Lecture 2 Productivity and Measurement Dr. Arshad Zaheer

Recap Management Operations Value-Added Operations Interfaces Definition of Operations Management Nomenclature Goods and Services Responsibilities of Operations Manager New Trends in OM

Lecture Outline Productivity definition Factors effecting productivity Single factor productivity Multifactor productivity Productivity Measurement Productivity analysis in enterprises Problems

Productivity Challenge Productivity is the ratio of outputs (goods and services) divided by the inputs (resources such as labor and capital) The objective is to improve productivity! Important Note! Production is a measure of output only and not a measure of efficiency

Factors Affecting Productivity Capital Quality Technology Management

Productivity Units produced Input used Productivity = Measure of process improvement Represents output relative to input Only through productivity increases can our standard of living improve How can we improve? Labor, Technology, Management

Productivity Calculations Labor Productivity Productivity = Units produced Labor-hours used = = 4 units/labor-hour 1,000 250 One resource input  single-factor productivity

Multi-Factor Productivity Output Labor + Material + Energy + Capital + Miscellaneous Productivity = Also known as total factor productivity Multiple resource inputs  multi-factor productivity

Labor Productivity At national level: Labor productivity- computed by taking entire economically active population as input Total value of goods & services produced as output. National productivity = GNP Population

Productivity Measurement Productivity Measurement is important for productivity improvement. Very effective tool for decision-making at all economic levels. Success of productivity measurement & analysis depends largely upon clear understanding by all parties concerned (enterprise managers, worker, employers, trade union orgs & government; institutions) of why productivity measurement is important for effectiveness of org.

Productivity Analysis in Enterprise Simple & practical approaches to productivity analysis are: Measurement of workers productivity Measurement systems for planning & analyzing unit labor requirements. Measurement system of labor productivity aimed at structure of labor resource use. Value added productivity at enterprise level.

Productivity Analysis in Enterprise . Three of most common purpose are: Comparing enterprise with its competitors. Determining relative performance of departments & workers Comparing relative benefits of various types of input for collective bargaining & gain sharing.

Collins Title Productivity Collins title wants to evaluate its labor and multifactor productivity with a new computerized title-search system. The company has a staff of four, each working eight hours per day (for a payroll of cost of $640/day) and overhead expenses of 400$ per day. Collins processes and closes on eight titles each day. The new computerized title-search system will allow the processing of 14 titles per day. Although the staff, their work hours and pay are the same, the overhead expenses are now 800$ per day. What is the labor productivity and multifactor productivity with old and new system?

Collins Title Productivity Staff of 4 works 8 hrs/day 8 titles/day Payroll cost = $640/day Overhead = $400/day Old System: 8 titles/day 32 labor-hrs = Old labor productivity

Collins Title Productivity Staff of 4 works 8 hrs/day 8 titles/day Payroll cost = $640/day Overhead = $400/day Old System: 8 titles/day 32 labor-hrs = Old labor productivity = .25 titles/labor-hr

Collins Title Productivity Staff of 4 works 8 hrs/day 8 titles/day Payroll cost = $640/day Overhead = $400/day Old System: 14 titles/day 32 labor-hrs 14 titles/day Overhead = $800/day New System: 8 titles/day 32 labor-hrs = Old labor productivity = .25 titles/labor-hr = New labor productivity

Collins Title Productivity Staff of 4 works 8 hrs/day 8 titles/day Payroll cost = $640/day Overhead = $400/day Old System: 14 titles/day Overhead = $800/day New System: 8 titles/day 32 labor-hrs = Old labor productivity = .25 titles/labor-hr 14 titles/day 32 labor-hrs = New labor productivity = .4375 titles/labor-hr

Collins Title Productivity Staff of 4 works 8 hrs/day 8 titles/day Payroll cost = $640/day Overhead = $400/day Old System: 8 titles/day $640 + 400 14 titles/day Overhead = $800/day New System: = Old multifactor productivity

Collins Title Productivity Staff of 4 works 8 hrs/day 8 titles/day Payroll cost = $640/day Overhead = $400/day Old System: 14 titles/day Overhead = $800/day New System: 8 titles/day $640 + 400 = Old multifactor productivity = .0077 titles/dollar

Collins Title Productivity Staff of 4 works 8 hrs/day 8 titles/day Payroll cost = $640/day Overhead = $400/day Old System: 14 titles/day Overhead = $800/day New System: 14 titles/day $640 + 800 8 titles/day $640 + 400 = Old multifactor productivity = .0077 titles/dollar = New multifactor productivity

Collins Title Productivity Staff of 4 works 8 hrs/day 8 titles/day Payroll cost = $640/day Overhead = $400/day Old System: 14 titles/day Overhead = $800/day New System: 8 titles/day $640 + 400 = Old multifactor productivity = .0077 titles/dollar 14 titles/day $640 + 800 = New multifactor productivity = .0097 titles/dollar

Measurement Problems Quality may change while the quantity of inputs and outputs remains constant External elements may cause an increase or decrease in productivity Precise units of measure may be lacking

Productivity Variables Labor - contributes about 10% of the annual increase Capital - contributes about 38% of the annual increase Management - contributes about 52% of the annual increase

Problem 1 The Production Manager at a Textile Mills, can currently expect his operation to produce 1000 square yards of fabric for each ton of raw cotton. Each ton of raw cotton requires 5 labor hours to process. He believes that he can buy a better quality raw cotton, which will enable him to produce 1200 square yards per ton of raw cotton with the same labor hours. What will be the impact on productivity (measured in square yards per labor-hour) if he purchases the higher quality raw cotton?

