PRODUCTIVITY

2-1
 The Economic System Transforms
Inputs to Outputs
Inputs Process Outputs

Land, Labor, The economic system Goods and

Capital, transforms inputs to outputs Services
Management at about an annual 2.5%
increase in productivity
(capital 38% of 2.5%), labor
(10% of 2.5%), management
(52% of 2.5%)

Feedback loop
2-2
 Measures of Competitiveness
 Productivity
 GDP (Gross domestic product) growth
 Market capitalization
 Technological infrastructure
 Quality of education
 Efficiency of government

2-3
 What is Productivity?
Productivity is a common measure of how well
resources are being used or a measure of the effective
use of resources usually expressed as the ratio of
output to input

Output
Productivity =
Input
2-4
Productivity measures are useful for
• Tracking an operating unit’s performance over time
• Judging the performance of an entire industry or
country

2-5
 Why Productivity Matters
High productivity is linked to higher standards of
living
As an economy replaces manufacturing jobs with lower
productivity service jobs, it is more difficult to maintain high
standards of living
Higher productivity relative to the competition leads to
competitive advantage in the marketplace
Pricing and profit effects
For an industry, high relative productivity makes it
less likely it will be supplanted by foreign industry
2-6
 Typical Impacts of Productivity
Improvement

As productivity improved Costs were decreased Wages increased

Parts per man hour Cost per unit decreased Average worker's annual cash
compensation increased
$2.25
115

110 $2.00 27000

105 26000
$1.75
100 25000
95 $1.50 24000
Year A Year B Year C Year A Year B Year C Year A Year B Year C

2-7
 Measures of Productivity

Partial Output Output Output Output

measures Labor Machine Capital Energy

Multifactor Output Output

measures Labor + Machine Labor + Capital + Energy

Total Goods or Services Produced

measure All inputs used to produce them

2-8
 Examples of Partial Productivity Measures
Labor Productivity Units of output per labor hour
Units of output per shift
Value-added per labor hour

Machine Units of output per machine hour

Productivity Value-added per machine hour

Capital Units of output per dollar input

Productivity Dollar value of output per dollar input

Energy Units of output per kilowatt-hour

Productivity Dollar value of output per kilowatt-hour
2-9
Typical Measures of Productivity in Different
Organizations
Restaurant Customers (meals) per
labor hour
Retail store Sales per square foot

Chicken farm Lbs of meat per lb. of feed

Utility plant Kilowatts per ton of coal

Paper mill Tons of paper per cord of

2-10
wood
 Example 1
7040 Units Produced
Which productivity
Sold for $1.10/unit measures can be
calculated?
Cost of labor : $1,000
What is the
Cost of materials: $520 multifactor
productivity?
Cost of overhead: $2000
2-11
 Solution 1

MFP = Output
Labor + Materials + Overhead

MFP = (7040 units)*($1.10)

$1000 + $520 + $2000

MFP = 2.20

2-12
 Example 2
5,500 Units Produced
Sold for $35/unit
500 labor hours are used
Cost of labor: $25/hr
Cost of raw material: $5,000
Cost of overhead: 2 x labor cost
What is the labor productivity?
What is the multifactor
2-13 productivity?
 Solution 2: Labor Productivity

 5,500 units/500 hours = 11 units/hour

Or we can arrive at a unitless figure:

 (5,500 units*$35/unit)/(500 hours * $25/hr) =15.4

2-14
 Solution 2: Multifactor Productivity
MFP = Output
Labor + Materials + Overhead

MFP = (5,500 units)*($35)

(500hrs.)*$25/hr. + ($5000) + 2*(500hrs.)*$25/hr.

MFP = 4.52

2-15
 Example 3
 You have just determined that your service
employees have used a total of 2400 hours of labor
this week to process 560 insurance forms. Last week
the same crew used only 2000 hours of labor to
process 480 forms.
 Which productivity measure should be used?
 Answer: Could be classified as a Partial Measure.
 Is productivity increasing or decreasing?
 Answer: Last week’s productivity = 480/2000 =
0.24, and this week’s productivity is = 560/2400 =
0.23. So, productivity2-16has decreased slightly.
 U.S. Multifactor Productivity

U.S. Multifactor Productivity

(1975 - 2007)
MFP (Index, 2000 = 100)

115
110
105
100
95
90
85
80
75
77
79
81
83
85
87
89
91
93
95
97
99
01
03
05
07
19
19
19
19
19
19
19
19
19
19
19
19
19
20
20
20
20
2-17 Year
 Productivity Growth

Current productivi ty - Previous productivi ty

Productivi ty Growth = 100%
Previous productivi ty

Productivity Growth is a key factor in a contry’s rate

of inflation and the standard of living of its people

2-18
 Example 4

Labor productivity on the ABC assembly line was 25

units per hour in 2006. In 2007, labor productivity was
23 units per hour. What was the productivity growth
from 2006 to 2007?

23 - 25
Productivi ty Growth = 100%  8%
25

2-19
 MFP Growth - Non-Farm
MFP Growth in the Private Non-Farm Business Sector

5
Average Annual Percent Change

3
1,9
2
1,1 1,3
1 0,4 0,6

0
1948-1973 1973-1990 1990-1995 1995-2000 2000-2007

2-20
MFP Growth - Manufacturing

2-21
 Measurement Problems

 Quality differences may distort productivity

measurements
 External elements may cause an increase or
decrease in productivity
 Precise units of measure may be lacking
 Technological differences may lead to
misleading results.

2-22
Productivity improves when firms:
 Become more efficient
 Downsize
 Expand
 Retrench
 Achieve breakthroughs

2-23
 Factors Affecting Productivity (1 of 3)
 Standardization
 Technology
 Use of Internet, fax machines, e-mail, computerized
billing, software
 Searching for lost or misplaced items
 Scrap rates
 Labor turnover, layoffs, new workers
 Safety
 Bottlenecks 2-24
 Factors Affecting Productivity (2 of 3)

Methods
Design of the workspace
Incentive plans that reward productivity
Capacity utilization
Location Methods Quality

Layout
Inventory
Technology Management
Scheduling
2-25
 Factors Affecting Productivity (3 of 3)

Shortage of IT workers and other technical

workers
Equipment breakdowns
Part and material shortages
Inadequate investment in training & education
of the employees

2-26
 Key Steps for Improving Productivity
 Develop productivity measures for all operations
 Determine critical (bottleneck) operations
 Develop methods for productivity improvements
 Establish reasonable goals
 Get management support (make it clear that management
supports and encourages productivity improvements.)
 Measure and publicize improvements
 Invest on labor force by training and education
(Don’t confuse productivity
2-27
with efficiency)
 Bottleneck Operation

10/hr
Machine #1

10/hr
Machine #2
Bottleneck 30/hr
Operation
Machine #3
10/hr

Machine #4 10/hr
2-28
 Service Productivity
Typically labor-intensive as in teaching
Frequently individually processed (doctors)
Often an intellectual task is performed by
professionals (medical diagnosis)
Often difficult to mechanize or automate
(haircut)

2-29
 Service Sector Productivity
Service sector productivity is difficult to measure
and manage because
 It involves intellectual activities
 It has a high degree of variability

A useful measure related to productivity is process

yield

2-30
 Productivity in the ‘90s
–
7– US
6– Germany
5– Japan

4–
3–
2–
1–
0–
-1 –
-2 –
-3 – | | | | | | | | | | | |
‘90 ‘91 ‘92 ‘93 ‘94 2-31
‘95 ‘96 ‘97 ‘98 ‘99 ‘00 2001