible.
 Comparability refers to how productivity performance is tracked over time.
Though there are many various definitions of productivity, the most typical strategy (not a
definition) to building a productivity model is to determine the appropriate output and input
components in line with the firm, sector, or country's long, intermediate, and short-term growth
goals.
Politicians, economists, and commentators discuss it on a broad scale. Business owners and
managers are concerned about their teams and workers that operate in a hybrid environment. And
most of us make some judgment about whether we "felt" productive on any particular day.
Each of these instances takes a different approach to productivity. Here are some instances of
diverse points of view about productivity.

1
Personal Productivity
Productivity may imply different things in different circumstances, especially as knowledge work
and automation become more prevalent. Personal productivity is defined as how frequently and
efficiently a person completes work or achieves goals.
Understanding the various layers of productivity can help you see how your personal productivity
at work contributes to the productivity of your business, and how both relate to the productivity of
your country.

Business Productivity
Productivity evaluates how successfully firms make income from input, labor, and materials.
Business productivity is often defined as revenue divided by hours worked. An aggregate
productivity level is unlikely to give practical insights for company executives, but it can assist
them assess how they compare to the competitors or other leading organizations.

Organizational Productivity
Productivity at the firm level – revenue compared to employee labor hours in a quarter — might
appear far distant from our individual efforts, which may show results or offer value in a different
timeline.

National Productivity
Productivity evaluates how successfully a country converts labor and resources (the input) into
products and services (the output, or gross domestic product [GDP]). It is a comprehensive
indicator that reflects policy and technological changes and demonstrates economic growth in
relation to other macroeconomic factors. This can lead to a greater level of living for those who
live in that country.
The capacity of a country to raise its quality of living is nearly completely dependent on its ability
to increase production per worker (i.e., produce more products and services for a given number of
hours of work). Economists utilize productivity growth to estimate economies' productive potential
and compute capacity utilization rates. This is then used to anticipate business cycles and forecast
future GDP growth rates.

4 Types of Productivity Measures

1. Labor Productivity: Labor productivity, as released by the Bureau of Labor Statistics, is
the most often reported productivity statistic. This is based on the GDP-to-total-hours-
worked ratio in the economy. Labor productivity growth is driven by increases in the
quantity of capital accessible to each worker (capital deepening), workforce education and
experience (labor composition), and technological advancements (multi-factor
productivity growth).
Productivity, however, is not always a reliable gauge of an economy's state at any one
moment. For instance, during the US recession of 2009, productivity increased even though
production and hours worked decreased more quickly (hours worked fell faster than
output).
Productivity gains may happen during recessions as well as booms, as they occurred in the
 late 1990s, therefore economic context must be considered when interpreting productivity
data.

2. Total Factor Productivity: Numerous factors influence the production of a nation. These
include education, enterprise, competitiveness, innovations, advances in supply chain
logistics, and investments in plant and equipment. The Solow residual, also known as total
factor productivity, quantifies the part of the rise in production of an economy that cannot
be explained by the accumulation of labor and capital.
It is understood to be the addition that financial, technological, managerial, and strategic
innovations make to economic growth.
This economic performance metric, often called multi-factor productivity (MFP), contrasts
the quantity of products and services generated with the total number of inputs utilized in
their production. Labor, capital, energy, materials, and paid services are examples of
inputs.

3. Capital Productivity: Capital as a productivity indicator examines how well physical capital
is used to produce products or services. Office equipment, labor materials, warehousing
supplies, and transportation equipment (cars and trucks) are examples of physical capital.
By removing liabilities from physical capital, capital productivity is computed. The sales
figure is then divided by the difference. A greater capital productivity figure indicates that
physical capital is being employed efficiently in the production of products and services,
whilst a lower capital productivity figure indicates the inverse.

4. Material Productivity: Determining output in relation to materials utilized is the aim of

productivity measurement by materials. Materials can be employed in the creation of an
object or service, including heat, fuel, and chemicals. It looks at how much output is
generated for every unit of usage.
The importance of productivity in boosting national wellbeing is now widely
acknowledged. No human endeavor does not profit from increased productivity. This is
significant because boosting the efficacy and quality of labor produces more of the rise in
gross national income (GNP) than adding labor and capital. In other words, as productivity
improves, national income, or GNP, grows faster than input factors.
As a result of the distribution of productivity gains according to contribution, productivity
enhancement leads to direct increases in the quality of life. At the moment, it would not be
incorrect to say that productivity is the sole significant source of global real economic
development, social progress, and higher living standards.
Productivity also influences how competitive a country's products are on a global scale. If
one country's labor productivity falls in comparison to productivity in other nations
producing the same commodities, a competitive imbalance is created: If increased
production costs are passed on, the country's industries will lose sales as consumers shift
to lower-cost suppliers. However, if additional expenses are absorbed by industries, their
 profit would be reduced. This means that they must reduce output or maintain production
costs by cutting real salaries.

