Lecture 2

Productivity and its Enhancement

At the end of this lecture, students will be able to:

• Define productivity and its importance in the context of Operations Management
• Identify factors that influence productivity, and learn the techniques and strategies to
improve organizational productivity
• Evaluate the impact of productivity enhancements on organizational performance.

2.1 Introduction
In today's fast-paced and competitive world, productivity is crucial for success in
various sectors, from individual pursuits to organizational achievements. At its core,
productivity refers to how efficiently and effectively inputs like time, labor, and
resources are transformed into valuable outputs such as goods, services, or desired
outcomes. Understanding productivity involves exploring its components, measuring its
impacts, and considering the countless factors that influence it.
The significance of productivity goes beyond economic metrics; it encompasses the
ability to achieve more with less, promoting growth, innovation, and sustainability. High
productivity levels are often linked to increased profitability, improved quality of life,
and enhanced competitiveness on both micro and macro scales.
However, achieving and maintaining high productivity is a complex challenge that
requires a multifaceted approach. It involves optimizing processes and resources,
fostering conducive environments, and implementing effective strategies. This includes
personal time management techniques, workplace ergonomics, technological
advancements, and comprehensive training programs.
When exploring the topic of productivity and its enhancement, several key areas are
typically covered. These topics span individual, organizational, and technological
aspects, offering a comprehensive understanding of how productivity can be measured,
analyzed, and improved. By covering these topics, individuals and organizations can
gain a thorough understanding of productivity and discover effective strategies to
enhance it, leading to improved performance, satisfaction, and success. Therefore, this
lecture aims to provide a comprehensive overview of productivity, shedding light on its
fundamental principles and the various ways in which it can be enhanced. By exploring

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Productivity and its Enhancement

key concepts, practical tools, and real-world applications, we aim to explore the
fundamental issues that boost personal productivity, drive organizational efficiency, and
effectively achieve organizational goals.

2.2 What is Productivity?

The term productivity can be interpreted and defined from different perspectives,
depending on the factors considered. Various authors, professional bodies, and
organizations have provided a large number of definitions of productivity. In simple
words,

Productivity is a measure of the effective use of resources, usually expressed as the

ratio of output to input.

In other words, “Productivity is a measure of the efficiency with which inputs such as
labor, capital, and raw materials, are converted into outputs like goods, services, or
other desired results”.

“Productivity is a measure of performance that compares the output of a product with

the input, or resources, required to produce it.”

The Bureau of Labor Statistics defines-

“Productivity as a measure of economic performance that compares the amount of

goods and services produced (output) with the amount of inputs used to produce those
goods and services.”

Productivity is typically measured by comparing aggregate output with a single input or

comparing aggregate input with aggregate output over time. The ILO publication
defines-

“Productivity is the ratio between output of wealth and the input of resources used in
the process of production.”

The European productivity Agency (EPA) has defined productivity as follows:

“Productivity is an attitude of mind. It is a mentality of progress, or the constant

improvement of that which exists. It is the certainty of being able to do better today
than yesterday, and continuously. It is the constant adaptation of economic and social
life to changing conditions, it is the continual effort to apply new techniques and
methods, it is the faith in human progress.”

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The term productivity is recognized for its contribution to operational, organizational,
industrial, and national competitiveness, particularly due to the global industrial
revolution. In general terms, the simplest definition of productivity is the ratio of output
generated to the input provided by either a manufacturing or service system. It can be
shown in the following equation:
Output O
Productivity (P) = =
Input I

where, P = productivity, O = output of goods or services, and I = input of resources.

The Organization for European Economic Co-operation (OCCE) defined productivity
as: “Productivity is the quotient obtained by dividing output by one of the factors of
production. In this way, it is possible to speak of the productivity of capital, investments
or raw materials according to whether output is being considered in relation to capital,
investment or raw materials.” A researcher of National Bureau of Economic Research
stated, “Productivity refers to a comparison between the quantity of goods or services
produced and the quantity of resources employed in turning out these goods or services”.
A formal definition provided by Ramsey on productivity as,

“Productivity is the optimization (or maximization of economic utilization) of all

available resources, investigation into the best-known resources and generation of
new resources through creative thinking, research and development and by the use of
all possible improvement technique and methods.”

2.3 Productivity Types

In the context of operations management, productivity is a measure of the efficiency
with which inputs (such as labor, capital, and materials) are converted into outputs
(goods and services). It is a critical indicator of an organization's operational efficiency
and effectiveness. Therefore, productivity can be understood in various contexts, such
as:
• personal productivity,
• workplace productivity, and
• economic productivity.
Personal productivity: Personal productivity refers to how efficiently and effectively an
individual manages their time and effort to achieve goals and get things done. In
essence, personal productivity is about working smarter, not just harder, to get the
most valuable and important tasks done within the available time frame. It is about
maximizing one's output and achievements. The main points are as follows:

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Productivity and its Enhancement

o Define the goals to be achieved daily, weekly, and monthly.

o Prioritize tasks using methods like the Eisenhower Matrix (also known as the
Urgent-Important Matrix, which is a time management tool that helps
prioritize tasks based on their urgency and importance).
o Manage time effectively with techniques like the Pomodoro method (a
technique like 25 minutes of work followed by a 5-minute break that can help
maintain focus).
o Minimize distractions by eliminating non-essential notifications.
o Utilize tools and techniques such as Todoist (a task management app that
allows users to create to-do lists and organize tasks with deadlines, priorities,
and labels), Trello (a project management tool that uses boards, lists, and cards
to visually organize tasks and projects.), or Notion (an all-in-one workspace
that combines notes, tasks, databases, and collaboration tools) to help organize
tasks and projects.
o Maintain a healthy lifestyle with adequate sleep, exercise, and a balanced diet
to enhance concentration and energy levels.
Workplace productivity: Workplace productivity is a measure of how well an
organization utilizes its resources, including time, labor, and materials, to produce
valuable outcomes. High workplace productivity typically means more output is
generated with the same or fewer resources, leading to increased profitability and
competitiveness. Factors that influence workplace productivity include:
o A comfortable and well-organized workspace that can enhance focus and
efficiency.
o Access to up-to-date technology and tools that can streamline processes.
o Encouraging a balance between work and personal life that can reduce burnout
and improve morale.
o Effective leadership that motivates and guides employees toward achieving
organizational goals.
o Clear and open communication that helps in coordinating efforts and reducing
misunderstandings.
o A culture that encourages teamwork and collaboration that can lead to more
innovative solutions and better problem-solving.
o Continuous learning opportunities help employees stay updated and efficient
in their roles.
o Healthy employees are more productive and less likely to take sick leave.
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Economic productivity: Economic productivity refers to the efficiency with which
economic resources are utilized in the production of goods and services within an
economy. It is measured as the ratio of output to inputs used in production. Higher
output relative to inputs means greater economic productivity. The key aspects of
economic productivity include:
o Investing in research and development to innovate and improve processes.
Implementing advanced technologies like automation and AI to streamline
processes.
o Good infrastructure (transportation, internet, etc.) supports efficient business
operations.
o A well-educated workforce can adapt to new technologies and processes more
efficiently.
o Supportive regulations that encourage business operations and fair
competition.
o Maintaining health, energy levels, and motivation through proper breaks
improves productivity over the long run.

