Productivity Management

1. Introduction

Production and productivity are not synonymous. Production refers to the

volume or value of goods and services produced during a given period by
a worker, plant, firm, or economy. It is the sum total of results achieved by
the various factors used together. Productivity, on the other hand, is not
concerned with the volume or value of production. It is the ratio of output
and input factors of an enterprise. It shows the efficiency of production or
the efficiency level of input factors. In other words, productivity is relative
to the resources used in turning out a certain amount of physical output,
while production is used, more or less, in absolute sense. The distinction
between these two terms becomes more clear when we find that increase
in production does not necessarily mean the increase in productivity.

The productivity measure, in its total form, takes the following

mathematical formula:
𝑂𝑢𝑡𝑝𝑢𝑡𝑠
Productivity =
𝐼𝑛𝑝𝑢𝑡𝑠

Productivity is the only measure of performance not production. To clarify

the error of relying on production not productivity to know the level of
performance of the organization, let us assume that you have the following
data about an organization:

Factor 2020 2021

Outputs in pounds 10000 15000
Inputs in pounds 2000 5000

Based on the above available data, do you think that the company's
performance is better in 2021 compared to 2020 or vice versa?

In this context, if the decision-maker relies on production as a measure of

performance, which is a mistake, he will reach the conclusion that the
company’s performance is better in 2021 compared to 2020, as its outputs
(production) are higher by 15,000 - 10,000 = 5,000 pounds. However, if he
relies on productivity, which is correct, the analysis will go like this:

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 𝑂𝑢𝑡𝑝𝑢𝑡𝑠
Productivity =
𝐼𝑛𝑝𝑢𝑡𝑠

10000
Productivity in 2020 = = 5 pounds outputs/inputs pound
2000
15000
Productivity in 2021 = = 3 pounds outputs/inputs pound
5000

This means that the organization's ability to benefit from its inputs to
achieve the maximum possible outputs, which is reflected in the
productivity measure, was better in 2020 compared to 2021, as every
pound invested in inputs in 2020 contributed to obtaining 5 pounds in
outputs, while every pound invested in inputs in 2021 contributed to
obtaining 3 pounds of outputs, and therefore the company’s performance
level is better in 2020 compared to 2021, although its production in 2021
exceeded its production in 2020.

We conclude from this that the productivity measure is the measure that
can be relied upon to identify the organization’s performance level, by
linking its outputs and inputs, and it is not possible to rely entirely on the
production scale, which expresses only one side of the picture, which is the
output side, which may mislead the decision-maker.

2. Productivity Relationship with Financial Indicators

Some may think that productivity and financial indicators (such as profit,
loss, rate of return on investment, and rate of return on owners’ equity) are
alternatives to each other, and in fact, this perception is completely wrong,
for the following reasons:

1- The productivity indicator is a measure of the performance itself, while

the financial indicators are a financial translation of performance, that
is, they express it only financially.
2- The factors that affect the productivity of the organization are subject to
its control in one way or another, while the organization cannot control
all the factors that affect its financial indicators. For example, the
organization cannot control a new tax system in the state or new policies
to attract and employ workers, all of which will certainly affect its
financial indicators.

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Accordingly, productivity and financial indicators cannot be viewed as
substitutes for each other, but rather they must be viewed as
complementing each other, as each performs a function that is different in
nature from the other.

3. Productivity Management Cycle

Productivity management goes through a cycle consisting of three stages:
productivity measurement, productivity analysis, and productivity
improvement. Figure 1 shows the three stages of the productivity
management cycle.

1- Productivity
measurement

3- Productivity 2- Productivity
improvement analysis

Figure 1: Productivity management cycle

It is noted from Figure 1 that:
1- The three activities that make up the productivity management cycle
come in a sequential form, and this sequence begins with productivity
measurement, followed by productivity analysis, and then productivity
improvement.
2- The productivity management cycle is infinite and does not stop at a
certain step, where the organization measures, analyzes, and improves
its productivity, then a new measurement, analysis, and improvement
again, and so on, the cycle of productivity management continues as
long as the organization continues in the world of business.
3- The succession of the productivity management cycle, measuring,
analyzing, and improving, does not mean that all the functions and
activities of the organization are in one of the three phases at the same
time. Rather, the marketing function can be in the measurement phase at
a certain time, while the human resources function is in the analysis
phase, and the financing function is in the stage of improvement at this

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 time. There is no doubt that this observation is related to partial
productivity only and has no place in the total measurement of
productivity.
4- For the success of the productivity management cycle and the
achievement of the target level, there must be a complete conviction by
the organization’s top management of the importance of productivity
management to ensure the necessary support for that.
5- Despite the importance of all the organization's human and physical
resources to the success of productivity management, the human
resource remains the central and main determinant of this success.

