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Concepts and mensuration of the productivity

M. En C. Eduardo Bustos Farías31 mayo 2005

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OBJECTIVES• To expose the student the concept of productivity. • To present a variety of perspectives from which one can

study the productivity. • To develop an appreciation of the characteristics of the

challenge from the productivity to national level, of industry, and of company.

• To show that the management of the productivity is essential for the survival and the success of a company and that the successful management of the productivity requires of arduous work, effective planning, consistency, persistence, patience, and it disciplines.

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Introduction

• Standars• Definitions• Ratios

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Standards

Standardare

Norms.

Used for planning labor, materialand overhead requirements.

Benchmarks formeasuring performance.

Used to simplify themanagement system.

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Standard

DirectMaterial

Managers focus on quantities and coststhat exceed standards, a practice known as

management by exception.

Type of Product Cost

DirectLabor

ManufacturingOverhead

Standard

Am

ount

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Variance Analysis and Management by Exception

How do I know which variances to investigate?

Larger variances, in dollar amount or as a percentage of the

standard, are investigated first.

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MOVIE

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Setting Standard

Accountants, engineers, personnel administrators, and production managers combine efforts to set standards based on

experience and expectations.

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Setting Standard

Should we usepractical standardsor ideal standards?

Engineer ManagerialAccountant

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Setting StandardPractical standards should be set at levels that are currently attainable with reasonable and

efficient effort.

Productionmanager

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Setting StandardI agree. Ideal standards,

based on perfection,are unattainable and

discourage mostemployees.

Human ResourcesManager

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Setting Direct Material Standards

PriceStandards

Final, deliveredcost of materials,net of discounts.

QuantityStandards

Use product design specifications.

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Setting Direct Labor Standards

RateStandards

Use wage surveys and

labor contracts.

TimeStandards

Use time and motion studies for

each labor operation.

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PELÍCULA

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What is a definition?• Although the answer sounds obvious, people often miss

the fact that "definition" is used in two different ways. • An extracted definition is based on the common usages

of a word. It may not say precisely what the word means; for example, the definition of when objects are called"chairs". As common usage shifts, extracted definitionsshift.

• A stipulated definition spells out precisely what a conceptmeans in terms of other known concepts. This is usuallythe situation in games; for example, the definition of"touchdown" in football.

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Ratios

• Ratios are simply comparisons amongquantities of the same kind.

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Common-Size Statementsin Finance

CommonCommon--sizesizestatements use

percentages to express the relationship of

individual components to a total within a singlesingleperiod. This is also known as vertical vertical

analysisanalysis.

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PROFITABILITY

• The ratios in finance measure the ability ofthe business to make a profit.

• Example:

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CONCEPTOS A PRIORI

• Presente una definición personal de productividad.

• Enumere conceptos o ideas que usted crea que representan a la productividad.

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• Profitability• Efficiency• Effectiveness• Quality• Value• Innovation• Performance

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Profitability

• The ability to earn a profit.• A measure of present value per monetary

unit invested.

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MOVIE

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EfficiencyFINANCE

• How easily and inexpensively transactions can occur.

THERMODYNAMICS• In thermodynamics and the theory of machines, efficiency is defined

as the ratio of the useful work derived from a machine to the energyput into it.

• The mechanical efficiency of a machine is always less than 100%, some energy being lost as heat in friction.

• When the machine is a heat engine, its thermal efficiency can be found from the second law of thermodynamics.

• A typical petrol engine may have a thermal efficiency of 25%, a steam engine 10%.

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Efficiency

ManufacturingCycle

Efficiency

Value-added timeManufacturing cycle time

=

Wait TimeProcess Time + Inspection Time

+ Move Time + Queue Time

Delivery Cycle Time

Order Received

ProductionStarted

Goods Shipped

Throughput Time

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Effectivenesseficacia

• This is the extent to which the set goals or objectives of a industry or person are accomplished.

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Effectiveness in HR

• absenteeism• accidents• communication• control • cooperation• initiative• moral • motivation

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Quality

1. Customer-Based Fitness for use, meeting customer expectations.

2. Manufacturing-Based Conforming to design, specifications, or requirements. Having no defects.

3. Product-Based The product has something that other similar products do not that adds value.

4. Value-Based The product is the best combination of price and features.

5. Transcendent It is not clear what it is, but it is something good...

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MOVIE

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Value• The concept of Value relies on the relationship between the

satisfaction of many differing needs and the resources used in doingso.

