PRODUCTIVITY

2-1
 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
Productivity =
Input
2-2
 Input Output - Input
Labor

Machine Output

Raw materials Products

Electricity / water / etc. Processes Or

Capital Services

Inventory

Others
 Productivity Improvement
Productivity Improvement (PI) is the result of
managing and intervening in transformation or work
processes.
PI will occur if:

O O O O O
I I I I I
Productivity measures are useful for
• Tracking an operating unit’s 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 Wages increased

Parts per man hour Cost per unit decreased Average worker's annual cash
compensation increased
$2.25
115

110 $2.00 27000

105 26000
$1.75
100 25000
95 $1.50 24000
Year A Year B Year C Year A Year B Year C Year A Year B Year C

2-7
 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

2-8
 Examples of Partial Productivity Measures
Labor Productivity Units of output per labor hour
Units of output per shift
Value-added per labor hour

Machine Units of output per machine hour

Productivity Value-added per machine hour

Capital Units of output per dollar input

Productivity Dollar value of output per dollar input

Energy Units of output per kilowatt-hour

Productivity 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
Which productivity
Sold for $1.10/unit measures can be
calculated?
Cost of labor : $1,000
What is the
Cost of materials: $520 multifactor
productivity?
Cost of overhead: $2000
2-11
 Solution 1

MFP = Output
Labor + Materials + Overhead

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

MFP = (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 week’s productivity = 480/2000 =
0.24, and this week’s productivity is = 560/2400 =
0.23. So, productivity2-16has decreased slightly.
 Productivity Growth

Current productivity - Previous productivity

Productivity Growth = 100%
Previous productivity

Productivity Growth is a key factor in a contry’s rate

of inflation and the standard of living of its people

2-17
 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

2-18
Factors Affecting Productivity

2-19
 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 2-20
 Factors Affecting Productivity (2 of 3)

Methods
Design of the workspace
Incentive plans that reward productivity
Capacity utilization
Location Methods Quality

Layout
Inventory
Technology Management
Scheduling
2-21
 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

2-22
2-23
 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

2-24
 Bottleneck Operation

10/hr
Machine #1

10/hr
Machine #2
Bottleneck 30/hr
Operation
Machine #3
10/hr

Machine #4 10/hr
2-25
 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)

2-26
 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

2-27
Productivity Example - An automobile manufacturer has presented the
following data for the past three years in its annual report. As a potential
investor, you are interested in calculating yearly productivity and year to
year productivity gains as one of several factors in your investment
analysis.

2003 2002 2001

2003 2002 2001
Labor Productivity
Unit car 2,700,000 2,400,000 2,100,000
sales
Unit Car Sales/Employee 24.1 21.2 18.3

Employees 112,000 113,000 115,000 Year-to-year Improvement 13.7% 15.8%

Total Productivity
$ Sales $49,000 $41,000 $38,000
(billions$) Total Cost Productivity 1.26 1.24 1.19

Cost of $39,000 $33,000 $32,000 Year-to-year Improvement 1.6% 4.2%

Sales
(billions)

28
 Assignment 1

1. A company that makes shopping carts for supermarkets recently purchased

new equipment, which reduced the labor content needed to produce the
carts. Information concerning the old system (before adding the new
equipment) and the new system (after adding the new machines) includes:

Old System New System

Output/hr 80 84
Workers 5 4
Wage $/hr 10 10
Machine $/hr 40 50

a) Compute labor productivity for both the Old System and the New System.
b) Compute AFP productivity for both the Old System and the New System.
c) Suppose production with old equipment was 30 units of cart A at a price of
$100 per cart, and 50 units of cart B at a price of $120. Also suppose that
production with new equipment is 50 units of cart A, at a price of $100 per
cart, and 30 units of cart B at a price of $120. Compare all-factor productivity
for the old and the new systems.

29
 Assignment 2
2. A company has introduced a process improvement that reduces the
processing time for each unit and increases output by 25% with less
material but one additional worker.
Under the old process, five workers could produce 60 units per hour.
Labor costs are $12/hour, and material input was $16/unit.
For the new process, material input is now $10/unit and overhead is
charged at 1.6 times direct labor cost. Finished units sell for $31 each.
a) Compute single factor productivity of labor in the old system.
(Compute it in four possible ways.)
b) Compute all factor productivity for both old and new systems.
Factor Old System New System

Output 60 60(1.25) = 75
# of workers 5 6
Worker cost $12/hr $12/hr
Material $16/unit $10/unit
Overhead 1.6(labor cost) 1.6(labor cost)
Price 31 31
30
 Assignment 3
3. A milk factory seeks advice from an external consulting company concerning its
business and production processes. The final consulting report describes
several steps to increase productivity including implementation of cutting-edge
processing techniques through more powerful filtering systems.

Existing System Proposed System

Workers 12 9
Milk Output/hour 1,000 gallons 1,400 gallons
Wage Rate/hour $12 $12
Filtration Cost/hour $120 $170

a) Calculate the labor productivity for the existing as well as the proposed system.
b) Find the All-Factor Productivity for both systems.
c) Assume that current processing includes 700 gallons of Grade-A milk sold at
$2.40/gallon and 300 gallons of Grade-B milk at $1.90/gallon. Furthermore,
assume that under the proposed system, processing will include 600 gallons of
Grade-A milk at $2.40/gallon and 400 gallons of Grade-B milk at $1.90/gallon.
Compare all-factor productivity for both the existing and the new system.

31