The document discusses productivity and how it is measured. It defines productivity as a ratio of output to input. Key points:
- Productivity increased annually in the US economic system by about 2.5%, with contributions from capital (38%), labor (10%), and management (52%).
- Measures of productivity include output per labor hour, units produced, value added, and multifactor productivity.
- Improving productivity leads to lower costs, higher wages, and competitive advantage. It is important for standards of living.
2. 2-2
The Economic System TransformsThe Economic System Transforms
Inputs to OutputsInputs to Outputs
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%)
Land, Labor,
Capital,
Management
Goods and
Services
Feedback loop
Inputs Process Outputs
3. 2-3
Measures of CompetitivenessMeasures of Competitiveness
Productivity
GDP (Gross domestic product) growth
Market capitalization
Technological infrastructure
Quality of education
Efficiency of government
4. 2-4
What is Productivity?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
Productivity =Productivity =
OutputOutput
InputInput
5. 2-5
Productivity measures are useful forProductivity measures are useful for
• Tracking an operating unit’s performance over time
• Judging the performance of an entire industry or
country
6. 2-6
Why Productivity MattersWhy 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
7. 2-7
Typical ImpactTypical Impactss ofof ProductivityProductivity
ImprovementImprovement
Parts per man hour
95
100
105
110
115
Year A Year B Year C
Cost per unit decreased
$1.50
$1.75
$2.00
$2.25
Year A Year B Year C
Average worker's annual cash
compensation increased
24000
25000
26000
27000
Year A Year B Year C
As productivity improved Costs wereAs productivity improved Costs were decreaseddecreased Wages increasedWages increased
8. 2-8
Measures of ProductivityMeasures 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
9. 2-9
Units of output per kilowatt-hour
Dollar value of output per kilowatt-hour
Energy
Productivity
Units of output per dollar input
Dollar value of output per dollar input
Capital
Productivity
Units of output per machine hour
Value-added per machine hour
Machine
Productivity
Units of output per labor hour
Units of output per shift
Value-added per labor hour
Labor Productivity
Examples of Partial Productivity MeasuresExamples of Partial Productivity Measures
10. 2-10
Typical Measures of Productivity in DifferentTypical Measures of Productivity in Different
OrganizationsOrganizations
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
wood
11. 2-11
ExampleExample 11
7040 Units Produced
Sold for $1.10/unit
Cost of labor : $1,000
Cost of materials: $520
Cost of overhead: $2000
Which productivity
measures can be
calculated?
What is the
multifactor
productivity?
13. 2-13
ExampleExample 22
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?
14. 2-14
Solution 2: Labor ProductivitySolution 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
16. 2-16
ExampleExample 33
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,
productivity has decreased slightly.
19. 2-19
Example 4Example 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?
%8%100
25
25-23
=GrowthtyProductivi −=×
22. 2-22
Measurement ProblemsMeasurement 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.
23. 2-23
Become more efficient
Downsize
Expand
Retrench
Achieve breakthroughs
Productivity improves when firms:Productivity improves when firms:
24. 2-24
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
Factors Affecting ProductivityFactors Affecting Productivity (1 of 3)(1 of 3)
25. 2-25
Methods
Design of the workspace
Incentive plans that reward productivity
Capacity utilization
Location
Layout
Inventory
Scheduling
Factors Affecting ProductivityFactors Affecting Productivity (2 of 3)(2 of 3)
Methods Quality
Technology Management
26. 2-26
Factors Affecting ProductivityFactors Affecting Productivity (3 of 3)(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
27. 2-27
Key Steps forKey Steps for ImprovImprovinging ProductivityProductivity
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 with efficiency)
29. 2-29
Service ProductivityService 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)
30. 2-30
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
Service Sector ProductivityService Sector Productivity