2.4 Nature of Productivity

The nature of productivity encompasses various characteristics and dimensions,
reflecting the efficient and effective use of resources to achieve desired outcomes.
Understanding the nature of productivity involves examining its components,
influencing factors, and methods for measurement and improvement. Some key aspects
of productivity include:
o Productivity is a ratio that compares outputs to inputs, indicating how efficiently
resources are used in the production process.
o It can be measured at different levels, such as individual, group/team,
organizational, industry, or national level, with corresponding metrics.
o It is not a measure of production quantity, but rather a relationship between output
and input. An increase in output with proportionately fewer inputs demonstrates
improved productivity.
o It is not a measure of profitability, but it indicates operational efficiency and
suggests potential profitability. However, an inefficient operation may be
temporarily profitable but will suffer in the long run.
o It is not a guaranteed method to reduce inflation, but it may be one of many
economic factors influencing price trends.
o It is not a technique to make workers work harder, but a well-organized and
comfortable workspace can significantly enhance productivity.

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Productivity and its Enhancement

2.5 Productivity Functions

Productivity functions establish the relationship between the quantity of outputs
produced by a productivity process and the quantities of different inputs used. They are
mathematical models or frameworks used to analyze and quantify productivity levels
within organizations or economies. Mathematically, a production function can be stated
as:
P = f (M1 , M 2 , M 3 , M 4 ,...........M n )

where, M1, M2, M3, M4, …. Mn are inputs and P is the output.
Some common types of productivity functions are:
a. Single factor productivity function (SPF): This function measures the productivity
of a single input factor relative to output. For example, it could assess labor
productivity by dividing total output by the number of labor hours worked.
Single product output
Single factor productivity =
Single input
Total outputs produced
For example, Labor productivity =
Number of labor hours
b. Multi-factor productivity function (MPF): This function considers multiple input
factors together to assess overall productivity.
Total outputs produced
Multi-factor productivity =
Multiple inputs

For example, total-factor productivity = Total units produced / (Labor + Capital +

Materials inputs).
c. Total productivity function (TPF): This function integrates all factors of production,
including labor, capital, materials, and potentially other inputs like technology or
energy, to provide a holistic view of productivity. TPF accounts for the combined
effect of all inputs and is often used to assess the impact of technological
advancements, organizational improvements, and other factors affecting
productivity. Mathematically,
Total output
TPF =
Total inputs (i.e., Labor, capital, materials, etc.)
For example, the overall efficiency measures the efficiency of all inputs (labor,
capital, materials, energy, etc.) in generating output.
In comparison, SPF focuses on a single input, providing a narrow view but useful
for specific resource management. MFP considers multiple inputs, offering a more
detailed perspective on productivity by evaluating the combined effect of selected
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 resources. TFP encompasses all inputs, providing the most comprehensive measure
of productivity and capturing overall efficiency and technological progress.
d. Dynamic productivity function (DPF): A dynamic productivity function model
acknowledges that productivity is not static or fixed, accounting for changes over
time due to factors such as technological advancements, process improvements,
and organizational changes. Mathematically,
Output in current period
DPF = 100%
Output in previous period

Dynamic productivity dynamic productivity factors are measured to compare

productivity levels across industries, regions, or over time. It identifies the efficiency
gap for resource utilization and helps plan for improvement and investments.

2.6 Productivity Measurement

The measurement of productivity can be quite direct. Measuring productivity involves
quantifying the efficiency and effectiveness with which inputs are converted into
outputs. The measurement can vary depending on the type of productivity being
analyzed, such as labor productivity, capital productivity, multi-factor productivity, or
total factor productivity. There are a few main ways that productivity is typically
measured:
o Labor productivity: This measures the output per worker or unit of labor input. It
is calculated by dividing total output by the total number of labor hours worked.
Labor productivity = Total output / Total labor input.
o Partial productivity: Partial productivity, as the name suggests, focuses on the
efficiency of a specific input, rather than considering all inputs like in multifactor
productivity. It examines the output produced per unit of a single input, such as
labor, capital, or materials.
Partial productivity = Output / Specific input.
o Multifactor productivity: Multifactor productivity indicates the ratio of goods and
services produced (outputs) to many or all resources (inputs). Sometimes,
multifactor productivity is also known as total factor productivity.
Multifactor productivity = Output / Two or more inputs
o Total productivity: This measures how efficiently all inputs (labor, capital, energy,
materials) are being used in combination to produce output.
Total productivity = Output/(labor +material +energy +capital +miscellaneous).
o Physical productivity: For manufacturing industries, productivity is best

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Productivity and its Enhancement

measured in physical output terms like tons of steel per worker-hour. Controls for
variations in product quality.
o Sales/revenue productivity: Total sales or revenues generated per unit of input
like worker. Captures both volume and price/ mix factors. Broader measure in
service industries.
Three interrelated terms are used to measure productivity. They are: (i) Profitability, (ii)
Effectiveness, and (iii) Efficiency. These terms are sometimes mistaken for productivity.
So, a clear understanding of these terms and their difference with productivity should be
identified.
▪ Profitability: Profitability is defined as “the state or condition of yielding a
financial profit or gain. It is often measured by the price to earnings ratio”.
Profitability refers to a company's ability to generate profits, which is the
difference between its revenues and expenses.
It is typically measured through metrics like profit margin, return on investment
(ROI), and earnings per share. Profitability emphasizes the financial performance
of a business, aiming to maximize profits.
1. Profit margin: Profit margin measures the percentage of profit generated
from each dollar of revenue. It indicates how efficiently a company
converts sales into profits. Mathematically.
Profit margin = Net income / Revenue
For example, if a company has a net income of $100,000 and revenue of
$1,000,000, its profit margin is 10%.
2. Return on investment (ROI): ROI measures the profitability of an
investment relative to its cost. It shows the return generated for each dollar
invested.
ROI = (Net profit / Investment cost) × 100%
3. Earnings per share: EPS represents the portion of a company's profit
allocated to each outstanding share of common stock. It indicates the
profitability of the company on a per-share basis. Mathematically,
EPS = Net income / Number of outstanding shares
For example, if a company has a net income of $1 million and 100,000
outstanding shares, its EPS is $10.
However, the real-life situation is quite different. A higher profitability of a firm
does not always mean a higher productivity. Again, higher productivity doesn’t
indicate high profitability.