What’s value-added product?

The process of increasing the value of raw materials or inputs via successive phases of production
is referred to as value-added production. The goal is to create a finished product that is worth more
than the sum of its parts. This increase in value might be attributed to enhancements in quality,
design, functionality, or other characteristics that make the finished product more appealing to
consumers.
In the manufacturing or production process, value-added production frequently entails a series of
phases or stages. Each stage increases the value of the product, resulting in a finished product with
a higher market value. This concept is critical to comprehending economic development since it
emphasizes the significance of developing products that provide more than just the essential
components.
Processing raw crops into completed food products, for example, is a type of value-added
production in the agriculture sector. Similarly, assembling raw materials into a finished product
with additional features or functionalities might be termed a value-added process in manufacturing.
The concept does not apply only to physical commodities; it also applies to services. For example,
consulting services that translate raw data into actionable insights provide value to the information.
Overall, value-added production is critical for firms looking to increase their competitiveness and
profitability by providing products or services that go beyond basic capabilities or features.

Value-added in the economy

The value-added of an industry, also known as GDP-by-industry, is the contribution of a private
industry or a government sector to overall gross domestic product (GDP). The entire value
contributed at all stages is what is counted in GDP if all phases of production occur within a
country's borders.
The total value added is the market price of the completed product or service and only takes into
account manufacturing within a specific time period.
This is the basis for calculating value-added tax (VAT), a common taxation scheme in Europe.
Economists can use this method to calculate how much value an industry adds to a country's GDP.
The difference between an industry's total revenue and the entire cost of inputs—the sum of labor,
materials, and services—purchased from other firms during a reporting period is referred to as
value-added.
The industry's overall revenue or production comprises of sales and other operational income,
commodity taxes, and inventory change. Inputs that could be obtained from other companies to
create a final product include raw materials, semi-finished goods, energy, and services.
What is GDP?
GDP is the total monetary or market worth of all finished goods and services produced within a
country's borders in a certain time period. It serves as a comprehensive scorecard of a country's
economic health because it is a wide measure of entire domestic production.
GDP is normally estimated on an annual basis, although it is also calculated on a quarterly basis.
In the United States, for example, the government publishes an annualized GDP estimate for each
fiscal quarter as well as for the entire calendar year. Because the data in this report is presented in
actual terms, it has been adjusted for price changes and is thus net of inflation.

Types of GDP
Nominal GDP: Nominal GDP is a measure of economic output in an economy that takes current
prices into account. In other words, it does not account for inflation or the rate at which prices rise,
which might exaggerate the growth statistic.
All products and services counted in nominal GDP are evaluated at the prices at which they are
actually sold that year. To compare countries' GDPs in purely financial terms, nominal GDP is
calculated in either local currency or US dollars at currency market exchange rates.
Real GDP: Real GDP is an inflation-adjusted measure of an economy's output in a particular year,
with prices held constant from year to year to separate the influence of inflation or deflation from
the trend in output over time. GDP is prone to inflation because it is dependent on the monetary
worth of goods and services.
Rising prices tend to boost a country's GDP, but this may not always represent changes in the
number or quality of goods and services provided. Thus, simply looking at an economy's nominal
GDP can make it impossible to identify whether the figure has climbed due to a real increase in
output or simply because prices have risen.
GDP Per Capita: GDP per capita is a measure of GDP per individual in a country's population. It
denotes that the amount of output or income per person in an economy might reflect average
productivity or living standards. GDP per capita can be expressed nominally, in real (inflation-
adjusted) terms, or in purchasing power parity (PPP) terms.
In its most basic form, per-capita GDP indicates how much economic production value can be
assigned to each individual citizen. This also translates to a measure of overall national wealth, as
GDP market value per person may easily be used as a metric of affluence.
GDP Growth Rate: The GDP growth rate examines a country's economic production year over
year (or quarterly) to determine how quickly it is increasing. This statistic, which is usually
presented as a percentage rate, is popular among economic policymakers since GDP growth is
regarded to be strongly related to important policy aims such as inflation and unemployment rates.
If GDP growth rates rise, it may indicate that the economy is overheating and that the central bank
may consider raising interest rates. Central banks, on the other hand, perceive a declining (or
negative) GDP growth rate (i.e., a recession) as a signal that rates should be decreased and stimulus
may be required.
Productivity and GDP
The rate of productivity growth in an economy is closely related to the pace of GDP per capita
growth, however, the two are not equivalent. For example, if the percentage of people working in
an economy improves, GDP per capita increases, but individual worker productivity may not. Over
time, the only way for GDP per capita to increase continuously is for average worker productivity
to increase or for capital to develop in tandem.
A common measure of U.S. productivity per worker is dollar value per hour the worker contributes
to the employer’s output. This measure excludes government workers, because their output is not
sold in the market and so their productivity is hard to measure. It also excludes farming, which
accounts for only a relatively small share of the U.S. economy. Figure 3.1 shows that the average
amount produced by a U.S. worker in an hour averaged over $100 in 2011, more than twice the
amount an average worker produced per hour in 1966.