We will discuss each of the three stages of the productivity management

cycle with a detailed explanation as follows:

1- Productivity measurement
Measuring productivity means identifying the current level of performance
of the organization, its functions, or its activities. The accurate
measurement of productivity is the most critical stage of the productivity
management cycle. In order to reach an accurate and objective
measurement of productivity, the following principles must be considered:

a- The management of the organization must be keen on the participation

of the practitioners of its functions and activities when measuring
productivity. The practitioners of the functions and activities are the
most knowledgeable and experienced in them and their problems, and it
is wrong to ignore this knowledge when measuring productivity. That
participation increases the practitioners’ sense of their importance and
self-worth, in addition to reducing their resistance to the decisions made.
b- Be careful as much as possible to rely on quantities not values when
measuring productivity. Relying on quantities provides the advantage of
excluding the impact of price changes, increase or decrease, as not
excluding this effect may lead to misleading results for decision makers.
Although it is extremely difficult to achieve this in practice, in the event
of having to rely on values, which is what often happens; these values
must be rid of the impact of price changes through means such as relying
on data for a particular base year.
c- Whoever builds productivity measures must be keen on the stability of
its components in numerator and/or denominator from one period to

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 another, as the change in the components of the numerator and/or
denominator of productivity measures leads to misleading decision
makers when comparing performance from one period to another.
d- It cannot be said that productivity measures will provide completely
accurate results. For example, when measuring total productivity, we
need complete data about the outputs and all inputs of the organization.
Also, when measuring partial productivity, we need complete data about
the organization’s outputs and the job or activity whose productivity is
measured, and there is no doubt that this complete data is difficult to
obtain completely accurate, and therefore the accuracy we mean when
measuring productivity is relative rather than absolute accuracy, and in
fact this is the case in the social sciences in general.
e- To reach a relatively accurate measurement of productivity, the
organization must rely on a fast and accurate management information
system through which the required data can be provided.
f- Productivity is measured at three levels, total, multifactor, and partial:

• Total productivity

Total productivity measures the productivity of the organization as a

whole; it refers to the productivity of all the inputs used in the production
process. The predominant form of the total measure of productivity is:
𝑂𝑢𝑡𝑝𝑢𝑡𝑠
Productivity =
𝐼𝑛𝑝𝑢𝑡𝑠

The previous equation can be reformulated in more detail, on the base that
the inputs can be categorized into four elements: Labor, capital, materials,
and utilities, as follows:
𝑂𝑢𝑡𝑝𝑢𝑡𝑠
Productivity =
𝐿𝑎𝑏𝑜𝑟 + 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 + 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝑠 + 𝑈𝑡𝑖𝑙𝑖𝑡𝑖𝑒𝑠

The labor element refers to the human resources of the organization. The
capital element expresses some of the organization’s physical resources
such as land, buildings, machines, equipment, and cash. The materials
element expresses the raw materials that the organization uses to produce
its products. Finally, utilities express what the organization uses from the
elements such as water, electricity, gas, and security.

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• Multifactor productivity

Multifactor productivity refers to the productivity of some inputs used in

the production process, such as:
𝑂𝑢𝑡𝑝𝑢𝑡𝑠
Labor and capital productivity =
𝐿𝑎𝑏𝑜𝑟 + 𝐶𝑎𝑝𝑖𝑡𝑎𝑙

𝑂𝑢𝑡𝑝𝑢𝑡𝑠
Labor and materials productivity =
𝐿𝑎𝑏𝑜𝑟 + 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝑠

𝑂𝑢𝑡𝑝𝑢𝑡𝑠
Capital and materials productivity =
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 + 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝑠

𝑂𝑢𝑡𝑝𝑢𝑡𝑠
Labor, capital, and materials productivity =
𝐿𝑎𝑏𝑜𝑟 + 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 + 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝑠

