Productivity Productivity is a measure of the efficiency of an organization in terms of the ratio of the outputs to inputs.

The higher the numerical value of this ratio, the greater the efficiency. Productivity measures the efficiency of the employees (teams or departments) in using the organization s scarce resources to produce goods and services. It is an important tool for managers because it helps them track progress in terms of the efficient use of resources in producing goods and services. It helps them identify inefficient activities (if any) in the production process in terms of man-hours spent, material consumed, etc. Thus, productivity can be used as a controlling tool to ensure that all the resources are utilized judiciously and efficiently. Productivity Defined The term productivity was first used by French mathematician Quesnay in 1776. He defined it as the relation of output to input. In 1883, another Frenchman Littre defined productivity as the faculty to produce . In 1950, the Organization of European Economic Cooperation (OEEC) formally defined productivity as The quotient obtained by dividing output by one of the factors of production. In this way, it is possible to speak of productivity of capital, investment, or raw materials, according to whether output is being considered in relation to capital, investment, or raw materials respectively. In general, productivity can be defined as the relationship between output from the system and inputs used to produce the output (products and services). In mathematical terms, it is the ratio of output to input. Productivity = Output / Input Inputs Inputs are all those factors of production like capital, men, material, machinery, etc. Inputs can be quantified into different categories like number of man-hours worked, quantity of material used, tons of raw material consumed, and power consumed in kilowatts (KW) or megawatts (MW). They can also be viewed in terms of costs associated like material costs, transportation costs, direct costs, overheads, etc. Input can also be categorized into tangible and intangible assets. Tangible assets include raw material consumed, components used, and machinery used, while intangible assets include leadership skills, knowledge of the workers, and training provided.

Outputs Outputs may be in terms of the number of customers served in a restaurant, the number or volume of products produced in a factory, or the number of customer requests processed in a bank. It can also be tangible or intangible. The number of goods produced, tons of cement produced, etc. are tangible outputs while customer satisfaction is intangible. Operation managers need to develop means to quantify the intangible output to determine productivity accurately. Components of Productivity Productivity can be improved in many ways such as by procuring quality raw material at the lowest possible cost, adopting an optimal mix of production factors, and training the workers. These different factors/components independently influence the productivity in different ways. The components can be categorized to include y y y y Price efficiency A locative efficiency Technical efficiency Scale efficiency

Price efficiency Organizations always try to achieve a trade-off between the quality of the material purchased and the associated costs. Procuring good quality material at the lowest possible costs would reduce the overall cost of the product. Price efficiency comes in when such cost reductions are possible without compromising on the quality of the material purchased. A locative efficiency Operation managers do consider an optimal mix of factors of production. For instance, a trade-off between capital and labor is necessary to maximize productivity due to constraints arising in utilizing either of them in a given situation. Hence, the adoption of an optimal mix of factors of production leads to a locative efficiency.

Technical efficiency Productivity can be increased either by increasing the output with the same number of inputs or by producing the same output using fewer inputs. For instance, if 100 units are produced using 80 units of raw material, then productivity can be increased either by producing more than 100 units (say 110 units) by using the same number of inputs (80 units), or by producing 100 units by using less than 80 units of input (say 75 units of raw material). Either way, the productivity increases and this increase is termed as technical efficiency. Technical efficiency can be gained by modifying the existing production processes, introducing automation in production processes, etc. Scale productivity This component is concerned with the activity volume. The volume or size of operations has an impact on the productivity of the organization. For example, let us assume that the ordering cost for a raw material is fixed irrespective of the quantity ordered. In this situation, a small organization whose volume of output is low may find this ordering cost (input) more than a large organization, which has larger output volumes. Measuring Productivity Productivity can be measured in relation to a single factor (single factor productivity), a combination of factors (multifactor productivity), or all the factors taken together (total productivity). Single factor productivity and multifactor productivity can also be termed as partial productivity as all the factors of production are not considered while calculating productivity. Kendrick and Creamer defined partial productivity (single factor productivity) in 1965 as the ratio of gross or net output to one class of output. An example of single factor measurement of productivity is labor productivity, which typically measures output per unit of labor. Multifactor productivity takes into consideration more than one factor of production such as labor and materials. Total factor productivity includes all the factors of production (labor, materials, process, energy, and other inputs). According to Kendrick and Creamer, total factor productivity is the ratio of the real

products originating in the economy, industry, or firm to the sum of the associated labor and capital (factor) inputs. Traditional Approach Productivity is measured in terms of partial and total productivity. As labor is one of the major sources of production costs for organizations, most productivity ratios are calculated by considering labor as the specific input. This partial productivity ratio is referred to as the labor productivity index or output per work-hour ratio. Labor productivity = (Goods and/or services produced) / (Labor hours/man) Figure 10. 1 gives a comparison between the labor productivities of USA, Japan and Ger+many.

Fig 10. 1 Labor productivity of USA, Japan and Germany

*Source: http://en.wikipedia.org/wiki/Productivity

Material costs also affect productivity as they add up to 30% to 40% of the overall costs. Hence, operations managers also measure productivity in terms of material used. Material productivity = (Goods and/or services produced) / (Quantity of material used) In addition, managers often develop specific ratios that gauge productivity for particular outputs and inputs, such as sales per square foot of floor space, return on investment, amount of scrap for certain units of output, etc. Multifactor productivity = (Goods and/or services produced) / (Quantity of raw material and components used)

Many organizations measure productivity in terms of partial productivity (single factor or multi-factor). This is because it is difficult to measure total productivity due to the difficulty in identifying/understanding the particular input variable(s) (among many variables) that has led to lower productivity. Another problem with total productivity is that all the variables (inputs and outputs) must be expressed in the same units. But it is difficult to add the number of labor hours to the number of units of energy or any other units of an input. Total productivity = (Goods and/or services produced) / (Labor + capital + energy + technology + materials) Productivity of Knowledge Workers It is easy to measure the productivity of quantifiable tasks (like the number of units produced by an individual working on a machine during a given time period). But it is difficult to measure the productivity of tasks (such as pharmaceutical research) that cannot be measured in units. In fact, measuring the productivity of skilled workers is difficult because of its dependence on many intangible and qualitative factors. However, in order to improve planning and control at the organizational level, it is essential to quantify the work and keep track of the productivity of the organization. The productivity of a knowledge worker is much more difficult to measure than that of industrial workers for the following reasons: y The quality of a knowledge worker s output cannot be determined immediately. For example, the effects of a strategic decision may not be evident for several years and even then the positive or negative effect of the strategic decision depends on various external factors beyond the control of those responsible for taking the decision. y Often, the output of knowledge workers contributes only indirectly to the achievement of the end result, and is, therefore, difficult to measure. For example, a human resources manager solves the employees problems and attempts to improve the quality of work life of the employees. These efforts contribute indirectly to an increase in productivity. y Knowledge workers often assist other organizational units/departments indirectly and this contribution is usually difficult to measure. For example, a scientist in the R&D department may give a suggestion to the marketing department to highlight a specific attribute of the product while marketing it. In this case, it is difficult to measure the actual contribution of the scientist in the increase in sales of the product.