2.4 The Power of Productivity Measurement: Gauging Operational Performance
In the realm of operations, measurement reigns supreme. A key metric for judging operational effectiveness is productivity. But what exactly is productivity, and how can it be measured?
Understanding Productivity:
- Relative Measure: Productivity is a relative measure, meaning it holds little meaning in isolation. Its true value is revealed when compared to a previous period, a similar department, or a competitor. The focus lies on whether productivity has improved, declined, or stagnated.
Types of Productivity Measures
The measure of a firm’s output depends on the nature of its products. For homogenous goods, output can be expressed as the number of units produced. However, when dealing with diverse products that vary in labour and material costs, the output is often described in terms of the dollar value of all goods produced within a specific time frame.
Inputs, on the other hand, are typically measured in dollars spent, although exceptions exist (such as labour hours, water usage, or electricity consumption). Productivity is usually assessed for significant expenditures, with farmers, for instance, measuring meat output and feed consumption.
To gain a comprehensive understanding of operational efficiency, we can explore various types of productivity measures:
- Labour Productivity: This metric measures the output (goods or services produced) per unit of labour input (typically labour hours).
- Machine Productivity: This metric focuses on the output produced per unit of machine time (e.g., number of widgets produced per hour of machine operation).
- Material Productivity: This metric measures the output per unit of material input (e.g., number of finished products per unit of raw material).
- Multifactor Productivity: This broader measure takes into account all inputs (labour, materials, machinery, etc.) to determine the overall efficiency of the production process.
Material Productivity
- Units of output per dollar spent on materials
- Dollars of output per dollar spent on materials
- Dollars of output per unit of material input
Machine Productivity
- Output per machine
- Units of output per machine hour
- Output per machine centre
Labour Productivity
- Dollars of output per labour hour
- Units of output per labour dollar
- Units of output per shift
Energy Productivity
- Units of output per gallon of water
- Dollars of output per dollar of hydro
- Dollars of output per kilowatt hour
Calculating Percent Change
Once you’ve chosen the appropriate productivity measure, you can calculate the percent change over a specific period. Here’s the formula:
Percent Change in Productivity = ((New Period Productivity – Old Period Productivity) ÷ Old Period Productivity) × 100
Percent Change
[latex]Percent\;Change\;=\frac{New\;Value\;-\;Old\;Value}{Old\;Value}\times100\%[/latex]
If the result is positive, it is an increase.
If the result is negative, it is a decrease.
Examples of Productivity Measures
Partial Productivity
[latex]PP\;=\;\frac{Output}{Labour}[/latex]
[latex]PP\;=\;\frac{Output}{Energy}[/latex]
[latex]PP\;=\;\frac{Output}{Materials}[/latex]
Multi-factor Productivity
[latex]MFP\;=\;\frac{Output}{Labour\;+\;Materials}[/latex]
[latex]MFP\;=\;\frac{Output}{Energy\;+\;Labour\;+\;Materials}[/latex]
Total Productivity
[latex]TP\;=\;\frac{Output}{All\;inputs}[/latex]
Example
Let’s say a company’s labour productivity in the previous quarter was 10 units per labour hour. In the current quarter, the productivity has increased to 12 units per labour hour.
Using the formula, the percent change in productivity is:
Percent Change = ((12 units/hour – 10 units/hour) ÷ 10 units/hour) × 100 = 20%
This indicates a 20% improvement in labour productivity over the quarter.
By employing various productivity measures and tracking their changes over time, organizations can gain valuable insights into their operational effectiveness. This allows them to identify areas for improvement, optimize resource allocation, and ultimately achieve a competitive advantage.
“2 Operations Strategy and Competitiveness” from Introduction to Operations Management Copyright © by Hamid Faramarzi and Mary Drane is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.—Modifications: used Productivity section, some paragraphs rewritten.