• The fewer the resources used or the greater the satisfaction ofneeds, the greater the value. Stakeholders, internal and externalcustomers may all hold differing views of what represents value.

• The aim of Value Management is to reconcile these differences and enable an organization to achieve the greatest progress towards itsstated goals with the use of minimum resources (see figure below)

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MOVIE

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Innovation

• Innovation is the conversion of knowledge and ideas into a benefit, which may be forcommercial use or for the public good; thebenefit may be new or improved products, processes or services.

• Innovation and technological change are withoutdoubt the main drivers of economic growth atorganisational, sector and economy-wide levels. Worldwide studies show that innovation is thekey to the competitiveness of businesses and ofnations.

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Performance

• The degree of accomplishment of the tasks that make up an employee’s job.

• Is the record of outcomes produced on a specified job function or activity during a specified period of time.

• Performance on the job as a whole is the sum (or average) of performance on the job functions or activities.

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Linkage Between Strategy,

Outcomes,and Organizational

Results

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Whatis Productivity?

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Productivity

• An economic measure of efficiency that summarizes the value of outputs relative to the value of the resources used to produce them.

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Generally productivity is a function of

• Capital• Quality• Technology• Management

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Some Factors Affecting Productivity

• Standardization• Use of Internet• Computer viruses• Searching for lost or

misplaced items• Scrap rates• New workers• Cuts in health benefits

• Safety• Shortage of IT workers• Layoffs• Labor turnover• Design of the workspace• Incentive plans that

reward productivity

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WhyMeasure

Productivity?

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Why Measure Productivity?• You can’t correct a problem if you don’t

know it exists• By the time the job is over, you’ve lost the

money• You will have current information to

manage and control your project• You should correct losses arising from

internal problems• You may be able to recover losses arising

from external causes

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MOVIE

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Why Measure Productivity?

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The Importance of Productivity

– Productivity is a primary determinant of an organization’s level of profitability and its ability to survive.

– Productivity partially determines people’s standard of living within a particular country.

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Levels of Productivity

Source: Barney, Jay B. and Ricky W. Griffin, The Management of Organizations. Copyright © 1992 by Houghton Mifflin Company. Used with permission.

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Levels of Productivity

• The unit of analysis used to calculate or define:• Aggregate productivity—the total level of productivity for a

country.• Industry productivity—the total productivity of all the firms

in an industry.• Company productivity—the level of productivity of a single

company.• Unit productivity—the productivity level of a unit or

department.• Individual productivity—the productivity attained by a

single person.

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Productivity• Productivity is a measure of how efficiently inputs are converted to

outputs (outputs can include finished goods not yet sold as well as work in progress)

Productivity = output/input

• Total Productivity Measure (includes all inputs in an organization i.e. labor, materials, capital)

Total Productivity = $sales/inputs $

• Partial Productivity Measure (measures a single input at a time to a specific output)

Partial Productivity = i.e. cars/employee

• Multifactor Productivity Measure (ratio of output to a group of inputs such as labor and material)

Multi-factor Productivity = sales/total $costs (total cost productivity)

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Forms of Productivity

– Total factor productivity–an overall indicator of how well an organization uses all of its resources(i.e., labor, capital, materials, and energy) to create all of its products and services.

Productivity = OutputsInputs

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Forms of Productivity

– Labor productivity–a partial productivity ratio that uses only one category of resource (labor) to gage the organization’s productivity in utilizing that resource.

Labor Productivity = OutputsDirect Labor

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What is Labour Productivity?Inputs

- material- information

Equipment- facilities- systems

People- knowledge- skills- abilities

OUTPUT- product/service- how measured?

ACTIVITYwhat tasksare required ?

