TOPIC: PRODUCTIVITY MEASUREMENT

1.2 Productivity:
Productivity is a relationship between the output (product/service) and input (resources
consumed in providing them) of a business system. The ratio of aggregate output to the
aggregate input is called productivity.
Productivity = output/Input
 For survival of any organization, this productivity ratio must be at least 1.If it is more
than 1, the organization is in a comfortable position. The ratio of output produced to the
input resources utilized in the production.

1.3 Importance:
Benefits derived from higher productivity are as follows:
 It helps to cut down cost per unit and thereby improve the profits.
 Gains from productivity can be transferred to the consumers in form of lower priced
Products or better quality products.
 These gains can also be shared with workers or employees by paying them at higher rate.
 A more productive entrepreneur can have better chances to exploit expert opportunities.
 It would generate more employment opportunity.
 Overall productivity reflects the efficiency of production system.
 More output is produced with same or less input.
 The same output is produced with lesser input.
 More output is produced with more input.
 The proportional increase in output being more than the proportional increase in input.

1.4 Productivity Measurement:

Productivity may be measured either on aggregate basis or on individual basis, which are called
total and partial measure.
Total productivity Index/measure = Total output/ Total input
= Total production of goods and services
Labour+material+capital+Energy+management
Partial productivity indices, depending upon factors used, it measures the efficiency of individual
factor of production.

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Labour productivity Index/Measure = Output in unit
Man hours worked
Management productivity Index/Measure = Output
Total cost of management

Machine productivity Index/Measure = Total output

Machine hours worked
Land productivity Index/Measure = Total output
Area of Land used
Partial Measure = Output or Output or Output or Output
Labour Capital Materials Energy

PROBLEMS:
Example-1
The input and output data for an industry given in the table. Find out various productivity
measures like total, multifactor and partial measure.

Output and Input production data in dollar ($)

Output

1. Finished units 10,000

2. Work in progress 2,500
3. Dividends 1,000
4. Bonds -------
5. Other income --------

Input
1. Human 3,000
2. Material 153
3. Capital 10,000
4. Energy 540
5. Other Expenses 1,500
Solution:
Total measure = Total Output = 13,500 = 0.89
Total Input 15,193
Multi factor measure = Total Output = 13,500 = 4.28
Human+Material 3,153
Multi factor measure = Finished units = 10,000 = 3.17
Human+Material 3,153
Partial Measure1 = Total Output = 13,500 = 25
Energy 540
Partial Measure2= Finished units = 10,000 = 18.52
Energy 540

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Note: For multifactor and partial measures it is not necessary to use total output as numerator.
Often, it is describe to create measures that represent productivity as it relates to some particular
output of interest.

Other fields for the measurement of partial measures of productivity are:

Business Productivity Measure

Restaurant Customers (Meals) per labour hour
Retail Store Sales per square foot
Utility plant Kilowatts per ton of coal
Paper mill Tons of paper per cord of wood

Example-2
A furniture manufacturing company has provided the following data. Compare the labour,
raw materials and supplies and total productivity of 1996 and 1997.

Output: Sales value of production in dollar ($)

22,000 (in 1996) and 35,000 (in 1997)
1996 1997
Inputs: Labour 10,000 15,000
Raw materials and Supplies 8,000 12,500
Capital equipment depreciation 700 1,200
Other 2,200 4,800

Solution:
1996 1997
a. Partial productivities
Labour 2.20 2.33
Raw materials and Supplies 2.75 2.80
b. Total Productivity 1.05 1.04

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PRODUCTIVITY MEASUREMENT: Productivity describes various
measures of the efficiency of production. A productivity measure is expressed as
the ratio of output to inputs used in a production process,
i.e. Mathematically : P=O/I
The measure of productivity is defined as a total output per one unit of a total
input. Productivity is a crucial factor in production performance of firms and
nations. Increasing national productivity can raise living standards because more
real income improves people's ability to purchase goods and services, enjoy
leisure, improve housing and education and contribute to social and environmental
programs. Productivity growth also helps businesses to be more profitable. There
are many different definitions of productivity and the choice among them depends
on the purpose of the productivity measurement and/or data availability.
Productivity is a measure of the efficiency of production. Productivity
measurements must show a linkage with profitability; after all, it is the bottom line
that is the ultimate barometer of a company’s success. An input in any production
process comprises capital, labor, material and energy.