Current Labor Productivity New Labor Productivity Solution 1000 sq yds 1 ton * 5 hours = Current Labor Productivity = 200 sq yds per hour 1200 sq yds 1 ton * 5 hours = New Labor Productivity = 240 sq yards per hour Productivity improves 20%= (240-200) / 200 = 0.2 (20%)

Problem 2 A local auto mechanic finds that it usually takes him 2 hours to diagnose and fix a typical problem. What is his daily productivity (assume an 8 hour day)? He believes he can purchase a small computer trouble-shooting device, which will allow him to find and fix a problem in the incredible (at least to his customers!) time of 1 hour. He will, however, have to spend an extra hour each morning adjusting the computerized diagnostic device. What will be the impact on his productivity if he purchases the device?

Productivity with computer Solution 8 hours per day 2 hours per problem = Current Productivity = 4 Problems per day 8 hours per day 2 hours per problem = Productivity with computer = 7 Problems per day Productivity improves 75% (7-4) / 4 = 0.75 (75%)

Problem 3 Susan has a part-time "cottage industry" producing seasonal plywood yard ornaments for resale at local craft fairs and bazaars. She currently works 8 hours per day to produce 16 ornaments. a. What is her productivity? b. She thinks that by redesigning the ornaments and switching from use of a wood glue to a hot-glue gun she can increase her total production to 20 ornaments per day. What is her new productivity? c. What is her percentage increase in productivity?

Solution 16 ornaments/8 hours = 2 ornaments/hour b. 20 ornaments/8 hours = 2.5 ornaments/hour c. Change in productivity = 0.5 ornaments/hour; percent change = 0.5/2= 25%

Problem 4 A firm cleans chemical tank cars. With standard equipment, the firm typically cleaned 70 chemical tank cars per month. They utilized 10 gallons of solvent, and two employees worked 20 days per month, 8 hours a day. The company decided to switch to a larger cleaning machine. Last April, they cleaned 60 tank cars in only 15 days. They utilized 12 gallons of solvent, and the two employees worked 6 hours a day. 1. What was their productivity with the standard equipment? 2. What is their productivity with the larger machine? 3. What is the change in productivity?

Solution

Problem 5 Joanna French is currently working a total of 12 hours per day to produce 240 dolls. She thinks that by changing the paint used for the facial features and fingernails that she can increase her rate to 360 dolls per day. Total material cost for each doll is approximately $3.50; she has to invest $20 in the necessary supplies (expendables) per day; energy costs are assumed to be only $4.00 per day; and she thinks she should be making $10 per hour for her time. Viewing this from a total (multifactor) productivity perspective, what is her productivity at present and with the new paint?

Solution Currently Using the new paint Labor 12 hrs * $10 = $120 = $ 120 Material 240 * $3.50 = $840 360 * $3.50 = $1260 Supplies   = $ 20 = $ 20 Energy = $ 4 = $ 4 Total Inputs = $984 = $1404 Productivity 240/984 = 0.24 360/1404 = .26

Problem 6 (Refer Problem 5) How would total (multifactor) productivity change if using the new paint raised Ms. French’s material costs by $0.50 per doll?

Solution If the material costs increase by $0.5 per doll: Using the new paint Labor 12 hrs * $10 = $ 120 Material 360 * $4 = $1440 Supplies   = $ 20 Energy = $ 4 Total Inputs = $1584 Productivity 360/1584 = .23

Problem 7 (Refer Problem 6) If she uses the new paint, by what amount could Ms. French’s material costs increase keeping the total (multifactor) productivity same as 0.24?

Solution We want to know how high the material cost could go, using the new paint, before the productivity drops to the current level of 0.24. In mathematical terms we make the material cost a variable (X), set the new multifactor productivity value to the current level, 0.24, and solve for X. 360 (12x10) + (360X) + 20 +4 = 0.24 360= 0.24(120 + 360X + 20 + 4 360= 28.8 + 86.4X + 4.8 + 0.96 X =3.77 $ It follows then that the new paint could raise Materials cost by no more than approximately $0.27 (the difference between $3.77 and $3.50) before Ms. French would experience a decrease in multifactor productivity.

Problem 8

Solution Total output is 1600 valves per day. 20 workers are active for eight hours per day. So Total working hours per day are 20x8=160. So Labor Productivity is 1600/160 i.e. 10 valves/hour. (b) Productivity rises by 20 percent, to 12 valves/hour. output will be 12x8x20 = 1920 (c) New productivity is 1800 / (20 x 8) = 11.25 valves/hour (d) Gibson did not gain the desired 20 percent increase in productivity, but they did gain over ten percent, without extra equipment or energy, and without increasing the wage bill.

Problem 9

Solution MFP before: 500 boxes / ($10x5x16 + $3000 + $400) = 500 / 4200 = 0.119 boxes/dollar MFP after: 600 boxes / ($10x5x16 + $3200 + $400) = 600 / 4400 = 0.136 boxes/dollar Prentice Hall Inc.

Problem 10 A farmer grows crop in his 100 by 100 foot garden. He then sells the crop at the local farmers' market. Two summers ago, he was able to produce and sell 1200 pounds of crop. Last summer, he tried a new fertilizer that promised a 50% increase in yield. He harvested 1900 pounds. Did the fertilizer live up to its promise?  

Solution Two summer ago Last Sumer Change 1200/10000=0.12 lbs/sq ft (0.19 - 0.12)/0.12 = 58.3% Since the productivity gain was 58.3%, not 50%, the fertilizer was at least as good as advertised.

Forthcoming lecture- Competitiveness and Strategy