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Job Characteristic Model

Core Job DimensionsSkill VarietyTask IdentityTask Significance

Autonomy

Feedback

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Job Characteristic Model

Core Job DimensionsSkill VarietyTask IdentityTask Significance

Autonomy

Feedback

Psychological States

Meaningful Work

Responsibilityfor outcome

Knowledge of results

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Job Characteristic Model

Psychological States

Meaningful Work

Responsibilityfor outcome

Knowledge of results

High Motivation

High Quality Work

High Satisfaction

Low Absenteeismand Turnover

Work Outcomes

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Summary of Job Design Approaches

Job Design ApproachSatisfaction Dimension Performance Dimension

Mechanistic

job satisfactionmotivationjob involvement

job performanceabsenteeism

training timechance of errorchance of stressuse levels

chance of stress

job satisfactionmotivation

training timechance of erroruse levels

absenteeism

Motivational

Legend: = negative= positive

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Summary of Job Design Approaches

Job Design Approach Satisfaction DimensionPerformance Dimension

job satisfaction physical effortfatigueabsenteeismmedical incidents

Biological

financial costs

chance of stressPerceptual/motor training time

chance of erroruse levelsjob satisfaction

motivation

Legend: = negative= positive

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What is Labour Productivity?

Productivity = Output / Input(e.g. Earned hours / Worked hours)

Or the reciprocal:

Productivity = Input / Output(e.g. Manhours per unit produced)

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Labor Rate Variance –A Closer Look

High skill,high rate

Low skill,low rate

Using highly paid skilled workers toperform unskilled tasks results in an

unfavorable rate variance.

Production managers who make work assignmentsare generally responsible for rate variances.

Production managers who make work assignmentsare generally responsible for rate variances.

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Productividad de la mano de obra en México por división de actividad económica

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Example for improving productivity

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DATA

Item Workers Raw Mat'l Profit

Tables 2 1 $30

Chairs 3 2 $40

Capacity 160 100

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Productivity ExampleApproach 1

Based on the maximum requirement

Chairs require more workers than tables 3 workers => 160/3 = 53.33

Chairs use up more raw material than tables 2 units of RM => 100/2 = 50

Thus if we take the minimum of the maximum requirements we should be safe

=> Produce 50 Chairs, 0 Tables

=> Profit = $ 2,000

=> Utilization of workers 94%, of RM 100%

Item Workers Raw Mat'l Profit

Tables 2 1 $30

Chairs 3 2 $40

Capacity 160 100

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Productivity Example

Approach 2

We can solve both equations simultaneously.

2 T + 3 C = 160

1 T + 2 C = 100

=> Produce 20 Tables and 40 Chairs

=> Profit = $ 2, 200

=> Utilization of Workers 100%, of RM 100%

Item Workers Raw Mat'l Profit

Tables 2 1 $30

Chairs 3 2 $40

Capacity 160 100

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Productivity Example

Approach 3

We can use Linear Programming

Maximize 30 T + 40 C

Subject to: 2 T + 3 C ≤ 160

1 T + 2 C ≤ 100

=> Produce 80 Tables and 0 Chairs

=> Profit = $ 2,400

=> Utilization of Workers 100%, of RM 80%

Item Workers Raw Mat'l Profit

Tables 2 1 $30

Chairs 3 2 $40

Capacity 160 100

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Hypothetical Tender

Labour 40%Materials 40%General Conditions

& Indirect Costs 10%Overhead 5%Profit 5%Total 100%

•Largest cost component

• Most volatile

• Most critical to control

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Hypothetical Tender

Labour 40% 45%Materials 40%General Conditions

& Indirect Costs 10%Overhead 5%Profit 5%Total 100%

A 12.5% overrun in the

labour component

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Hypothetical Tender

Labour 45%Materials 40%General Conditions

& Indirect Costs 10%Overhead 5%Profit 0%Total 100%

Wipes out all profit!

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Productivity Example - Auto manufacturer data past three years

Investment analysis 2003 2002 2001

Partial Prod. Measure

Unit Car Sales/Employee 24.1 21.2 18.3

Year-to-year Improvement 13.7% 15.8%

Multifactor Prod. Measures

Total Cost Productivity 1.26 1.24 1.19

Year-to-year Improvement 1.6% 4.2%

Which is the best measurement?