𝑂𝑢𝑡𝑝𝑢𝑡𝑠
Labor, materials, and utilities productivity =
𝐿𝑎𝑏𝑜𝑟 + 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝑠 + 𝑈𝑡𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝑂𝑢𝑡𝑝𝑢𝑡𝑠
Capital, materials, and utilities productivity =
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 + 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝑠 + 𝑈𝑡𝑖𝑙𝑖𝑡𝑖𝑒𝑠

• Partial productivity

Partial productivity refers to the productivity of a single input used in the

production process, such as:
𝑂𝑢𝑡𝑝𝑢𝑡𝑠
Labor productivity =
𝐿𝑎𝑏𝑜𝑟

The labor may be expressed in the number of workers, the number of

working days of workers, the hours worked by the workers, the salaries
and wages of the workers, or other measures of labor.
𝑂𝑢𝑡𝑝𝑢𝑡𝑠
Capital productivity =
𝐶𝑎𝑝𝑖𝑡𝑎𝑙

Capital includes items such as land, buildings, machines and equipment,

and cash, as mentioned earlier, which may be expressed in quantity or
value.
𝑂𝑢𝑡𝑝𝑢𝑡𝑠
Materials productivity =
𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝑠

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Materials may be expressed in quantitative measures such as ton, kilogram,
barrel, liter, meter, etc., and it can also be expressed in value.
𝑂𝑢𝑡𝑝𝑢𝑡𝑠
Utilities productivity =
𝑈𝑡𝑖𝑙𝑖𝑡𝑖𝑒𝑠

Utilities are expressed quantitatively according to their nature. Electricity

is expressed in kilowatts, gas is expressed in cubic meters, and water is
expressed in cubic meters. Utilities can also be expressed in the value paid
to obtain them.

2- Productivity analysis
Productivity analysis is intended to identify the significance and meaning
of the results of productivity measurement. The results of productivity
measurement in themselves are important, but their importance will
become clear and crystallize more through analysis to identify their
significance, which may be positive, negative, or normal. Productivity
analysis is carried out in two stages, namely, comparing productivity
values and diagnosing, as follows:

a- Comparing productivity values

There are many forms of comparing productivity values. The comparison

may be in the form of comparing the productivity values of the
organization with the productivity values of another similar organization
operating in the same type of activity. The comparison may be in the form
of comparing the productivity values of the organization with the average
productivity at the level of the industry to which it belongs. The
comparison may be in the form of comparing productivity values of
internal units belonging to the same organization. Finally, the comparison
may take the form of historical comparison of productivity values of the
same organization over different periods.

The historical comparison of productivity values for the same organization

over different periods enables the decision maker to identify the trends of
increasing, decreasing, or no change in these values through a number of
historical observations. The time range of these historical observations may
be the day, week, month, quarter, half year, year, or others. In general, the
matter is not so simple; the decision maker needs an assistant tool that
enables him to identify the trends in changing of productivity values, which
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is the Productivity Change Rate (PCR) that takes the following
mathematical formula:
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 − 𝑃𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦
PCR = × 100
𝑃𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦

The value of the productivity change rate may be positive, in the case of
the increase of current productivity over the previous productivity, its value
may be negative, in the case of the increase of previous productivity over
the current productivity, and its value may be zero, if the current
productivity is equal to the previous productivity. The positive value of the
productivity change rate indicates an improvement in productivity, the
negative value of the productivity change rate indicates a decline in
productivity, and the zero value of the productivity change rate indicates
the stability and non-change of productivity.

Example 1

Given the following data about company x:

Factor 2020 2021

Productivity in pounds 1000 1200

Compute the productivity change rate for that company.

Solution
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 − 𝑃𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦
PCR = × 100
𝑃𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦

𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝑓𝑜𝑟 2021 −𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝑓𝑜𝑟 2020

PCR 2021 = × 100
𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝑓𝑜𝑟 2020

1200 − 1000
PCR = × 100 = 20%
1000
This means that there is an increase in the productivity of company x in
2021 compared to 2020 by 20%.

However, the following question arises: Does the productivity change rate
reflect the company's performance level? Or does it reflect its effort to
change the performance? In fact, the productivity change rate does not
reflect the level of the company’s performance, but only reflects its effort

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to change the performance. What reflects the company’s performance level
is its productivity not its productivity change rate. It is possible for the
company to have outstanding performance, as measured by its
productivity, and a low productivity change rate. The company’s
performance may be weak, as measured by its productivity, and its
productivity change rate is high. The reason is that improving high levels
of productivity is very difficult, while improving low levels of productivity
is possible and easy. Example 2 illustrates this idea.