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▪ Effectiveness: Effectiveness is defined as the degree to which goals are attained.
A system can be identified as effective if it can produce the intended or expected
results. Effectiveness is the ratio of what is achieved to what was possible.
In operations management, efficiency measures how well an organization uses
its resources to produce outputs. It focuses on the input-output relationship,
aiming to minimize inputs while maximizing outputs. Effectiveness typically
emphasizes the strategic alignment of efforts and the achievement of desired
outcomes. It is often measured through qualitative assessments of goal
attainment, customer satisfaction, market share, and other relevant metrics.
▪ Efficiency: Efficiency refers to the optimal utilization of resources to achieve a
desired output. It focuses on minimizing waste and maximizing output per unit
of input.
In general terms, efficiency is defined as how well the resources are used to
generate a useful output. Higher efficiency indicates generating an output using
fewer resources hence less waste occurs. It is typically measured through
quantitative metrics like labor productivity, material usage, and process cycle
time.
The relation between effectiveness and efficiency and their effect in an
organization is shown below:

Effective Pursuing the right goals, wastes Pursuing the right goals and
are high. generating a high rate of return.

Ineffective Pursuing the wrong goals and Pursuing wrong goals but low
too much expense. cost associated.

Inefficient Efficient

The key difference between effectiveness and efficiency can be tabulated as:

Feature Effectiveness Efficiency

Focus Achieving goals Optimizing resource use

Question Doing the right things Doing things right

Measurement Qualitative Quantitative

Impact Strategic alignment Operational optimization

Analogy: The team builds a house that The team builds the house
Imagine a team meets the client's needs and with minimal waste of
trying to build a specifications (achieving the materials and time
house. goal). (optimizing resource use).

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Productivity and its Enhancement

Problems 1: X Ltd. wants to evaluate its labor and multifactor productivity with a new
computerized title-search system. The company has a staff of four, each working 8 hours per
day (for a payroll cost of $ 640/day) and overhead expenses of $ 400 per day. X Ltd. processes
and closes on 8 titles each day. The new computerized title-search system will allow the
processing of 14 titles per day. Although the staff, their work hours, and pay are the same, the
overhead expenses are now $800 per day. [ Heizer, 13e, pp. 46-47].
Solutions:
8 tiles/day
Labor productivity (old system) = = 0.25 title/labor hour
32 labor hours
14 tiles/day
Labor productivity (new system) = = 0.4375 title/labor hour
32 labor hours
8 tiles/day
Multi-factor productivity (old system) = = 0.0077 title/dollar
$ (640+ 400)

14 tiles/day
Multif-factor productivity (new system)= = 0.0097 title/dolla
$ (640 +800)
Solution shows that the labor productivity has increased from 0.25 to 0.4375. The change is
(0.4375 – 0.25)/ 0.25 = 0.75, or a 75% increase in labor productivity. However, multi-factor
productivity has increased from .0077 to .0097. This change is (0.0097 – 0.0077)/0.0077 = 0.26,
or a 26% increase in multifactor productivity.
Problem 2: A bank employs three loan officers, each working eight hours per day. Each officer
processes an average of five loans per day. The bank’s payroll cost for the officers is $820 per
day, and there is a daily overhead expense of $500.
i. Compute the labor productivity.
ii. Compute the multifactor productivity, using loans per dollar cost as the measure.
The bank is considering the purchase of new computer software for the loan operation. The
software will enable each loan officer to process eight loans per day, although the overhead
expense will increase to $550.
iii. Compute the new labor productivity.
iv. Compute the new multifactor productivity.
v. Should the bank proceed with the purchase of the new software? Explain.
Solution:
(i) Labor productivity is simply the ratio of loans to labor-hours.

No.of loans per day 3 officers × 5 loans/day

Labor productivity = = = 0.625 loans /labor.hr
Labor hour per day 3 officers × 8 hr/day

Outputs (No.of loans per day) 15 loans /day

(ii) Multi-factor productivity = = = 0.0113 loans /$
Inputs (Labor cost+ overhead) $ 820 +$ 500

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After installing the new software,
No.of loans per day 3 officers  8 loans/day
(iii) Labor productivity = = = 1.0 loan /labor.hr
Labor hour per day 3 officers × 8 hr/day
3 officers  8 loans/day 15 loans /day
(iv) Multi-factor productivity = = = 0.0175 loans /$
$ 820 + $ 550 $ 1,370

Purchasing new software would increase the labor productivity by: (1.0−0.625)/0.625×100% =
60 %, and increase in multifactor productivity by ( 0.0175 – 0.0113)/0.0113 ×100% = 55%; so,
it is certainly worth the bank must install new software, however, it added overhead.
Problem 3: Modern Lumber, Inc. (MLI) produces apple crates, which it sells to growers. With
the current equipment, MLI produces 240 crates per 100 logs. It currently purchases 100 logs
per day, and each log requires three labor hours to process. MLI is considering the hire of a
professional buyer who can buy better quality logs at the same cost. If this is the case, MLI can
increase production to 260 crates per 100 logs, and the labor hours required will increase by
eight hours per day (for the buyer).
i. Compute the labor productivity for the current method (i.e., no buyer).
ii. What will the labor productivity be if MLI hires the professional buyer?
Suppose that MLI spends $12 per hour for each worker who constructs the crates. The buyer,
however, is paid $24 per hour. The material cost is $10 per log (regardless of who purchases
them).
iii. Compute the multifactor productivity for the current method, using crates per dollar cost
(labor + materials) as the measure.
iv. How does the multifactor productivity change if the professional buyer is hired?
Solution: Labor productivity for the current method:
240 Crates 240
(i) Labor productivity = = = 0.8 Crates/Labor-hr.
100 logs × 3 labor 300
(ii) Adding labor of the buyer increases both the inputs and the outputs
260 Crates 260
Labor productivity = = = 0.844 Crates/Labor-hr.
100 logs × 3 labor + 8 hr 308

This means that the labor productivity would increase by 5.5 percent [= (0.844 − 0.8)/0.8)].
The multifactor productivity measures the amount of output (crates) is produced per unit of
input (dollars).
260 Crates 260
MFP = =
(iii) (100 logs × 3 hr/log  12 $/hr) + (8 hrs  $ 24) + (100 log  10 $/log) 4,792
= 0.0543 Crates/$
(iv) If the professional buyer is hired, the multifactor productivity would be:
260 Crates 260
MFP = = = 0.0543 Crates/$
(100 logs × 3 hr/log  12 $/hr) + (8 hrs  $ 24) + (100 log  10 $/log) 4,792

This represents an increase of 4.0 percent (= [0.0543 − 0.0522]/0.0522).