Productivity of each resource can be measured separately. Such measurement gives

single factor productivity. The method of calculating productivity considering
more than one resource is called multi-factor productivity approach to measuring
productivity. Total productivity (total productivity index) refers to the productivity
of all resources put together. So productivity of all resources put together gives
total productivity.
There are broadly three types of productivity measurements and these are
explained below:

1. Single-Factor Productivity Measurement.

2. Multi-Factor Productivity Measurement.

3. Total (Composite) Factor Productivity Measures.

4. Total Productivity Model.

1. SINGLE-FACTOR PRODUCTIVITY MEASUREMENT:

Single-Factor Productivity is a measure of output against specific input. Partial

productivity is concerned with efficiency of one class of input. Its significance lies
in its focus on utilization of one resource. Labor productivity is a single factor
productivity measure. It is the ratio of output to labor input (units of output per
labor hour). Material productivity is the ratio of output to materials input.
Machine productivity is the ratio of machine units of output per machine hour,
output per unit machine. Capital productivity is the ratio of output to capital input
and it is measured in Rupees. Energy Productivity is units of output per kilowatt-
hour (Rupee value of output per kilowatt-hour).

Advantages of Single-Factor Productivity:

i. Ease in obtaining relevant data and easy to comprehend.

ii. Acts as a good diagnostic measure to identify areas of improvement by

evaluating inputs separately across the output.

iii. Ease in comparing with other businesses in the industry.

Disadvantages of Single-Factor Productivity:

i. Does not reflect the overall performance of the business.

ii. Misinterpreted as technical change or efficiency/effectiveness of labor.

iii. Management may identify wrong areas of improvements if the focus areas of a

business are not examined accurately.

2. MULTI-FACTOR PRODUCTIVITY MEASUREMENT:

The concept of multi-factor productivity was developed by Scott D. Sink, multi-
factor productivity measurement model considered labour, material and energy as
major inputs. Capital was deliberately left out as it is most difficult to estimate how
much capital is being consumed per unit/ time.

The concept of depreciation used by accountants make it further difficult to

estimate actual capital being consumed. Multi-factor productivity is ratio of output
to a group of inputs such as; labor, energy and material. Multi-factor productivity
is an index of output obtained from more than one of the resources (inputs) used in
production. It is the ratio of net output to the sum of associated labor and other
factor inputs.

Advantages of Multi-Factor Productivity:

i. Considers intermediate inputs of a business.

ii. Measures technical change in an industry. Disadvantages of Multi-Factor

Productivity.

iii. Difficulty in obtaining all the inputs.

iv. Difficulty in communicating inter-industry linkages and aggregation.

3. TOTAL (COMPOSITE) FACTOR PRODUCTIVITY MEASURES:

The Total Factor Productivity model developed by John W. Kendrick in 1951, he

has taken only labour and capital as only two input factors. In an effort to improve
productivity of labour, company may install more machinery and then productivity
of labour will go up bringing down the capital productivity.

Therefore, labour and capital are considered to be the most significant in

contribution in the process of production.

Advantages of Total Factor Productivity:

i. Ease in obtaining data and to understand.

ii. Ease in understanding.

iii. Ease of aggregation across industries.

Disadvantages of Total Factor Productivity:

i. Not a good measure for technological change.

ii. Other inputs are ignored.

iii. Net output does not reflect the efficiency of production system in a proper way.

