2-1

PRODUCTIVITY
2-2
The Economic System Transforms
Inputs 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
2-3
Measures of Competitiveness
Productivity
GDP (Gross domestic product) growth
Market capitalization
Technological infrastructure
Quality of education
Efficiency of government
2-4
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 =
Output
Input
2-5
Productivity measures are useful for
Tracking an operating units performance over time
Judging the performance of an entire industry or
country
2-6
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
2-7
Typical Impacts of Productivity
Improvement
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 decreased Wages increased
2-8
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
2-9
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 Measures
2-10
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
wood
2-11
Example 1
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?

2-12
Solution 1
MFP = Output
Labor + Materials + Overhead
MFP = (7040 units)*($1.10)
$1000 + $520 + $2000
MFP = 2.20
2-13
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?
2-14
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

2-15
Solution 2: Multifactor Productivity
MFP = Output
Labor + Materials + Overhead
MFP = 4.52
MFP = (5,500 units)*($35)
(500hrs.)*$25/hr. + ($5000) + 2*(500hrs.)*$25/hr.
2-16
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.
2-17
U.S. Multifactor Productivity
U.S. Multifactor Productivity
(1975 - 2007)
80
85
90
95
100
105
110
115
1
9
7
5
1
9
7
7
1
9
7
9
1
9
8
1
1
9
8
3
1
9
8
5
1
9
8
7
1
9
8
9
1
9
9
1
1
9
9
3
1
9
9
5
1
9
9
7
1
9
9
9
2
0
0
1
2
0
0
3
2
0
0
5
2
0
0
7
Year
M
F
P

(
I
n
d
e
x
,

2
0
0
0

=

1
0
0
)
2-18
Productivity Growth
% 100
ty productivi Previous
ty productivi Previous - ty productivi Current
= Growth ty Productivi
Productivity Growth is a key factor in a contrys rate
of inflation and the standard of living of its people

2-19
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?

% 8 % 100
25
25 - 23
= Growth ty Productivi
2-20
MFP Growth - Non-Farm
MFP Growth in the Private Non-Farm Business Sector
1,9
0,4
0,6
1,1
1,3
0
1
2
3
4
5
1948-1973 1973-1990 1990-1995 1995-2000 2000-2007
A
v
e
r
a
g
e

A
n
n
u
a
l

P
e
r
c
e
n
t

C
h
a
n
g
e
2-21
MFP Growth - Manufacturing
2-22
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.
2-23
Become more efficient
Downsize
Expand
Retrench
Achieve breakthroughs
Productivity improves when firms:
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 Productivity (1 of 3)
2-25
Methods
Design of the workspace
Incentive plans that reward productivity
Capacity utilization
Location
Layout
Inventory
Scheduling
Factors Affecting Productivity (2 of 3)
Methods Quality
Technology Management
2-26
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
2-27
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)
2-28
Bottleneck Operation
Machine #2
Bottleneck
Operation
Machine #1
Machine #3
Machine #4
10/hr
10/hr
10/hr
10/hr
30/hr
2-29
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)


2-30
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 Productivity
2-31
Productivity in the 90s
| | | | | | | | | | | |
90 91 92 93 94 95 96 97 98 99 00 2001

7
6
5
4
3
2
1
0
-1
-2
-3
US
Germany
Japan