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Productivity and its Enhancement

2.7 Productivity Measurement Models

Several authors have contributed to generate models for measuring productivity. The
concept of measuring productivity has been challenged over the years. So, researchers
have proposed several models using different methodologies and approaches. The
models can be categorized based on the approaches or concepts on which they were
constructed. The major categories of models are:
• Production Function Models
• Financial Ratios as Measures of Productivity
• Production Based Model
• Product Oriented Model
• Surrogate Models
• Economic Utility Model
• System Approach Model
It should be noted that many of the models can fit into more than one category. So, the
classification is not mutually exclusive. Some of the models are discussed below.
2.7.1 Production Function Models
Production function models establish the relationship between inputs (resources used in
production) and outputs (goods and services produced). They provide a framework for
understanding how firms can optimize their production processes and achieve maximum
efficiency. Some production function models include:
▪ Cobb-Douglas Production Function: This function is a classic example of a
production function model. The function is expressed as:
Q = A  K   L

where, Q = Output, A = Total factor productivity (a measure of technological

efficiency), K = Capital input, L = Labor input, and α and β = Output elasticities
of capital and labor, respectively (representing the sensitivity of output to changes
in each input).
Following this approach, a firm's output (Q) is determined by its capital (K) and
labor (L) inputs, with a specific level of technological efficiency (A). The output
elasticities (α and β) indicate how much output changes for a given change in
capital or labor. It exhibits constant returns to scale (doubling both inputs doubles
output). This model is widely used for its simplicity and flexibility.
▪ The Leontief Production Function: The Leontief production function, also known
as the fixed-proportions production function, assumes that inputs are used in
fixed proportions, with no substitution between them. According to this approach,

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 the output can be calculated as:
L K
Q = min  , 
a b 

where, Q = Total output, K = Capital input, L = Labor input, and a and b = Fixed
input coefficients (representing the fixed ratio of inputs required for production).
This model exhibits that a fixed proportion of inputs must be used in a specific
ratio to generate a specific output. According to this model, a firm needs a fixed
ratio of capital (K) and labor (L) to produce a specific output (Q). For instance, a
construction company might need one crane (K) for every five workers (L) to
complete a project.
▪ Linear Production Function: The linear production function assumes that inputs
contribute additively to the output, with constant marginal contributions. The
mathematical formula used in this function is:
Q = aK + bL
Where Q = Output, K = Capital input, L = Labor input, and a and b = Marginal
products of capital and labor, respectively (representing the additional output
produced by one unit of each input).
This approach indicates that constant marginal products of inputs are used in a
simple production process where inputs are easily substitutable.
▪ Klein-Goldberger Production Function: This function is an extension of the
Cobb-Douglas function, incorporating more variables and interactions to capture
more complex production processes. The mathematical formula used as:
Q = A  L  K   M 

where, Q = total output, A = a constant representing total factor productivity, L =

labor input, K = capital input, M = materials input, and 𝛼, β, and γ are the output
elasticities of labor, capital, and materials, respectively.
▪ Constant Elasticity of Substitution (CES) Production Function: The CES
production function allows for different substitution rates between inputs and can
represent various types of returns to scale. The mathematical formula used is:
1
Q =  .K  + (1 −  ) L  

where, Q = total output, K = capital input, L = labor input, α = distribution

parameter (representing the relative importance of capital and labor), and ρ =
substitution parameter (representing the ease with which capital and labor can be
substituted for each other). According to this formula, a firm can adjust its input
mix based on the relative prices and the ease of substitution between them.

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Productivity and its Enhancement

▪ Stochastic Frontier Production Function: This model incorporates a stochastic

error term to account for random effects and inefficiency in the production
process, providing a way to measure technical efficiency. This model estimates
technical efficiency and inefficiency in production processes, particularly when
there are random factors affecting productivity. Mathematical formula used is:
Qi = f ( X i ) .evi −ui

where, Qi is the output for the i-th unit, Xi are the input quantities, f ( X i ) is the
deterministic part of the production function, vi is the random error term, and ui
is the inefficiency term.
According to this model, the function represents random shocks or factors beyond
the control of the firm that affect output. The output is typically assumed to be
normally distributed with mean zero and variance 𝜎2.
2.7.2 Financial Ratio Model
While traditional production functions focus on physical inputs and outputs, the
financial ratio model of productivity takes a different approach, analyzing productivity
through the lens of financial performance, especially for accountants, financial analysts
and economists. This model utilizes financial ratios to assess a company's efficiency in
generating profits and utilizing its assets. Some key financial ratios are:
▪ Profitability ratios: Profitability ratios measure the company's ability to generate
profit relative to its revenue, assets, or equity. These ratios include:
o Gross profit margin (GPM)
o Net profit margin (NPM)
o Return on assets (ROA)
o Return on equity (ROE), etc.
▪ Liquidity ratios: Liquidity ratios measure the company's ability to meet its short-
term obligations with its short-term assets. This category includes:
o Current ratio
o Quick ratio (Acid-test ratio)
o Super quick ratio.
▪ Debt and leverage ratios: Debt and leverage ratios measure the company's ability
to meet its long-term financial obligations and the extent of its leverage.
▪ Efficiency ratios measure how effectively a company uses its assets and liabilities
to generate sales and cash flow.
▪ Market value ratios: Market value ratios relate the company's stock price to its
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 earnings, book value, or other financial metrics.
Ratios are often compared to industry averages or competitors to assess relative
performance. Companies that are always engaged in monitoring ratios over time can
reveal trends in financial performance and operational efficiency.
2.7.3 Production-Based Model
This type of model quantifies output and input related to production. Based on the
valuation of output, production based models are classified as:
o Output as the value of production.
o Output as value addition.
▪ Model based on value of production: A model based on the value of production
focuses on analyzing economic activities and outputs based on their monetary
value rather than physical quantities alone. This approach is integral to
understanding the economic impact of production activities, assessing economic
performance, and making policy decisions. A measurement method proposed by
Ruist (1961) used ther term ‘production index’, which is defined as:
Production of current period
Production index =
Production of base period

Faraday suggested a different approach considering the relation of output to input,

in terms of a ‘total productivity measure’, that can be calculated as:’
V
TPM =
M +Q+C

where, V = value of the total output, M = input of manpower in cash or man-years,

Q = input of materials in cash or man-years, and C = Input of capital equipment in
cash or man-years.
The value-based model of productivity offers a more comprehensive and market-
relevant approach to understanding productivity. By focusing on value creation, it
encourages companies to prioritize quality, innovation, and customer satisfaction,
ultimately leading to greater long-term success. However, its complexity and
subjectivity require careful consideration when applying this model.
▪ Models based on value addition: Models based on value addition take a more
nuanced approach to productivity measurement than traditional production-based
models. This approach recognizes that productivity is not just about producing
more, but about producing more valuable goods or services.
According to this approach, adding the concept of value addition, Faraday proposed
three measures:

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Productivity and its Enhancement

