Productivity, its evaluation and the economic added value concept
Definition and components of productivity
Productivity has been generally defined as a ratio of a measure of output to a measure of some or all of the resources used to produce this output. Defined in this way, one or a number of input measures can be taken and compared with one or a number of output measures.
When attempts are made to include all inputs and all outputs in a system the measure is called a total productivity measure (TPM). Palik (1979) explains in his definition that the inputs used in a process can be hours of labor, units of capital, and quantities of raw materials compared with the consequent output.
Revisiting the Productivity Conceptual Model, the roots denote the inputs to the system, the trunk the conversion process and the branches, leaves and fruits the systems outputs.
The model shows two fundamental problems:
1. Selecting different factor, inputs and outputs, can derive different measures of productivity.
2. The diversity of the sum of the factor inputs and outputs, many of which are of a qualitative nature.
Notwithstanding these, there is little debate about the need to be able to measure productivity, for without it comparisons of performance are not feasible and control action cannot be properly taken.
The question is 'what do we measure, and how do we collect and analyze the data we collect?' What factors are chosen for measurement, how important these are, and how that measurement is made is probably best gained from an analysis of the specific reasons why companies should wish to measure productivity. Teague and Eilon (1973) have outlined the main reasons why productivity should be required to be measured.
1. For strategic purposes in order to compare the global performance of the firm with competitors or similar firms.
2. For tactical purposes, to enable management to control the performance of the firm via the performance of individual sectors of the firm either by function or product.
3. For planning purposes, to compare the relative benefits accruing from the use of differing inputs or varying proportions of the same inputs.
4. For internal management purpose, such as collective bargaining with trade unions.
Thorpe (1982) has looked more closely at some of the specific measurement requirements of companies under these headings and looked at the data collected for the purpose, how it is used and the ambiguities and problems that occur. The areas examined were:
* The measurement of work content and the reward of labor;
* The determination of staffing levels by comparison;
* The appraisal of managerial performance;
* Investment decisions;
* The measure of organizational effectiveness.
Longitudinal studies of 63 organizations (Bowey et al. (1983)) found that amongst the problems and the choice of a measure, were:
* Conceptual problems that relate to the exact measurement of productivity improvement and exactly how company performance improvement is brought about;
* Perspectives of how different people view productivity;
* Operational problems relating to the collection of data and the synthesis of data of different types.
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Measure Employee Effectiveness
With increased interest in productivity, measurements that evaluate employee effectiveness have become more sophisticated and reliable. This article looks at how productivity measurements can be used in your organization to measure the effectiveness of your employees. The article looks at both manufacturing industries, where production costs are based on worker output, and service industries, where productivity is determined by tasks performed or customers serviced in a given amount of time. An understanding of productivity measures can help you positively affect your business's profitability. This discussion will help you better understand how you can apply the most effective measures and implement an incentive program that is fair to all employees in every department.
Since the 1800s, the Bureau of Labor Statistics (BLS) has tracked studies of output per hour (productivity) in individual industries. A study of 60 manufacturing industries, prompted by congressional concern that human labor was being displaced by machinery, was released as Hand and Machine Labor in 1898. This report provided striking evidence of the savings in labor resulting from mechanization in the last half of the 19th century. The effects of productivity advance upon employment remained an important focus of the BLS throughout the 1920s and 1930s. Also during this period, the bureau began the preparation and publication of industry indexes of output per hour, which were based on available production data from the periodic Census of Manufacturers and from employment statistics collected by BLS.
In 1940, Congress authorized the BLS to undertake continuing studies of productivity and technology changes. The bureau extended earlier indexes of output per hour developed by the National Research Project of the Works Progress Administration, and published measures for selected industries. This work, however, was reduced in volume during World War II, owing to the lack of meaningful production and employee hour data for many manufacturing industries.
The advent of World War II also caused a change in the emphasis of the program from problems of unemployment to concern with the most efficient use of scarce labor resources. BLS undertook a number of studies of labor requirements for defense industries, such as synthetic rubber and shipbuilding. After the war, the industry studies program resumed on a regular basis and was supplemented by a number of industry studies based on the direct collection of data from employers.
