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PRODUCTIVITYPRODUCTIVITY

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The Economic System Transforms The 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

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Measures of CompetitivenessMeasures of Competitiveness

Productivity GDP (Gross domestic product) growth Market capitalization Technological infrastructure Quality of education Efficiency of government

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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 = OutputOutputInputInput

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Productivity measures are useful for Productivity measures are useful for • Tracking an operating unit’s performance over time

• Judging the performance of an entire industry or country

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Why Productivity MattersWhy Productivity Matters

High productivity is linked to higher standards of livingAs an economy replaces manufacturing jobs with lower productivity

service jobs, it is more difficult to maintain high standards of livingHigher productivity relative to the competition leads to

competitive advantage in the marketplacePricing and profit effects

For an industry, high relative productivity makes it less likely it will be supplanted by foreign industry

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Typical ImpactTypical Impactss of of Productivity Productivity 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 were As productivity improved Costs were decreaseddecreased Wages increased Wages increased

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Measures of ProductivityMeasures of Productivity

Partial Output Output Output Outputmeasures Labor Machine Capital Energy

Multifactor Output Outputmeasures Labor + Machine Labor + Capital + Energy

Total Goods or Services Producedmeasure All inputs used to produce them

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Units of output per kilowatt-hourDollar value of output per kilowatt-hour

Energy Productivity

Units of output per dollar inputDollar value of output per dollar input

Capital Productivity

Units of output per machine hourValue-added per machine hour

Machine Productivity

Units of output per labor hourUnits of output per shiftValue-added per labor hour

Labor Productivity

Examples of Partial Productivity MeasuresExamples of Partial Productivity Measures

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Typical Measures of Productivity in Different Typical 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

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Example Example 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 becalculated?

What is the multifactorproductivity?

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SSolutionolution 1 1

MFP = OutputLabor + Materials + Overhead

MFP = (7040 units)*($1.10) $1000 + $520 + $2000

MFP = 2.20

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Example Example 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?

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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

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SolutionSolution 2: Multifactor Productivity 2: Multifactor Productivity

MFP = OutputLabor + Materials + Overhead

MFP = 4.52

MFP = (5,500 units)*($35) (500hrs.)*$25/hr. + ($5000) + 2*(500hrs.)*$25/hr.

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Example Example 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.

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U.S. Multifactor ProductivityU.S. Multifactor Productivity

U.S. Multifactor Productivity(1975 - 2007)

80859095

100105110115

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

Year

MFP

(Ind

ex, 2

000

= 10

0)

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Productivity GrowthProductivity Growth

%100typroductivi Previous

typroductivi Previous-typroductiviCurrent =Growth ty Productivi

Productivity Growth is a key factor in a contry’s rate of inflation and the standard of living of its people

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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%10025

25-23 =Growth ty Productivi

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MFP Growth - Non-FarmMFP Growth - Non-FarmMFP Growth in the Private Non-Farm Business Sector

1,9

0,4 0,61,1 1,3

0

1

2

3

4

5

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

Ave

rage

Ann

ual P

erce

nt C

hang

e

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MFP Growth - ManufacturingMFP Growth - Manufacturing

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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.

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Become more efficient Downsize Expand Retrench Achieve breakthroughs

Productivity improves when firms:Productivity improves when firms:

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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)

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MethodsDesign of the workspaceIncentive plans that reward productivityCapacity utilizationLocationLayoutInventory Scheduling

Factors Affecting ProductivityFactors Affecting Productivity (2 of 3)(2 of 3)

Methods Quality

Technology Management

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Factors Affecting ProductivityFactors Affecting Productivity (3 of 3)(3 of 3)

Shortage of IT workers and other technical workers

Equipment breakdownsPart and material shortages Inadequate investment in training & education

of the employees

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Key Steps for Key Steps for ImprovImprovinging Productivity 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 with efficiency)

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Bottleneck OperationBottleneck Operation

Machine #2 BottleneckOperation

Machine #1

Machine #3

Machine #4

10/hr

10/hr

10/hr

10/hr

30/hr

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Service ProductivityService Productivity

Typically labor-intensive as in teachingFrequently individually processed (doctors)Often an intellectual task is performed by

professionals (medical diagnosis)Often difficult to mechanize or automate

(haircut)

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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

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Productivity in the ‘90sProductivity in the ‘90s

| | | | | | | | | | | |‘‘9090 ‘91‘91 ‘92‘92 ‘93‘93 ‘94‘94 ‘95‘95 ‘96‘96 ‘97‘97 ‘98‘98 ‘99‘99 ‘00‘00 20012001

–7 7 –6 6 –5 5 –4 4 –3 3 –2 2 –1 1 –0 0 –

-1 -1 –-2 -2 –-3 -3 –

UUSS

GermanyGermanyJapanJapan