V −Q V −Q V −Q
Productivity = or Productivity = or Productivity =
M M +C M +Q+C
where, V = Money value of total output, M = Manpower in cash, Q = Materials in cash
C = Capital in cash.
Models based on value addition provide a more comprehensive and relevant approach
to productivity measurement than traditional production-based models. By focusing on
the increase in value created during the production process, they encourage companies
to prioritize quality, innovation, and customer satisfaction, ultimately leading to greater
long-term success.
2.7.4 Product-Oriented Model
The product-oriented model for productivity analysis shifts the focus from general
production processes to the specific value creation associated with individual products
or product lines. This approach emphasizes understanding the unique factors that
contribute to the profitability and success of each product, rather than looking at overall
company-wide productivity.
2.7.5 Surrogate Models
Surrogate models, also known as metamodels or response surface models, play a crucial
role in productivity analysis by providing a simplified representation of complex
simulation models or real-world processes. They act as a bridge between
computationally expensive simulations and the need for quick and efficient analysis and
optimization. The benefits of using surrogate models are: (i) faster analysis, optimization
and decision-making, (ii) reduced computational cost, and (iii) improved understanding.
However, these models suffer from difficulties in model complexity, and they are
completely accuracy dependent.
2.7.6 System Approach Model
The System Approach Model for productivity analysis takes a holistic view, considering
the entire system of production as a complex network of interconnected elements. It
goes beyond analyzing individual components or processes in isolation and focuses on
understanding how these elements interact and influence overall productivity. Some
prominent approaches are:
1. Kurosawa Structural Approach
2. Alan Lawlor Approach
3. Gold’s Approach
4. Quick Productivity Appraisal Approach
These approaches are not discussed here.
30
2.8 Factors Affecting Industrial Productivity
Industrial productivity is a measure of how efficiently goods are produced. The factors
affecting industrial productivity are interrelated and sometimes interdependent activities
and are difficult tasks to evaluate the influence of each individual factor on the overall
productivity. Several factors can influence this efficiency, and they can be broadly
categorized into two main areas:
1. Internal factors, or micro factors
2. External factors, or macro factors

Economic Government Regulatory Supply Technological

conditions policy environment chain environment
External factors

Technological Workforce Process Facilities and

Advancement Management Equipment
s
Productivity Internal
Factors

Organizational Financial Innovation Health and

Structure Management and R&D safety

Socio-political Globalization Environmental Social

factors factors factors

Fig. 2.1 List of factors that affect industrial productivity.

A list of key factors is summarized in Fig. 2.1. Internal factors, or micro factors, directly
influencing industrial productivity are those that can be controlled and managed within
the organization. The key internal factors are:
(i) Technological advancements
▪ Automation and robotics: The implementation of automated systems and
robotics can significantly enhance efficiency, reduce human error, and
increase production speed.
▪ Software and IT solutions: Utilizing enterprise resource planning (ERP)
systems, customer relationship management (CRM) software, and other IT
solutions to streamline operations and improve decision-making.
(ii) Workforce
▪ Skill level: The training, education, and expertise of employees play a crucial
role in productivity. A skilled workforce can operate machinery efficiently,
minimize errors, and contribute to innovation.

31
Productivity and its Enhancement

▪ Motivation and morale: Employee satisfaction, engagement, and morale can

directly impact productivity. Motivated employees are more likely to perform
better, show initiative, and remain committed to organizational goals.
▪ Workforce management: Effective management of the workforce, including
planning, scheduling, and monitoring productivity, ensures that the right
number of employees with the right skills are available when needed.
(iii) Process management
▪ Lean manufacturing: Practices that minimize waste and enhance
productivity.
▪ Quality control: Systems to ensure high-quality output, reducing rework and
waste.
▪ Inventory management: Efficient management of inventory to avoid
overstocking or stockouts.
(iv) Facilities and equipment
▪ Maintenance: Regular maintenance of machinery and equipment to avoid
breakdowns.
▪ Layout and design: Efficient layout of production facilities to optimize
workflow.
(v) Organizational structure
▪ Management practices: Leadership quality and managerial effectiveness.
▪ Corporate culture: An environment that fosters innovation and efficiency.
▪ Communication: Effective communication within the organization ensures
that information flows smoothly, decisions are made quickly, and employees
are aligned with organizational objectives.
(vi) Financial management
▪ Cost control: Effective cost management practices to ensure that resources
are used efficiently and waste is minimized.
▪ Investment in technology and training: Allocating financial resources to
invest in the latest technology and employee training programs to enhance
productivity.
(vii) Innovation and R&D
▪ Research and development: Continuous investment in research and
development to innovate and improve products and processes.
▪ Adaptability: The ability of the organization to adapt to new technologies,
market changes, and emerging trends.

32
 (viii) Health and safety
▪ Workplace safety: Ensuring a safe working environment to prevent accidents
and injuries, which can disrupt productivity.
▪ Employee well-being: Programs and policies that support employee well-
being, reducing absenteeism and enhancing performance.
External factors, or macro factors, on the other hand, are those that influence
productivity but are outside the control of the organization. These include:
(i) Economic conditions
▪ Market demand: Fluctuations in demand for products.
▪ Economic policies: Government policies, including taxes, subsidies, and
tariffs.
▪ Inflation: Rising costs of materials and labor due to inflation can affect
profitability and productivity.
(ii) Government policy
▪ This includes regulations, tax structures, trade agreements, and infrastructure
development.
(iii) Regulatory environment
▪ Compliance: Adherence to industry regulations and standards.
▪ Environmental laws: Regulations regarding environmental impact and
sustainability.
(iv) Supply chain
▪ Supplier reliability: Consistency and reliability of suppliers.
▪ Logistics: Efficiency of the transportation and distribution network.
(v) Technological environment
▪ Innovation: Technological advancements in the industry.
▪ Competition: The level of competition and the pace of technological change
within the industry.
(vi) Socio-political factors
▪ Political stability: The stability of the political environment affecting
operations.
▪ Labor laws: Regulations governing labor practices and employee rights.
(vii) Globalization
▪ International trade: Access to international markets and global supply chains
can provide opportunities for growth but also pose challenges.

33
Productivity and its Enhancement

▪ Exchange rates: Currency fluctuations can impact the cost of imports and
exports, affecting profitability and pricing strategies.
▪ Foreign competition: Competition from international firms can drive the need
for efficiency and innovation.
(viii) Environmental factors
▪ Natural disasters: Earthquakes, floods, and hurricanes can disrupt production
and supply chains.
▪ Climate change: Long-term changes in climate can affect resource
availability, operational costs, and regulatory requirements.
▪ Resource availability: Access to raw materials, water, and energy can impact
production capacity and costs.
(ix) Social factors
▪ Consumer preferences: Changes in consumer behavior and preferences can
affect demand for products and necessitate adjustments in production.
▪ Workforce demographics: Changes in the availability and characteristics of
the labor force, such as aging populations or shifts in workforce skills.
Each of these factors can significantly impact the productivity of industrial operations,
either positively or negatively. Improving productivity typically involves a
comprehensive approach that addresses multiple areas simultaneously.
Among these factors, key factors that significantly affect industrial productivity can be
categorized into four main areas: Capital, Quality, Technology, and Management. Each
of these factors, illustrated in Fig. 2.2, influences productivity in a great exitance:
1. Capital: Capital refers to the financial resources available for an industry. It
encompasses funds for investment in machinery, technology, raw materials, and
workforce development.
• Investment in machinery and equipment: Modern, efficient machinery and
equipment increase production speed and reduce downtime.
• Financial resources: Adequate funding allows for investments in technology,
training, and infrastructure improvements.
• Working capital: Sufficient working capital ensures smooth operation by
maintaining inventory levels and covering day-to-day expenses.
• Workforce development: Invest in training and skill development for the
workforce.
2. Quality: This refers to the overall quality of various aspects of an industry,
including:
34
 • Raw materials: High-quality
Capital Quality
raw materials lead to fewer
defects and higher-quality end
products. Productivity
• Product quality: Producing
defect-free products reduces Technology Management
waste and rework, leading to
higher output.
Fig. 2.2 Main factors that significantly
• Process quality: Streamlined affect industrial productivity.
and efficient production
processes minimize downtime and errors.
• Workforce quality: A skilled and well-trained workforce can operate
machinery effectively, identify and solve problems, and contribute to
continuous improvement.
3. Technology: This encompasses the machinery, tools, and processes used in
production. Advancements in technology can significantly improve industrial
productivity by:
• Automation: Automated systems and robotics can significantly increase
production speed and accuracy.
• Advanced manufacturing technologies: Adopting technologies such as
additive manufacturing, IoT, and AI can streamline operations and enhance
productivity.
• Research and development (R&D): Continuous investment in R&D leads to
innovations that can improve processes and product offerings.
4. Management: Effective leadership and management practices are crucial for
maximizing industrial productivity. Key aspects include:
• Strategic planning and leadership: Effective leadership and strategic planning
are crucial for setting goals, motivating employees, and guiding the
organization toward higher productivity.
• Operational efficiency: Implementing lean manufacturing principles and
optimizing workflows can reduce waste and improve efficiency.
• Motivation and engagement: Fostering a positive work environment that
motivates employees and encourages innovation.
• Communication: Ensuring clear and consistent communication between
management and workers.
• Performance monitoring: Regularly monitoring performance and
35
Productivity and its Enhancement