2003 2002 2001

Unit car sales

2,700,000 2,400,000 2,100,000

Employees 112,000 113,000 115,000

$ Sales(billions$)

$49,000 $41,000 $38,000

Cost of Sales(billions)

$39,000 $33,000 $32,000

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Common Factors Impacting Labour Productivity

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Factors Affecting ProductivityMCA - Labour Estimating Manual - 1986

Factors Minor Average Severe

1. Stacking of Trades 10% 20% 30%2. Morale and Attitude 5% 15% 30%3. Reassignment of Manpower 5% 10% 15%4. Crew Size Inefficiency 10% 20% 30%5. Concurrent Operations 5% 15% 25% 6. Dilution of Supervision 10% 15% 25%7. Learning Curve 5% 15% 30%8. Errors and Omissions 1% 3% 6%9. Beneficial Occupancy 15% 25% 40%10. Joint Occupancy 5% 12% 20%11. Site Access 5% 12% 30%12. Logistics 10% 25% 50%13. Fatigue 8% 10% 12%14. Ripple 10% 15% 20%15. Overtime 10% 15% 20%16 Season and Weather Change 10% 20% 30%

Muchas tareas

cuadrillas

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Factors Affecting ProductivityInternal:

• Poor planning & management of work• Rework & errors• Bad estimate• Lack of training• Morale problems• Staff turnover• Material & equipment availability

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Factors Affecting Productivity

External:

• Overtime• Changes• Crowding• Trade Stacking• Weather• Site Access

These factors seldom occur in isolation

aislamiento

agolparse

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Quantifying Productivity Losses

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Crew OvermanningU.S Army Corps of Engineers, Modification Impact Evaluation

Guide, 1979%

Tot

al C

rew

Effi

cien

cy

% Crew Size Increase Above Optimum200 40 60 80 100

0

20

40

60

80

100

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Effect of Congestion (Crowding) on Labour Efficiency

U.S. Army Corp of Engineers "Modification Impact Evaluation Guide" - July 1979

0%

5%

10%

15%

20%

0% 5% 10% 15% 20% 25% 30% 35%% Crowding

% L

abou

r Los

s to

Inef

ficie

ncy

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Effects of OvertimeUS Army Corps of Engineers - 1979

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Summary of Overtime Curves

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Impact Due to Change OrdersEffects of Change Orders on Productivity: Civil and Architectural Work

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0% 10% 20% 30% 40% 50% 60% 70%

% CHANGE ORDERS

% L

OSS

OF

PRO

DU

CTI

VITY

CHANGES ONLY CHANGES PLUS ONE OTHER CAUSE CHANGES PLUS TWO OTHER CAUSES

Reference: Impact of change orders on construction productivity, Moselhi, Leonard, and FazioCanadian Journal of Civil Engineering, Volume 18, 1991

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Productivity Effect of Temperature and Relative Humidity

0%10%20%30%40%50%60%70%80%90%

100%

-20 -10 0 10 20 30 40 50 60 70 80 90 100 110 120

5% RH15% RH25%RH

35% RH45% RH55% RH65% RH75%RH

85% RH95% RH

PRO

DU

CTI

VITY

IN %

-20 °C -10 °C 0 °C 10 °C 20 °C 40 °C30 °C

EFFECTIVE TEMPERATURE IN °F

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The Balanced Scorecard

Management translates its strategy into performance measures that employees

understand and accept.

Management translates its strategy into performance measures that employees

understand and accept.

Performancemeasures

Customers

Learningand growth

Internalbusiness

processes

Financial

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The Balanced Scorecard

How do we lookto the owners?

How can wecontinually learn,

grow, and improve?

In which internalbusiness processes

must we excel?

How do we lookto customers?

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The Balanced Scorecard

Learning improvesbusiness processes.

Improved businessprocesses improve

customer satisfaction.

Improving customersatisfaction improves

financial results.

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Benefits of Balance Scorecard

If implemented well:– Forces management to articulate a coherent

strategy.– Strategy is communicated throughout

organization.– Performance measures are more likely to be

consistent with strategy and actionable.– Portfolio of measures reduces gaming

problems.– Feedback loop makes strategy dynamic.

If implemented well:– Forces management to articulate a coherent

strategy.– Strategy is communicated throughout

organization.– Performance measures are more likely to be

consistent with strategy and actionable.– Portfolio of measures reduces gaming

problems.– Feedback loop makes strategy dynamic.

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Some Possible Problems

Cultural/behavioral– Program fatigue.

– Culture shock/resistance.

– Every existing performance measurehas a champion.

– Gaming still possible.

Cultural/behavioral– Program fatigue.

– Culture shock/resistance.

– Every existing performance measurehas a champion.

– Gaming still possible.