Basic Concepts Of Productivity 4b1m1t

Unit – I

Basic Concepts of Productivity

Basic definition of productivity: Depending upon who is defining it-whether it is an economist, ant, manager, politician, union leader, or industrial engineer-you will get a slightly different definition of he term productivity. How ever, if we closely examine the various definitions and interpretations of this term, three basic types of productivity appear to be emerging. For the purpose of this text, we shall refer to these basic forms as follows. 1) Partial Productivity: It is the ratio of output to one class of input. For example, labor productivity (the ratio of output to labor input) is a partial productivity measure. Similarly, capital productivity (the ratio of output to capital input) and material productivity (the ratio of output to materials input) are examples of partial productivity. 2) Total-factor productivity: It is the ratio of net output to the sum of associated labor and capital (factor) inputs. By “net output,” we mean total output minus intermediate goods and services purchased. Notice that the denominator of this ration is made up of only the labor and capital input factors. 3) Total productivity: It is the ratio of total output to the sum of all input factors. Thus, a total productivity measure reflects the t impact of all the inputs in producing the output. In al of the above definitions, both the output and input (s) are expressed in “real” or “physical” by being reduced to constant dollars (or any other monetary currency) of a reference period (often referred to as “base period”). This reducing to base period is accomplished by dividing the values of output and input(s) by deflators or inflators, depending upon whether the prices of outputs and inputs have gone up or down, respectively. In other words, the effect of reducing the output and input(s) to a base period is to eliminate the effects of price variations, so that only the “physical” changes in output and input(s) are considered in any of the productivity ratios. We shall take a simple numerical example to illustrate these here basic definitions. Example: Consider the ABC Company. The data for output produced and inputs consumed for a particular time period are given below. Output = $1000 Human input = 300 Material input = 200 Capital input = 300 Energy input = 100 Other expense input = 50 It is assumed that these values are in constant dollars with respect to a base period. Then the partial, total-factor, and total productivity values are computed as follows: Partial productivities: Human productivity = output/human input = 1000/300 = 3.33 Material productivity = output/material input = 1000/200 = 5 Capital productivity = output/capital input = 1000/300 = 3.33 Energy productivity = output/energy input = 1000/100 = 10 Other expense productivity = output/other expense input = 1000/50 = 20 Total-factor productivity = net output/ (labor + capital) input = total output — material and services purchased/ (labor + capital) input Source: Productivity Engineering and Management by David J. Sumanth [email protected]

Unit – I

Basic Concepts of Productivity

Assume that the company purchases all its materials and services, including the energy, machinery and equipment (on lease), and other services, such as marketing, advertising, information processing, consulting, etc. Advantages and limitations of using the three basic types of productivity measures in companies. Advantages

limitations

Partial productivity measures 1) Easy to understand. 2) Easy to obtain the data. 3) Easy to compute the productivity indices 4) Easy to sell to management because of the above three advantages.

1) If used alone, can be very misleading and may lead to costly mistakes. 2) Do not have the ability to explain overall cost increases. 3) Tend to shift the blame to the wrong areas of management control. 4) Profit control through partial productivity measures can be a hitand-miss approach.

5) Some partial productivity indicator data is available industry wide. 6) Good diagnostic tools to pinpoint areas for productivity improvement, if used along with total productivity indicators. Total factor productivity measure: 1. The data from company records are relatively easy obtain. 2. Usually appealing from a corporate economist’s viewpoint.

1. Does not capture the impact of materials and energy inputs. 2. The value-added approach to defining the output is not very appropriate in a company setting because it is difficult for operational managers to relate the value-added output to production efficiency. 3. Not appropriate when material costs from a sizable portion of total product costs since the impact of material input is not directly shown in this productivity measure. 4. Only labor and capital inputs are considered in the total factor input. 5. Data for comparison purposes are relatively difficult to obtain, although for some specific industries and specific time periods, the indices have been published.

Total productivity measure: 1. Considers all the quantifiable output and 1. Data for computations are relatively input factors: therefore, is a more accurate difficult to obtain at product and representation of the real economic picture customer levels, unless data collection of a company systems are designed for this purpose.

Source: Productivity Engineering and Management by David J. Sumanth [email protected]

Unit – I 2. Profit control through the use of total productivity indices is a tremendous benefit to top management.

Basic Concepts of Productivity 2. As with the partial and total-factor measures, does not consider intangible factors of output and input in a direct sense.

3. If used in conjunction with partial measures, can direct management attention in an effective manner. 4. Sensitivity analysis is easier to perform 5. Easily related to total costs.

1.1 Productivity vs. Inflation: While increased inflation rates in an economy must be explained by the t effect of several factors, economists do agree that a lack of productivity growth contributes to the increase. As expected, this is because price inflation of goods and services results from the excessive increases in sales prices of products or services. Such increases are mostly due to the management’s intention to meet their sales revenue targets, even if it means increasing the selling price just to hold the profits margins. Also, since the path of least resistance is to the increases in input costs on to the customer, many companies resorts to that strategy rather than consistently increasing total productivity, a practice that can actually reduce, if not hold, the total cost of manufacture. Willard Butcher [1979] of the chase Manhattan Bank, in his remarks at the Town hall of California on September 25, 1979, emphasizes. The most compelling force we possess to improve our standard of living while at the same time fight inflation may very well be – increased productivity.

The percent increases in prices and labor productivity are inversely correlated in fig 1.1 and 1.2, reinforcing the above statement.

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Source: Productivity Engineering and Management by David J. Sumanth [email protected]

Unit – I

Basic Concepts of Productivity

Fig 1.2 Relation between price increases and labor productivity in selected industries, 1960 to 1978. For an example of the relationship between productivity and price increases, consider the case of the Eli Lilly Company, one of the better known pharmaceutical companies in the world. During the period 1963-1974, by increasing its total factor productivity at a rate of 10.1% years on average. Lilly decreased its prices at an average annual rate of 0.4% [Virts and Cocks, 1976]. John W. Kendrick, a well-known professor of economics at George Washington University, is reported by the Chicago tribune (January 11, 1979) to have said that “productivity could be a potent weapon in fighting inflation.” Geoffrey Moore [1973] (Vice President of Research at the National Bureau of Economic Research, and Senior Research Fellow at The Hoover Institution, Stanford University, in 1972) also points out in great detail the need for increasing productivity to combat inflation over the next several years. Fig 1.3, taken from a recent publication of United States Chamber of Commerce [1979], points out that the money supply in the United States grew faster in the 1970s than it did in the 1960s. Faster growth in the money supply and slower real growth in output have produced higher inflation. In other words, the money supply grew faster in recent years than did the national output of goods per unit of labor resource (labor productivity). Gross Money Supply

Money

Gross national product National Supply

Product Inflation Portion

Real growth portion Fig 1.3 Money supply growth faster than real growth in GNP, thereby causing inflation Source: Productivity Engineering and Management by David J. Sumanth [email protected]

Unit – I

Basic Concepts of Productivity

1.2 PRODUCTIVITY VS. THE STANDARD OF LIVING

Source: Productivity Engineering and Management by David J. Sumanth [email protected]