productivity metrics helps identify areas for improvement and ensure that
goals are being met.
Other factors that also significantly impact the productivity are:
Positive impacts (or, positive factors):
• Standardization: Consistent processes and parts minimize errors and rework,
leading to higher production rates.
• Use of computers: Computers can automate tasks, improve data analysis for
process optimization, and enhance communication, all contributing to increased
efficiency.
• Workers' skills: A skilled and experienced workforce can operate machinery
effectively, solve problems quickly, and contribute to continuous improvement.
• Safety in the workplace: A safe work environment reduces accidents and injuries,
minimizing downtime and production disruptions.
• Design of the workspace: Well-designed workspaces with efficient layouts
minimize wasted time and movement, improving production flow.
• Incentive/reward plans: Rewarding workers for high performance or achieving
production goals can motivate them to be more productive.
Negative impact (or negative factors):
• Quality differences: Inconsistent product quality can lead to rejects, rework, and
delays, impacting overall output.
• Lost or misplaced items: Time spent searching for lost tools or materials reduces
production time and efficiency.
• Scrap rates: High scrap rates indicate wasted resources and lower overall output.
• Labor turnover: Frequent employee turnover disrupts production flow and
requires time and resources for training new workers.
Neutral impact:
• Layouts: While a well-designed layout improves productivity, a poorly planned
one can hinder it. The impact depends on the specific layout.
Indirect impact:
• Safety in the workplace: While promoting safety is crucial, overly restrictive
safety measures could potentially slow down production processes - the key is
finding the right balance.
By focusing on these key factors (i.e., Capital, Quality, Technology, and Management)
and auxiliary positive, negative, neutral and indirect factors, industries can enhance their
productivity, achieve higher efficiency, and maintain a competitive edge in the market.
36
2.8.1 Controllable and uncontrollable factors
Industrial productivity is influenced by a mix of factors that can be broadly categorized
into two main groups:
1. Controllable factors: These factors are within the direct influence of an industry
and can be managed to improve productivity. Controllable factors are considered
as internal factors, e.g. capital, quality, technology, management, organizational
structure, inventory management, factory layout, workforce management,
incentive program, workers safety, etc.
2. Uncontrollable factors: These factors are external to the industry and cannot be
directly controlled, but their impacts can be mitigated. Uncontrollable factors are
known as external factors and these factors are beyond the control of the
individual industrial organization. For instance, a country’s economic condition,
governmental rules and regulations, political instability, natural factors, social
changes, technological changes, globalization, etc. are listed in this group.

2.8.2 Positive, negative, and neutral factors

Industrial productivity can be influenced by a variety of factors, which can have positive,
negative, or neutral impacts.
1. Positive factors of productivity are elements that contribute to increased
efficiency, output, and overall performance within industrial settings. Key
positive factors of productivity include the adoption of technology and
automation, standardization, use of computers and software, engagement in
innovation and research & development, effective management practices, the
employment of skilled workers, a well-designed workplace, a good incentive
plan, etc.
2. Negative factors of productivity are aspects that hinder or reduce efficiency,
output, and overall performance within an organization or industry. These factors
can lead to increased costs, lower quality, and reduced competitiveness. The key
negative factors of productivity include poor management practices in the
industry, a lack of employee skills and training, a lack of employee motivation
and morale, the use of obsolete technology and equipment, poor workflow, poorly
designed production layouts, a lack of standard operating procedures, a poor
communication system, inadequate recognition for achievements, and lack of
career advancement opportunities, etc.
3. Neutral factors related to productivity are those elements that neither
significantly enhance nor detract from overall efficiency, output, or performance
within an organization or industry. These factors may have minimal direct impact

37
Productivity and its Enhancement

on productivity but can still influence operational dynamics. Some examples of

neutral factors of productivity are market stability, emerging new technologies
that have not yet been fully integrated into operations, workforce demographics,
government policies, globalization and different trade agreements, etc.

2.9 Production Systems

A production system of an organization is that part, which produces products of an
organization. A production system of an organization is the arrangement of resources,
facilities, and activities involved in the manufacturing or provision of goods and
services. It encompasses all the processes, methods, tools, equipment, and personnel
required to transform inputs (i.e., raw materials, components, information) into outputs
(i.e., finished products or services) that meet specific objectives, such as quality
standards, cost efficiency, and delivery schedules. A simplified production system is
shown in Fig. 2.3.

Fig. 2.3 A simplified production system of a manufacturing industry.

In short, production system may be defined as ‘the methods, procedure or arrangement

which includes all functions required to accumulate the inputs, process or reprocess the
input, and deliver the marketable outputs.’ In the realm of manufacturing processes, a
production system refers to the entire framework for creating goods or services.

2.9.1 Key components

Key components, as shown in Fig. 2.4, of a production system typically include:

38
 Fig. 2.4 Key components of a production system.
1. Inputs: Raw materials, components, energy, information, and human resources
that are needed for production.
2. Processes: Methods, procedures, and workflows used to transform inputs into
outputs. This includes manufacturing processes, assembly lines, testing
procedures, etc.
3. Resources: Physical resources such as machinery, tools, equipment, and facilities,
as well as intellectual resources like knowledge, expertise, and technology.
4. Output: The final products or services produced by the system, ready for
distribution and consumption.
5. Control: Systems and mechanisms to monitor and control production processes
to ensure quality, efficiency, and adherence to standards.

2.9.2 Characteristics
Production systems can vary widely depending on the industry, scale of operation,
technology employed, and organizational goals. Therefore, the characteristics of a
production system may differ slightly depending on the requirements of the production
facilities. The production system has the following basic characteristics:
i. Production is an organized activity, so every production system has an objective.
ii. The system transforms the various inputs into useful outputs.
iii. The system can be scaled up or down, depending on production needs. For
instance, a production line might be designed to handle increased demand by
adding more equipment or workers.
iv. It does not operate in isolation from the other organizational systems.