In recent years, public interest in productivity has grown, and increases in output per hour have been recognized as important indicators of economic progress and means to higher income levels, rather than a threat to job opportunities.
There are a variety of factors, such as the quality of your equipment, the management of materials flow and general economic considerations (e.g., inflation or recession) that can affect your business's profits. However, your company's profitability depends, in large part, on the quality of your employees' performance. You can evaluate the quality of your employees' work through productivity measurements.
Choose a convenient measure of productivity based on the type of operation your business is involved in and what you're producing. You'll also need to choose a time frame in which to measure it. Productivity will mean something different to each business.
One standard measurement of productivity is output per worker-hour, or the ratio between the number of hours worked to total output. You can also measure your productivity per week or month, if each unit of production takes more than an hour to create.
Labor output can be measured in terms of volume or quantity of items produced, or dollar value of items produced or services provided. For example, a graphic designer's productivity may include aspects of how many jobs he or she completes in a month, as well as how quickly the jobs were produced. A company that builds and sells cogs, on the other hand, might measure productivity in terms of the number of units built and sold over a month's time. If you manufacture goods, consider using output per worker-hour or number of worker-hours required to produce a single product. Of course, your total production will include more than labor. It will also include the cost of raw materials, machinery and equipment, and other assets. In this example, however, we are focusing solely on labor output:
You have five employees who each work 160 hours per month to produce 100 widgets.
The unit cost of a widget is: 5 employees x 160 hours = 800 worker hours.
Worker hours divided by 100 widgets per month equals eight worker-hours per widget.
If you pay each of the workers $5 per hour, then the labor cost of the unit is:
$5.00 x 800 worker-hours = $4,000 per month
$4,000 per month divided by 100 widgets per month equals $40 per widget.
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II. Service Industries
It can be a bit harder to measure productivity in a service industry due to the somewhat intangible nature of the product involved. Service industries can measure productivity by considering the number of tasks performed or the number of customers served in a given time period. Other measures might include whether the service delivered measured up to company or customer standards or whether performance deadlines were met.
Professional employees can keep personal time sheets to indicate the number of hours spent on a given task. Quantity of work is a possible measure, such as number of service calls made per day or number of contracts written. Clerical workers can be given specific amounts of work to determine the relative time it takes to complete a given task.
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III. Sales Performance
The most effective means of measuring performance by sales representatives is by taking into account and measuring each of these factors:
The volume of sales in dollars per given unit of time: Sales volume alone won't indicate how much profit or loss each sale represents, as a salesperson may make too many concessions or sell to poor credit risks in order to make the sale.
The number of calls made by a sales rep alone doesn't indicate if those accounts with the most profit potential are being serviced.
The number of new accounts opened.
The dollar amount expended per sale: Comparing sales over a given period of time, say monthly periods each year, will not account for changes in price, product competition or routes.
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IV. Other Methods
Another method for measuring productivity involves determining the time an average worker needs to generate a given level of production. You can also observe the amount of time that a group of employees spends on certain activities (such as production, travel, or idle time spent waiting for materials or replacing broken equipment). The latter method can reveal if employees are spending too much time away from production on other aspects of the job that can be controlled by the business.
Once you've figured out how to measure your business's productivity, you need to determine whether your productivity is where it should be. This task can be tricky, especially if you are getting this information for the first time. Factors to take into consideration are:
The cost per unit compared with price
Your competitors' productivity level, cost per unit and price.
Some of this information may be available either from your trade or industry association, or through networking with contacts in similar businesses. Once you've established a baseline measure, you can assess your productivity periodically and be able to spot trends and track your progress over time.
How to Improve Productivity
Identify potential problem areas. The quality of leadership in the business can have an effect on productivity. As a leader, make sure that your business isn't suffering from:
Poor planning or scheduling of work
Unclear or untimely instructions to employees
An inability to adjust staff size and duties during light or heavy work load periods
Poor coordination of material flow
The unavailability of needed tools
Excess travel time
Ultimately, the key to improving productivity lies with the employees themselves and the way that you work with those employees. Studies have shown that most workers think it's important to do their best at their jobs. Chances are that most of your employees feel that way. People want to do a good job, and you should provide them with every opportunity to do so. It becomes your challenge to tap into that desire to perform and make work happen for your business.