Value Added Ratios in Productivity Measurement

Value added is sales value minus raw material and purchased service expenses. It includes profit
as well as the costs of the firm's services and facilities in transforming outside supplies into finished
goods or services; it is 'this process of transformation that is the reason for the firm's existence and
thus must lie at the root of the idea of measuring productivity.
The use of value added ratios, like most ratio analysis, is susceptible to misinterpretation and even
abuse. For example: It is easy to believe that a growing ratio of value added to total income
indicates increased productivity. Clearly, this could be a self-justifying tactic because bigger
incomes and salaries are available. Making up part of the value added helps to enhance the ratio
which may continue to seem better and better by paying greater and higher wages and salaries.
The important aspect that pulls the situation back into viewpoint, however, is profit: without an
increase in the latter, the ratio of total profit to value added will look less and smaller, making the
ratio of profit to value added a more suitable overall measure.
Value added ratios are already extensively used in interfirm comparisons to measure the
productivity of individual factor inputs. In fact, any input element could be treated this way: for
example, let v = Value Added, S = Salaries, and W = Total Wages, then the ratios V/W, V/S, could
be regarded as the productivity per pound of wages or salaries.
Other ratios commonly found are:
 Value Added: Capital Employed
 Value Added: Fixed and Working Assets
 Value Added: Sales
 Value Added: Number of Employees
 Value Added: Square-foot Floor Area
 Operating Profit: Value Added
This is neither a complete list, nor is it, at least in part, a recommended list. With all ratios, it is
important to first evaluate what, if any, significance may be linked to them and how they are to
be assembled, including any changes that may be required, such as for inflation.

Case studies about Value-added production:

Coffee Farm
Certainly! Let's consider a case study in the context of a small-scale coffee farm that transitions
from selling raw coffee beans to engaging in value-added production.
Case Study: Enhancing Value in Coffee Production
Background: Maria owns a small coffee farm in a rural area. For years, she has been selling raw
coffee beans to a local distributor, but she realizes that she can potentially increase her income
by engaging in value-added production.
Initial Situation: Maria's coffee beans are of high quality, but the profit margin is relatively low
when sold in bulk to the distributor. She decides to explore ways to add value to her product and
increase its market value.
Stages of Value-Added Production:
1. Processing: Maria invests in equipment to process her raw coffee beans. Instead of selling
them as raw beans, she now produces roasted coffee beans, ground coffee, and even
packages whole beans in attractive bags.

2. Branding and Packaging: To differentiate her product, Maria creates a brand for her
coffee and designs appealing packaging. She includes information about the origin of the
coffee beans, the roasting process, and even includes a brief story about her family's
 commitment to sustainable farming practices.

3. Diversification: Recognizing that some customers prefer convenience, Maria also explores
producing flavored coffee, creating unique blends, and offering organic options. This
diversification further increases the perceived value of her coffee.

4. Direct Sales and Marketing: Instead of relying solely on the distributor, Maria starts
marketing her coffee directly to local coffee shops, farmers' markets, and through an
online platform. She attends events to showcase her product and shares her story,
connecting with consumers on a personal level.
Results:
1. Increased Profit Margins: By adding value to her coffee through processing, branding,
and diversification, Maria can charge a higher price for her product. The profit margins
increase compared to selling raw beans.

2. Brand Loyalty: Customers are drawn to Maria's story, the quality of her product, and the
uniqueness of her offerings. This creates a loyal customer base that appreciates the added
value in her coffee.