39
Productivity and its Enhancement

v. There is feedback about the activities, which is essential to controlling and

improving system performance.

2.9.3 Types of production systems

Production systems can be classified into several types based on several criteria such as:
o volume of production, the number of expected outcomes;
o variety of production, the range of different products a production system can
create;
o flexibility of production, how easily the production system can adapt to changes
in product design, volume, or customer demands; and.
o nature of the production process, the speed and direction, the rate and the type of
transformation the raw materials undergo to become finished products.
Based on production volume, production systems can be classified into two groups, as
illustrated in Fig. 2.4: (i) discrete production systems and ((ii) continuous production
systems.

Production
Systems

Intermittent Continuous
Production Production

Job- Shop Batch Mass Process

Production Production Production Production

Fig. 2.4 Various types of production systems based on production volume and product faxibility.

1. Discrete production system: A discrete production system, also called intermittent

production system, handles distinct, countable units (e.g., cars, furniture). These
systems can handle a very low to wide range of production volumes, from low-
volume job shops to high-volume mass production lines. Generic characteristics
of this group include:
o The volume of each product is low;
o Generally, it produces make-to-order, custom products in accordance with
designs supplied by the customer;
o Each job may be unique and may require a special set of production steps;

40
 o Each job may require a particular routing (no standard routing);
o Products may follow different paths;
o Needs general purpose production equipment.
Based on these characteristics, discrete or intermitted production systems can
further be divided into two categories,
a. Job production, or Job-shop production
b. Batch production, or lot-size production
2. Continuous production system: Continuous production systems involve the
uninterrupted flow of materials transformed into a single product or similar
products (e.g., chemicals, oil). These systems typically operate at high volumes
with minimal variation. Basic characteristics of a continuous system include:
o The volume of each product is high;
o There are mass production facilities that produce a high volume of the same
products, i.e., make- to- stock orders,
o Each job follows a sequence of operations, and standard routing,
o Needs automatic or semi-automatic, special-purpose equipment.
Job production: Job production, or job shop production, is characterized by the
production of one or a few quantities of products designed and produced as per the
specifications of customers within a predetermined time and cost. The distinguishing
feature of this category is the low volume and high variety of products; thus, the process
is always non-standardized.
The general characteristics of job production are:
o High variety of products and low volume.
o Produces customized products based on specific customer orders, e.g., custom
furniture, tailored clothing, or general-purpose machinery.
o The complete task is handled by a single worker or group of workers.
o Large inventory of materials, tools, parts.
o Jobs can be small-scale/low technology as well as complex/high technology.
o It is inefficient, where quality is greatly depends on the skillness of the operator,
o Detailed planning is essential for sequencing the requirements of each product,
capacities for each work centre and order priorities.
o Two important varieties are: Low technology jobs and High technology jobs.

41
Productivity and its Enhancement

Low-technology jobs: The organization of production is extremely simple,

with the required skills and equipment easily obtainable. This method
enables customer's specific requirements to be included, often as the job
progresses. Examples: hairdressers; tailoring
High technology jobs: Jobs involve much greater complexity, and present
greater management challenge. Important ingredient is project
management, or project control. Clear definitions of objectives (how should
the job progress), decision-making process (how are decisions taking about
the needs of each process), labor and other resources are fixed. Examples
include film production, large construction farms, etc.
Job shop production systems, as shown in Fig. 2.5, are commonly found in industries
where customization and flexibility are critical, such as: tool and die manufacturing,
prototyping, repair and maintenance activities, custom furniture manufacturing, etc.

Fig. 2.5 Workflow in the job shop production system.

The advantages of the selection of job shop production include:
o A large variety of products can be produced by a general purpose machine tools.
o Operators become more skilled and competent with each job; therefore, full
potential of operators can be utilized,
o Opportunity exists for creative method and innovative ideas.
o Meet customer's specific demands, therefore high profit margin.,
o Less capital investment for production, and negligible production loss.
However, there are some disadvantages of job shop production include:
o Customization and low volume production volume lead to higher per-unit costs.
o Skilled labor required for diverse tasks often commands higher wages.
o Each job may have a unique sequence of operations, making scheduling complex.
o Managing different jobs simultaneously can be challenging, leading to higher
lead times and delays.
42
 o High setup times and frequent changeovers can lead to downtime.
o Keeping a variety of materials and components in stock to handle different
custom jobs can lead to high inventory costs.
o Each job may require specific quality checks and standards, adding to
complexity.

Batch production: Batch production is a manufacturing system where items are

produced in groups, or batches, instead of in a continuous stream. This method is
common in situations where the demand for a product is not high enough to justify
continuous production. American Production and Inventory Control Society (APICS)
defines the batch production “as a form of manufacturing in which the job passes
through the functional departments in lots or batches and each lot may have a different
routing.”
Examples: Bakery goods, pharmaceutical manufacturing, clothing production, electrical
and electronics devices, etc. The workflow in a batch production is shown in Fig. 2.6.

M1 M2 M1 M2
M5

M3 M4 M3 M4
M6
A group of machines A group of machines

Fig. 2.6 The workflow in a batch production system.

Based on these factors, the characteristics of a batch production system are:
o Products are made in specific groups or batches that move through the production
process together.
o It is capable of handling a wide range of custom-made products (high variability)
or one-off projects.
o It allows for flexibility in manufacturing as different products can be made in the
same production facility by changing the setup between batches.
o Production occurs intermittently, with periods of production followed by periods
of downtime for setup and changeover.
o Typically, it is used for medium-scale production volumes.
o It uses versatile general-purpose equipment and machinery that can be adapted
to different tasks.

43
Productivity and its Enhancement

o It requires skilled workers with the ability to handle diverse projects.

o It is suitable for producing a wide variety of products without needing a complete
overhaul of the production process.
Advantages of batch production include:
o Flexible in the sense that it can go from one job to another with almost zero cost.
o More efficient than job production since machines and workers are organized to
work on a batch of products at a time.
o Economies of scale can be achieved by producing in larger batches, reducing the
cost per unit.
o Easier to manage and maintain quality control within each batch.
o Allows for better inventory management as products can be made to stock in
anticipation of demand.
o It needs a general purpose machine having high production rate.
o Easy to schedule the job.
o Required fewer skilled operators than job shop production processes.
o Requires comparatively less capital investment.
However, there are some limitations of this system, they are:
o Difficulty in the selection of the batch size.
o Cost of sales, cost of distribution, and the cost of advertisement are high as
compared to mass production.
o Time and resources are needed to change the setup between different batches,
leading to downtime.
o As the raw materials to be purchased are in smaller quantities, the benefits of
discount due to large lot purchasing are not possible.
o It needs specially designed jigs and fixtures.
o If a product design changes or demand fluctuates, there may be waste or
obsolescence of produced batches.

