1. Total Factor Productivity Reference: Dynamic Manufacturing

2. TFP Starting Point Factor Productivity –The amount of output relative to amount of a specific input (e.g. units per labor hour) –Example: last year - 10 units of output per labor hour this year – 12 units of output per labor hour labor productivity increased by 20% (from 10 to 12) Total Factor Productivity (TFP) –A combined measurement of the amount of output (of a product) relative to the sum of all resource inputs (the factors) –A means of measuring the overall performance of an operation

3. Total Factor Productivity Productivity Price Volume Profit IncreaseBase Profit New Profit

4. Productivity Measurement Issues How to combine inputs that are measured in different units? …Labor hours …Material weights …Energy BTUs How to treat output ‘units’ that change over time …Standard product & options …Quality improvements …New products, line mix

5. TFP Basic Approach Monetarize all variables …assumes quality differentials are reflected in prices & costs Adjust for inflation Use $$$ as a surrogate (Implicit measure) Note: Requires units & price data for all inputs and outputs … or calculable approximations

6. TFP Simplified Analytical Process Restate base period (P1) results @ current period (P2) prices Calculate real volume growth: P2 sales (output) divided by P1 sales @ P2 prices Calculate increase (decrease) in the nominal levels of all inputs in P2 relative to their respective levels in P1 (stated @ P2 prices) … sum the ‘total factors’ Compare % increases in factor levels to the % real volume growth … differences are approximately the factor and total factor productivity …e.g. if real volume growth is 15% and price adjusted factor levels increase 10%, period-to-period productivity is approximately 5% Alternate method …

7. TFP Alternate Method Compute total sales dollars per factor in the base period (P1) … i.e. divide sales dollars by the dollar cost of each individual factor and total of all factors …e.g. $7 of sales per each dollar of labor Restate current period (P2) sales and factor costs; ‘deflate’ by the specific price increases …e.g. If nominal P2 sales are $110,000 and prices increase by 10% from P1 to P2, then the restated P2 value is $100,000 ($110,000 / 1.10) Compute total sales dollars per factor in the current period (P2) on a restated (deflated) basis … i.e. divide deflated sales dollars by the deflated dollar cost of each individual factor Compare increases / decreases in sales per factor dollar from P1 to deflated P2 … % changes are approximately the factor and total factor productivity