PRODUCTIVITY

The Economic System Transforms Inputs to Outputs The economic system transforms inputs to outputs at about an annual 2.5% increase in productivity (capital 38% of 2.5%), labor (10% of 2.5%), management (52% of 2.5%) Land, Labor, Capital, Management Goods and Services Feedback loop Inputs Process Outputs

Measures of Competitiveness Productivity GDP (Gross domestic product) growth Market capitalization Technological infrastructure Quality of education Efficiency of government

What is Productivity? Productivity is a common measure of how well resources are being used or a measure of the effective use of resources usually expressed as the ratio of output to input Productivity = Output Input

Productivity measures are useful for Tracking an operating unit’s performance over time Judging the performance of an entire industry or country

Why Productivity Matters High productivity is linked to higher standards of living As an economy replaces manufacturing jobs with lower productivity service jobs, it is more difficult to maintain high standards of living Higher productivity relative to the competition leads to competitive advantage in the marketplace Pricing and profit effects For an industry, high relative productivity makes it less likely it will be supplanted by foreign industry

Typical Impacts of Productivity Improvement As productivity improved Costs were decreased Wages increased Parts per man hour 95 100 105 110 115 Year A Year B Year C Cost per unit decreased $1.50 $1.75 $2.00 $2.25 Year A Year B Year C Average worker's annual cash compensation increased 24000 25000 26000 27000 Year A Year B Year C

Measures of Productivity Partial Output Output Output Output measures Labor Machine Capital Energy Multifactor Output Output measures Labor + Machine Labor + Capital + Energy Total Goods or Services Produced measure All inputs used to produce them

Examples of Partial Productivity Measures Units of output per kilowatt-hour Dollar value of output per kilowatt-hour Energy Productivity Units of output per dollar input Dollar value of output per dollar input Capital Productivity Units of output per machine hour Value-added per machine hour Machine Productivity Units of output per labor hour Units of output per shift Value-added per labor hour Labor Productivity

Typical Measures of Productivity in Different Organizations Restaurant Customers (meals) per labor hour Retail store Sales per square foot Chicken farm Lbs of meat per lb. of feed Utility plant Kilowatts per ton of coal Paper mill Tons of paper per cord of wood

Example 1 7040 Units Produced Sold for $1.10/unit Which productivity Cost of labor : $1,000 Cost of materials: $520 Cost of overhead: $2000 Which productivity measures can be calculated? What is the multifactor productivity?

Solution 1 MFP = Output Labor + Materials + Overhead MFP = (7040 units)*($1.10) $1000 + $520 + $2000 MFP = 2.20

Example 2 5,500 Units Produced Sold for $35/unit 500 labor hours are used Cost of labor: $25/hr Cost of raw material: $5,000 Cost of overhead: 2 x labor cost What is the labor productivity? What is the multifactor productivity?

Solution 2: Labor Productivity 5,500 units/500 hours = 11 units/hour Or we can arrive at a unitless figure: (5,500 units*$35/unit)/(500 hours * $25/hr) =15.4

Solution 2: Multifactor Productivity MFP = Output Labor + Materials + Overhead MFP = (5,500 units)*($35) (500hrs.)*$25/hr. + ($5000) + 2*(500hrs.)*$25/hr. MFP = 4.52

Example 3 You have just determined that your service employees have used a total of 2400 hours of labor this week to process 560 insurance forms. Last week the same crew used only 2000 hours of labor to process 480 forms. Which productivity measure should be used? Answer: Could be classified as a Partial Measure. Is productivity increasing or decreasing? Answer: Last week’s productivity = 480/2000 = 0.24, and this week’s productivity is = 560/2400 = 0.23. So, productivity has decreased slightly.

U.S. Multifactor Productivity

Productivity Growth Productivity Growth is a key factor in a contry’s rate of inflation and the standard of living of its people

Example 4 Labor productivity on the ABC assembly line was 25 units per hour in 2006. In 2007, labor productivity was 23 units per hour. What was the productivity growth from 2006 to 2007?

MFP Growth - Non-Farm

MFP Growth - Manufacturing

Measurement Problems Quality differences may distort productivity measurements External elements may cause an increase or decrease in productivity Precise units of measure may be lacking Technological differences may lead to misleading results.

Productivity improves when firms: Become more efficient Downsize Expand Retrench Achieve breakthroughs

Factors Affecting Productivity (1 of 3) Standardization Technology Use of Internet, fax machines, e-mail, computerized billing, software Searching for lost or misplaced items Scrap rates Labor turnover, layoffs, new workers Safety Bottlenecks

Factors Affecting Productivity (2 of 3) Methods Design of the workspace Incentive plans that reward productivity Capacity utilization Location Layout Inventory Scheduling Methods Quality Technology Management

Factors Affecting Productivity (3 of 3) Shortage of IT workers and other technical workers Equipment breakdowns Part and material shortages Inadequate investment in training & education of the employees

Key Steps for Improving Productivity Develop productivity measures for all operations Determine critical (bottleneck) operations Develop methods for productivity improvements Establish reasonable goals Get management support (make it clear that management supports and encourages productivity improvements.) Measure and publicize improvements Invest on labor force by training and education (Don’t confuse productivity with efficiency)

Bottleneck Operation Machine #1 Machine #2 Bottleneck Operation 10/hr 30/hr Machine #2

Service Productivity Typically labor-intensive as in teaching Frequently individually processed (doctors) Often an intellectual task is performed by professionals (medical diagnosis) Often difficult to mechanize or automate (haircut)

Service Sector Productivity Service sector productivity is difficult to measure and manage because It involves intellectual activities It has a high degree of variability A useful measure related to productivity is process yield

Productivity in the ‘90s – 7 – 6 – 5 – 4 – 3 – 2 – 1 – 0 – -1 – -2 – | | | | | | | | | | | | ‘90 ‘91 ‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘99 ‘00 2001 – 7 – 6 – 5 – 4 – 3 – 2 – 1 – 0 – -1 – -2 – -3 – US Germany Japan