Mass production: Mass production, also known as flow production or continuous

production, is characterized by the large-scale manufacturing of standardized products,
often using assembly lines or automated processes. Examples include automobiles,
consumer electronics, Large-scale production of packaged foods and drinks, household
appliances, textile industries, etc.
The characteristics of the mass production system are listed as given below:
44
 o Mass production is designed to produce large quantities of the same product with
a shorter cycle time.
o Standardization of products with minimal variation, and process sequence.
o Workers and machinery are specialized for specific tasks, enhancing efficiency.
o High levels of automation to maintain speed, precision, and consistency. Products
typically move along a conveyor belt or assembly line, where each worker or
machine performs a specific task.
o Perfectly balanced production lines thus ensure lower in process inventory.
o Flow of materials, components and parts is continuous and without any back
tracking.
Therefore, advantages of mass production systems include:
o Producing large quantities of products that ultimately reduce the cost per unit.
o High levels of specialization and automation lead to faster production times.
o Standardized processes ensure uniformity and high quality.
o Automation reduces the need for skilled labor, lowering overall labor costs.
o Capable of meeting large-scale demand effectively.
There are some limitations too. These disadvantages of mass production include:
o Difficult to change production processes or products without significant cost and
time.
o Breakdown of one machine will stop an entire production line.
o Significant capital investment in machinery and infrastructure is required.
o Repetitive tasks can lead to worker dissatisfaction and lower motivation.
o Producing large quantities can lead to excess inventory if demand fluctuates.
o High dependency on machinery and automation, which can lead to significant
downtime in case of malfunctions.
o Cycle time is determined by the slowest operation.

Flow process production: Flow process production, also known as continuous flow
production, is a manufacturing system designed for the continuous production of goods.
It involves the sequential processing of materials in a constant, streamlined flow, often
facilitated by an assembly line. These systems typically operate at high volumes with
minimal variation. Applications of flow process production cover the automotive
industry, large-scale production of beverages, canned goods, and packaged foods,

45
Productivity and its Enhancement

chemical industries, continuous production of fabrics and clothing items, etc. A

schematic diagram of the flow production process is illustrated in Fig. 2.7.

3 3 3

2 2 2
1 1 1

Raw materials Finished goods

Fig. 2.7 The workflow in a flow process production system.

The key characteristics of flow process production system include:
o Products are produced continuously without interruption, often 24/7.
o The plant and the equipment are dedicated and have zero flexibility.
o The products are highly standardized with minimal variation.
o Material handling is fully automated.
o The process follows a predetermined sequence of operations.
o The component materials cannot be readily identified with the final product.
o Each part of the process is specialized and optimized for specific tasks.
Flow methods are quite similar to batch methods, except that the problem of rest/idle
production/batch queuing is eliminated. The aims of flow methods are:
• Improving work and material flow,
• Reducing the need for skilled labor, and
• Adding value / completing work faster.
The advantages of flow process production include:
o Continuous operation ensures high efficiency and productivity.
o Standardized processes ensure uniform quality and consistency.
o High production volumes lead to economies of scale, reducing the cost per unit.
o Streamlined processes minimize waste and optimize the use of materials.
o Products are manufactured quickly due to the uninterrupted flow.
o Skilled manpower is not required for material handling as it is completely
automatic.
o Higher capacity utilization due to line balancing.
However, the disadvantages of flow process production are:
o It is difficult to change the production line for different products without
significant cost and time.

46
 o It requires significant capital investment in machinery and infrastructure.
o Repetitive tasks can lead to worker dissatisfaction and lower motivation.
o There is a high dependency on machinery; any breakdowns can lead to significant
production stoppages.
o High production rates may lead to large inventories, increasing holding costs.
Each production system has its own strengths and weaknesses, making them suitable for
different types of products and production requirements. The choice of system depends
on factors such as product variety, production volume, cost considerations, and market
demand. A comparison among these production systems is summarized in the table
below.
Table: Comparison among various production systems
Production Job shop Batch production Mass production Process flow
Processes production production
Customization High Moderate Low Low
and flexibility

Production Low Moderate High Very high

volume

Workflow Intermittent Intermittent Continuous Continuous

Equipment General purpose General purpose Specialized Very specialized

Initial investment Low Moderate High Very high

Inventory cost High Medium Low Low

Efficiency Low Moderate High Very high

Lead time Long Moderate Short Short

Product types Unique and Varied and Standardized, Standardized,

custom seasonal high demand high demand

Examples Custom furniture, Bakery products, Automobiles, Oil refining,

prototype clothing electronics, and chemical
development, and manufacturing, appliances. processing, paper
shipbuilding. and printing. manufacturing.

Each production system serves different needs based on the required product volume
and variety. The choice of the production process will depend on the specific demands
of the product, market, and business objectives. A comparison among various
productions systems with respect to production volume and their varieties is illustrated
in Fig. 2.8.
47
Productivity and its Enhancement

Fig. 2.8 Comparison among various productions systems with respect

to production volume and their varieties.

2.10 Importance of Operations Strategy

An operations strategy is a comprehensive plan that outlines how an organization will
allocate its resources and processes to achieve its overall business goals. It focuses on
the creation and delivery of products or services that meet customer demands efficiently
and effectively. Key elements of the operations strategy include:
o Alignment with business goals, which must be closely linked to the company's
overall mission and objectives.
o Resource optimization measures the effective utilization of people, technology,
facilities, and materials.
o Capacity planning, which determines the amount of production capacity needed
to meet demand. It also discusses expanding, reducing, or maintaining capacity
levels.
o Supply chain management, which coordinates the flow of materials, information,
and finances from suppliers to customers.
o Process design determines the best way to produce goods or deliver services. It
also includes choices about technology, equipment, workflow, and layout.
o Innovation means continuously improving processes and products to stay
competitive.
o Quality management is the process of ensuring a product or service meets or
exceeds customer expectations.
o Product and service design, which develops new products and services that align
with market needs and company capabilities.

48
A well-crafted operations strategy is the cornerstone of a successful business.
Implementation of operations strategies works in the area of:
o Competitive advantage: Efficient operations can lead to lower production costs,
superior product quality, faster delivery, enabling price competitiveness, and
exceptional customer service.
o Efficient operations can support higher sales volumes or premium pricing;
streamlined processes and waste reduction contribute to higher profit margins;
and proper utilization of resources leads to cost savings.
o Better-quality products and services meet customer expectations, which promptly
increase satisfaction and build loyalty.
o A robust operations strategy can help manage supply chain disruptions. An
effective contingency plan can minimize the impact of unforeseen events and
reduce the risk of product defects or service failures.
o Optimized processes and resource allocation enhance output, eliminating non-
value-added activities that save time and money.
o Efficient operations support innovation and product launches. An operations
strategy can facilitate the integration of new technologies. Scalable operations
enable growth into new markets.
o Well-defined operations strategies provide employees with direction.
Streamlined work reduces frustration and improves job satisfaction.
o By identifying and mitigating potential risks to operations, organizations can
incorporate environmental and social considerations into their operations.
Therefore, by aligning operations with overall business objectives, organizations can
achieve sustainable growth, profitability, and customer satisfaction.

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