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Productivity MeasurementProductivity Measurement

Operations Management

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• Productivity equals labor intensity – meaning where there is high labor input, there must be low productivity or where there is a high degree of automation there must be high productivity

• Productivity is solely a measure of labor productivity – meaning, usually that we use the term productivity in relation to direct labor

• Performance can be measured solely by productivity – meaning if the company made a profit, then this is a sufficient measure of performance

• Productivity equals profitability – meaning that one term is synonymous with other

• Productivity applies only to the manufacturing sector.• Cost cutting can improve productivity

Productivity

WHICH OF THE ABOVE STATEMENTS IS(ARE) CORRECT ?

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• Productivity equals labor intensity – meaning where there is high labor input, there must be low productivity or where there is a high degree of automation there must be high productivity

• Productivity is solely a measure of labor productivity – meaning, usually that we use the term productivity in relation to direct labor

• Performance can be measured solely by productivity – meaning if the company made a profit, then this is a sufficient measure of performance

• Productivity equals profitability – meaning that one term is synonymous with other

• Productivity applies only to the manufacturing sector.• Cost cutting can improve productivity

Productivity

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Productivity, numerically defined:

Productivity = OUTPUT(s) INPUT(s)

Input = the amount of resource (manpower, materials, information, energy, capital, time

Productivity = value to customer = effectiveness cost to producer efficiency

Effectiveness =Efficiency =

Productivity

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Productivity, numerically defined:

Productivity = OUTPUT(s) INPUT(s)

Input = the amount of resource (manpower, materials, information, energy, capital, time

Productivity = value to customer = effectiveness cost to producer efficiency

Effectiveness = doing the right things in the best wayEfficiency = the least possibly cost

Productivity

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OUTPUTS [Goods and Services]Productivity = ------------------------------------------ INPUTS [Resources:labor, capital]

HOW CAN IMPROVE PRODUCTIVITY?

• Decrease the Inputs but maintain the outputs• Increase outputs with the same inputs

Productivity

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Productivity, numerically defined:

(i) Total Factor Productivity (TFP) = Pt = Ot/(L+C+R+Q)

Pt = Total factor Productivity Ot = Total output (sales value £)L = Labour Input factor (£)C = Capital Input factor (£)R = Raw materials/ purchased parts (£)Q = Other miscellaneous services (£)

(ii) Partial Factor Productivity (PFP) = Ot/ L or C or Ot/ a combination of inputs

Productivity

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• Relation between output and the input provided to create the output• Efficient use of resources in the provision of services and the

manufacturing of products• Relationship between results and the time taken to accomplish them.

– managerial productivity

What productivity means for:• A politician• An economist• Operations manager?

Some definition of productivity

Productivity

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Productivity means for• A politician: to spend money on roads and hospitals• An economist: health, vitality and competitive strength of an economy• Operations manager: comparative measure of improvement

Some definition of productivity

Productivity

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• CAPITAL: Level of capital investment and cost of labor• LABOR: Basic education and skills; motivation, labor availability• MANAGEMENT: Education

Major constituents of productivity

Productivity

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QUESTIONA state owned transportation company charges €18 per ticket, plus a €3 surcharge to fund planned equipment. It expects to sell 4,700 tickets during the eight week summer season. During that period, the service will experience €110,000 in labor costs. Materials required for each passage sold (tickets, a tourist-information sheet, and the like) cost €1.3. Overhead during the period comes to €79,000.1. What is the total Productivity ratio?2. If the staff works an average of 310 person-hours per week for the eight weeks of the summer season, what is the labor productivity ratio? Calculate labor productivity here on an hour basis.

Productivity

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ANSWER

OUTPUTSMultifactor Productivity = -------------- INOUTS Tickets sold = 4,700Price = € 18 value of the output = 4,700 x [18+3]= 98,700Surcharge = €3

Labor cost = €110,000Materials costs = €1.3 value of the input = 110,000 + [1.3 x 4,700]

+Overheads = €79,000 79,000 = 195,1001. miltifactor Productivity= 98,700/195,100 = 0.512. labor productivity = 98,700/[8x310] = 39.8

Productivity

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QUESTION

Calculate the productivity for the following operations:1. Three employees process 600 insurance policies in a

week. They work 8 hours/day, 5 days/week.2. A team of workers make 400 units of a product, which

is valued by its standard cost of €10 each (before markups for other expenses and profit). The accounting department reports that for this job the actual costs are €4,000 for labor, € 1,000 for materials, and €300 for overhead.

Productivity

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ANSWER

Policies processedPartial [LABOUR] Productivity = ------------------------ Employee hours

600 policies----------------------------------------- = 5

policies/h[3 employees) x [40 h/employee]

Quantity at standard costMultifactor Productivity = ----------------------------------------------------- Labor cost + Materials cost + Overheads

[400 units] x [€10/unit] € 4,000----------------------------- = ---------- = 0.75€4000 + €1,000 + €300 € 5,300

Productivity

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