PRODUCTIVITY

2-1

The Economic System Transforms

Inputs to Outputs
Inputs
Land, Labor,
Capital,
Management

Process
The economic system
transforms inputs to outputs
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

Outputs
Goods and
Services

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
Input

Productivity =
2-4

Productivity measures are useful for

Tracking an operating units 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

Cost per unit decreased

Parts per man hour

Wages increased
Average worker's annual cash
compensation increased

$2.25

115
110

27000

$2.00

105

26000
$1.75

100
95

25000
24000

$1.50
Year A

Year B

Year C

Year A

2-7

Year B

Year C

Year A

Year B

Year C

Measures of Productivity
Partial
measures

Output
Labor

Output Output
Machine Capital

Output
Energy

Multifactor
Output
Output
measures
Labor + Machine Labor + Capital + Energy
Total
measure

Goods or Services Produced

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
Productivity

Units of output per machine hour

Value-added per machine hour

Capital
Productivity

Units of output per dollar input

Dollar value of output per dollar input

Energy
Productivity

Units of output per kilowatt-hour

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
Sold for $1.10/unit
Cost of labor

: $1,000

Cost of materials: $520

Cost of overhead: $2000
2-11

Which productivity
measures can be
calculated?
What is the
multifactor
productivity?

Solution 1
MFP =

MFP =

Output
Labor + Materials + Overhead
(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
productivity?
2-13

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 =

MFP =

Output
Labor + Materials + Overhead
(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 weeks productivity = 480/2000 = 0.24,
and this weeks productivity is = 560/2400 = 0.23. So,
productivity has decreased slightly.
2-16

U.S. Multifactor Productivity

2-17

Productivity Growth
Current productivity - Previous productivity
Productivity Growth =
100%
Previous productivity

Productivity Growth is a key factor in a contrys 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
Productivity Growth =
100% 8%
25
2-19

MFP Growth - Non-Farm

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
Layout
Inventory
Technology
Scheduling
2-25

Quality

Management

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

(Dont confuse productivity with efficiency)

2-27

Bottleneck Operation
Machine
Machine #1
#1
Machine
Machine #2
#2

10/hr

10/hr

Machine
Machine #3
#3

Bottleneck
Bottleneck
Operation
Operation
10/hr

Machine
Machine #4
#4

10/hr
2-28

30/hr

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
6
5
4
3
2
1
0
-1
-2
-3 |

90

US

Germany
Japan

|
91

|
92

|
93

|
94

|
95

2-31

|
96

|
97

|
98

|
99

|
|
00 2001