4. TOTAL PRODUCTIVITY MODEL:

Total Productivity Model was developed by David J. Sumanth in 1979 considered
five items as inputs. These are human, material, capital, energy and other expenses.
This model can be applied in any manufacturing or service organization.

Total Tangible Output = Value of finished units produced + Partial units produced
+ Dividends from securities + Interests from bonds + other incomes.

Total Tangible Inputs = Value of human inputs + Capital inputs + Materials

purchased + Energy inputs + other expenses (taxes, transport & office expenses
etc.).

Advantages of Total Productivity:

i. All quantifiable inputs are considered.

ii. Sensitivity analysis can be done.

iii. Provides both firm level and operational unit level productivity.

Disadvantages of Total Productivity:

i. Data is difficult to compute.

ii. Does not consider intangible factors of input and output.

BENEFITS FROM PRODUCTIVITY GROWTH:

Productivity growth is a crucial source of growth in living standards. Productivity

growth means more value is added in production and this means more income is
available to be distributed.

At a firm or industry level, the benefits of productivity growth can be distributed in

a number of different ways:

• To the workforce through better wages and conditions;

• To shareholders and superannuation funds through increased profits and
dividend distributions;
• To customers through lower prices;
• To the environment through more stringent environmental protection; and
• To governments through increases in tax payments (which can be used to
fund social and environmental programs).

Productivity growth is important to the firm because it means that it can meet its
(perhaps growing) obligations to workers, shareholders, and governments (taxes
and regulation), and still remain competitive or even improve its competitiveness
in the market place. Adding more inputs will not increase the income earned per
unit of input (unless there are increasing returns to scale). In fact, it is likely to
mean lower average wages and lower rates of profit. But, when there is
productivity growth, even the existing commitment of resources generates more
output and income. Income generated per unit of input increases. Additional
resources are also attracted into production and can be profitably employed.

DRIVERS OF PRODUCTIVITY GROWTH:

In the most immediate sense, productivity is determined by the available

technology or know-how for converting resources into outputs, and the way in
which resources are organized to produce goods and services. Historically,
productivity has improved through evolution as processes with poor productivity
performance are abandoned and newer forms are exploited. Process improvements
may include organizational structures (e.g. core functions and supplier
relationships), management systems, and work arrangements, manufacturing
techniques, and changing market structure. A famous example is the assembly
line and the process of mass production that appeared in the decade following
commercial introduction of the automobile.
Mass production dramatically reduced the labor in producing parts for and
assembling the automobile, but after its widespread adoption productivity gains in
automobile production were much lower. A similar pattern was observed
with electrification, which saw the highest productivity gains in the early decades
after introduction. Many other industries show similar patterns. The pattern was
again followed by the computer, information and communications industries in the
late 1990s when much of the national productivity gains occurred in these
industries.
There is a general understanding of the main determinants or drivers of
productivity growth. Certain factors are critical for determining productivity
growth. The Office for National Statistics (UK) identifies five drivers that interact
to underlie long-term productivity performance: investment, innovation, skills,
enterprise and competition. (ONS 3, 20)

• Investment is in physical capital — machinery, equipment and buildings.

The more capital workers have at their disposal, generally the better they are
able to do their jobs, producing more and better quality output.

• Innovation is the successful exploitation of new ideas. New ideas can take
the form of new technologies, new products or new corporate structures and
ways of working. Speeding up the diffusion of innovations can boost
productivity.

• Skills are defined as the quantity and quality of labour of different types
available in an economy. Skills complement physical capital, and are needed
to take advantage of investment in new technologies and organisational
structures.

• Enterprise is defined as the seizing of new business opportunities by both

start-ups and existing firms. New enterprises compete with existing firms by
new ideas and technologies increasing competition. Entrepreneurs are able
to combine factors of production and new technologies forcing existing
firms to adapt or exit the market.

• Competition improves productivity by creating incentives to innovate and

ensures that resources are allocated to the most efficient firms. It also forces
existing firms to organise work more effectively through imitations of
organisational structures and technology.