Productivity Measurement and Improvement Prepared by: Bhakti Joshi Date: November 29, 2012

Definition Productivity is commonly defined as a ratio of a volume measure of output to a volume measure of input use OR Productivity = Output Input Generated from production or service Provided to create this output The concept of productivity can be applicable to any economy, business (small, medium and large), government and individuals

Numerical Example 1 Britannia Industries produces units of biscuits in October and the number of workers employed during this months was 30. These workers normally work 8 hours a day. Calculate the productivity for the month of October /30 = 1000 units per labour OUTPUT INPUT Total Hours worked by workers = 30 workers * 8 hours = 240 Total working days = 20 days. 4 weeks in a month * 5 working days. 240*20 = /4800 = 6.25 units per worker

Problem 1: Quarterly Productivity Data ParametersQuarter 1Quarter 2 Unit Selling PriceRs 20Rs 21 Total Units Sold10, Labor cost/hourRs 10 Number of employees15 Working hours10 hour/employee8 hours/per employee Labour hours10*15*20*3 = 9000 hours 8*15*20*3 = 7200 hours Labour input cost9000*10= *10=72000 Output Value10000*20 = Rs *21 = Labour Productivity200000/90000= /72000 = 2.48 By what percentage has labour productivity improved or not improved?

Problem 1: Quarterly Productivity Data (Contd…) ParametersQuarter 1Quarter 2 Material Usage1600 KGs/month1500 KGs/month Material CostRs 15/KGRs 15.50/KG Other CostsRs 6500/monthRs 5000/month Materials Input Cost1600*3*15= *3*15.50=69750 Other Inputs Costs6500*3= *3=15000 Total Material and Input Costs = =84750 Material Productivity200000/91500= /84750 = 2.11 By what percentage has material productivity improved or not improved?

Quarterly Productivity Data (Contd…) Determine the total productivity ParametersQuarter 1Quarter 2 Output Value Total Input Cost = = Total Productivity200000/181500= /156750=1.14 What about Profit? By what percentage has material productivity improved or not improved?

Problem 2 A brewery produces 50,000 bottles of beer each week. The equipment costs are Rs and will remain productive for 3 years. The annual labour cost is Rs Calculate the total productivity in units of output per rupee of input over a 3 year period

Problem 2 – Solution ParametersCalculationResult Total Output Units50000*52* Machine Input Cost--Rs 10,000 Labour Input Cost100,000*3Rs Total Input Cost Rs Total Productivity / OR Approximately 25 bottles/Re input Suppose, the management has an option of Rs equipment with an operating life of 5 years that reduces labour cost to Rs per year. Should the management purchase this equipment (using productivity calculation methods)?

Problem 2 – Solution (Contd…) ParametersCalculationResult Total Output Units50000*52* Machine Input Cost--Rs 20,000 Labour Input Cost40000*3Rs Total Input Cost Rs Total Productivity / OR Approximately 55 to 56 bottles/Re input What does this mean?

Problem 3 WEEKOUTPUT SALES (Rs) MATERIAL COST (Rs) LABOUR COST OVERHEAD COST TOTAL COST TOTAL PRODUCTIVITY

Productivity Measurement - Types Partial Factor Productivity Total Factor Productivity Total Factor Productivity Multi-Factor Productivity Multi-Factor Productivity Labour Capital LabourCapital LabourEnergyMaterials

Partial Factor Productivity Traces labour requirement per unit or Reflects change in input coefficient of labour PURPOSE Ease in measurement and readable Mostly easy to obtain relevant data ADVANTAGES Partial productivity measure Misinterpreted as technical change or efficiency/effectiveness of individuals in the labour force DISADVANTAGES

Total Factor Productivity Traces growth in an economy or a business Includes labour and especially capital that is representative of mostly infrastructure PURPOSE Ease in obtaining data and to understand ADVANTAGES Other inputs ignored Net output does not reflect the efficiency of production system in a proper way Not representative to technological change DISADVANTAGES

Multi-Factor Productivity Overall changes in a firm/industry Captures technical change, efficiency, economies of scale, etc PURPOSE Role of intermediate inputs are also included Measures technical change in an industry ADVANTAGES Difficult to obtain data on all inputs Inter-industry linkages and aggregation is difficult to communicate DISADVANTAGES

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