What to be Cautious of
Let's now assume that you're aware of the importance of overseeing business processes and measuring performance. You may have already done some time studies and established standards for measuring employee productivity. Many of these types of programs are set up quickly in response to a need for some sort of criteria to help evaluate performance. But their implementation creates general resentment on the part of the employees, who believe that either they do not need grading or that the grading does not accurately reflect their contributions. If the performance measurement program doesn't encourage improvement in the volume and quality of output, it will not improve productivity nor provide information needed to manage operations. It may be detrimental to employee morale. It certainly won't reduce operating costs or enhance operating profits.
In order to avoid this type of negative experience with performance measurement, make certain the program addresses these issues:
It must measure both product and quality.
It must be fair.
It must provide incentives.
Making certain the program measures quality, not just productivity, sounds rather elementary. But many companies fail to recognize the difference between employee/process productivity and quality of output, says Richard Hagberg, president of Hagberg Consulting Group in Foster City, Calif.
"They tend to hone in on one or the other. Those that concentrate on productivity create a nimble employee machine that processes work at a frenetic pace. Unfortunately, that nimble employee makes mistakes that are then passed on to the customer," states Hagberg. "Those that focus on quality tend to generate great products, but also unacceptable lead times and missed delivery dates." The ideal program helps improve both, balancing the need for speed with the need for doing the job right.
One of the toughest elements to get right in a performance measurement program is an equal standard of measurement. Too many programs fail to assess each individual, department or process in the same way. For example, an accounts payable clerk may be measured in terms of processed checks per day, while a shipping dock worker is measured in terms of pallets loaded.
Even in the same department, inequities often exist. For instance, suppose a customer service department's standard is for each representative to handle a minimum of 20 calls per day. One representative works with newer customers, who tend to have more questions when they call. She resents what she perceives as an unreasonable standard because her calls take longer than those with established customers. As a result, she consistently receives low marks. Alternatively, she may decide to defeat the standard by rushing through her calls, in the process delivering poor service and quite likely losing customers.
Finally, the program must include incentives that recognize and reward outstanding performance. Senior management, or the owners, in many companies remain convinced that the introduction of any incentive would throw their organization into chaos. While it would be naive to assume an incentive plan contains no risks, introducing any kind of performance measurement program has the potential for employee revolt if mishandled. If you develop incentives that give every employee the opportunity to be rewarded for good performance, they will not engender problems. Quite the contrary, they may prove to be the most important element in ensuring the success of the entire measurement and improvement effort.
Trends and Reporting
What type of information is necessary to ensure that processes are achieving expected results? Since productivity and quality are both expressed in terms of time, you can calculate performance at various levels, from an individual employee right up to company-wide and overall types of work performed.
Maintain and analyze data to indicate trends over time.
Each person should have appropriate information for his or her level to track over time. This information will quickly identify opportunities for improvement and superior performance to be rewarded. Maintain a performance report at a department level with employee detail.
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Eileen Appelbaum, "Manufacturing Advantage: Why High-Performance Work Systems Pay Off" (Cornell University Press, 2000)
Trevor Bentley, "Bridging the Performance Gap" (Gower Publishing, 1997)
Jeanne Farrington and James Fuller, "From Training to Performance Improvement" (Pfeiffer, 1999)
Edward Gordon, "Skill Wars: Winning the Battle for Productivity" (Butterworth-Heineman, 1999)
Danny Langdon, "Aligning Performance" (Jossey-Bass, 1999)
Charles Manz and Henry Sims, "Business Without Bosses: How Self-Managing Teams are Building High Performance Companies" (John Wiley & Sons, 1993)
there are different ways and forms to measure productivity. It depends on the organization and its Management practices, which one they will adopt.
However at the core of it one I tell my students as the base of all formulae is this:
Quantity output * Quality output * time input/ Quantity expected*Quality expected * time output
Remember the Raw-material input has to be a constant factor
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