Example 2

Given the following data about company x and company y:

Factor Company x Company y

Productivity in pounds 2020 5000 2000
Productivity in pounds 2021 6000 4000

What is the best company in terms of performance and effort in changing

performance?

Solution

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b- Diagnosing

Diagnosing means identifying the reasons behind the change or stability of

productivity from one period to another, in order to enhance and support
the reasons that lead to increased productivity, and to avoid the causes that
lead to a decrease in productivity or limit its effects. The reasons for the
change in the total productivity of the organization are due to the change
in some or all of its input elements, which are labor, capital, materials, and
utilities, as shown in Figure 2.

Change in Change in Change in Change in

labor capital materials utilities
productivity productivity productivity productivity

Change in total
productivity

Figure 2: The reasons for the change in total productivity

Example 3

Given the following data about company x:

Factor %
Change rate in total productivity 25
Change rate in labor productivity 35
Change rate in capital productivity 0
Change rate in materials productivity - 20
Change rate in utilities productivity 10

Diagnose the reasons behind the change in total productivity for company
x.

Solution

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3- Productivity improvement
Several approaches can be followed to improve total productivity, these
approaches are:

a- Reducing the inputs with the stability of the outputs level. This can be
achieved through the determination and elimination of excess inputs,
which are those inputs whose elimination will not affect the level of the
organization’s outputs. The excess inputs are those that do not add value
to the organization’s outputs. This description may apply to any of the
inputs items such as land, buildings, machines and equipment, raw
materials, cash, and others.
b- Increasing the level of outputs with the stability of the inputs. This
implies that the available inputs to the organization are not fully
exploited, which means that there is room for the administration to make
more supervisory and oversight efforts to achieve full exploitation of the
same available inputs to the organization in a way that can improve the
level of outputs.
c- Increasing inputs and outputs, provided that the increase in outputs is at
a higher rate, or that the increase in inputs is at a lower rate. This can be
done through making new investments (increasing the inputs), provided
that it results in improving outputs at a higher rate than the increase in
inputs. New machines and equipment, hiring new workers, and adding
new products to the existing product mix are examples of doing so.
d- Reducing the inputs and the outputs, provided that the reduction of the
inputs is at a higher percentage, or the outputs are reduced by a lower
percentage. This is achieved by eliminating some activities that reduce
the organization’s productivity and focusing only on the activities with
high productivity. Of course, this is assume that there are no
interrelationships between the activities to be eliminated and the
activities to be maintained by the organization.

Example 4

Given the following data about company x that has two activities A and B:

Factor Activity A Activity B

Inputs in pounds 1500 1000
Outputs in pounds 6000 3000

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Assuming that there is a kind of independence between activity A and
activity B; is it better for company x to stay focused on both of them or
leave one and focus on the other? Support your answer with formulas and
numbers.

Solution

e- Increasing outputs while reducing inputs. Although this approach is the

best at all, it represents a strong challenge to the management of the
organization, as it requires making radical changes in work systems that
cannot be applied often in the short term. A clear example of this is the
replacement of labor by machines.

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 Problems

1- Given the following data in pounds about company x for the years 2020
and 2021:

Factor 2020 2021

Outputs 160 200
Labor wages 35 38
Capital 25 35
Materials 45 32
Utilities 16 20

a- Compute the total productivity in 2020 and 2021.

b- Determine the productivity change rate.
c- Compute the partial productivity and use the results in diagnosing the
change in total productivity.

2- Given the following data about a business school for the years 2020 and
2021:

Factor Business administration dept. Accounting dept.

Number 2020 2021 2020 2021
Graduates 600 800 3000 2500
Faculty 8 10 10 12
Administrators 15 17 20 15

a- Compute the faculty and administrators productivity in 2020 in business

administration and accounting departments.
b- Determine the productivity change rate for faculty in the accounting
department.

3- Given the following data about company x and company y:

Factor Company x Company y

Productivity in pounds 2020 3000 500
Productivity in pounds 2021 3300 900

What is the best company in terms of performance and effort in changing

performance?

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