3. Community Impact: Maria's success in value-added production not only benefits her but
also positively impacts the local community. As her business grows, she employs more
local workers, supporting the local economy.

4. Competitive Edge: Maria's coffee now stands out in the market due to its unique features,
story, and diversified product range. This gives her a competitive edge over other coffee
producers in the region.
Summary: Maria's transition from selling raw coffee beans to engaging in value-added production
not only increased her profitability but also had positive effects on her community. This case study
illustrates the transformative impact of adding value to a product through various stages of
production, from processing to branding and marketing.

Bike Crafters
Let's consider a case study in the context of a manufacturing company that specializes in producing
customized bicycles. The company, called Bike Crafters, initially produces basic bicycles using
standard components such as frames, wheels, and gears. To increase their competitiveness and
profit margins, they decide to implement value-added production by offering customization
options to customers.
Case Study: Bike Crafters - Customized Bicycle Manufacturing
1. Initial Production (Baseline):
- Basic bicycle production with standard components.
- Cost per bicycle: $200
- Selling price: $300
- Profit margin: $100 per bicycle
2. Value-Added Steps: Bike Crafters introduces a customization process where customers can
choose from various options, such as custom paint colors, premium seats, personalized decals,
and upgraded gear systems.
- Customization cost per bicycle: $50
- Additional selling price for customized features: $100
- Increased profit margin due to customization: $50 per bicycle
3. Customer Response:
- Initially, 20% of customers opt for customization.
- The customization process takes an additional day of production time.
4. Numerical Solution:
- Number of bicycles produced per day: 100
- Initial profit without customization: $10,000 per day (100 bicycles * $100 profit each)
- Number of customized bicycles: 20 per day (20% of 100 bicycles)
- Additional profit from customization: $1,000 per day (20 bicycles * $50 additional profit each)
- Total profit with customization: $11,000 per day
Outcome:
- The introduction of value-added production through customization increases daily profits by
$1,000.
- Over a month (assuming 20 working days), the additional profit from customization would be
$20,000.
- Bike Crafters not only enhances its profit margins but also differentiates itself in the market by
offering personalized products.
Summary:
- Implementing value-added production through customization proves to be a successful strategy
for Bike Crafters.
- The numerical solution demonstrates the financial benefits of offering customization options to
customers.
- Bike Crafters can further refine their customization options based on customer preferences and
market trends.
This case study illustrates how value-added production, in this case, customization, can
significantly impact the financial performance of a manufacturing company. It showcases the
importance of understanding customer preferences and leveraging customization as a means to
enhance the overall value of the product.
Conclusion:
In the realm of economics and business, productivity and value-added products are closely related
concepts. Productivity is the efficiency and effectiveness with which resources are employed to
generate goods and services, whereas value-added products are the additional value created in the
manufacturing process that surpasses the cost of the inputs. How are they connected?
1-Increased Productivity Leads to Value Addition: Increased productivity indicates that a company
may generate more output with the same input resources or produce the same output with less
resources. When a corporation grows more productive, it may produce more value-added items
because the production process generates a surplus or profit. This added value is what distinguishes
value-added products from their raw materials.
2- Value-Added Represents Economic Value: comprehending how firms contribute to the
economy requires comprehending the idea of value-added. A company's value-added is a measure
of the economic value it generates. This value is estimated by deducting the cost of inputs (for
example, raw materials, labor, and overhead) from the revenue generated by selling the finished
product. A positive value-added metric implies that the company created economic value.
3- Competitiveness and Innovation: Productivity enhancements frequently entail technological,
process, and management innovations. A corporation can remain competitive by supplying high-
quality products at competitive prices by boosting productivity. These breakthroughs can result in
the development of new value-added products or the upgrading of existing ones.
4- Consumer Value: Productivity enhancements can also lead to the development of products with
improved features, quality, or cost-effectiveness. Such products are often more valuable to
consumers, and the added value provided contributes to the economy's overall value-added.
5- Economic Growth: An improvement in overall national productivity can lead to economic
growth. When firms become more productive as a whole, they generate more value-added, which
can contribute to higher GDP and higher living standards.
In summary, productivity and value-added products are linked because increased productivity
allows enterprises to develop more value-added products, which contributes to economic growth
and competitiveness. Productivity gains can lead to the development of new products and services,
as well as improved quality and cost-effectiveness, benefiting both firms and consumers in the
long run.
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