Don Honorio Ventura State University

Module 4

Productivity

INTRODUCTION

One of the primary responsibilities of a manager is to achieve productive use of an

organization’s resources. The term productivity is used to describe this. Although productivity
is important for all business organizations, it is particularly important for organizations that use a
strategy of low cost, because the higher the productivity, the lower the cost of the output.
Productivity growth is a key factor in a country’s rate of inflation and the standard of living of its
people. Productivity increases add value to the economy while keeping inflation in check.

OBJECTIVES

At the end of this module, students are expected to;

1. Define productivity.
2. Understand why productivity matters.
3. Compute productivity using different measures.
4. Identify the factors affecting productivity and how it can be improved.

1. PRODUCTIVITY?

Productivity is an index that measures output (goods and services) relative to the input
(labor, materials, energy, and other resources) used to produce it. It is usually expressed as the
ratio of output to input:

Formula:

A productivity ratio can be computed for a single operation, a department, an

organization, or an entire country. In business organizations, productivity ratios are used for
planning workforce requirements, scheduling equipment, financial analysis, and other
important tasks.

Productivity has important implications for business organizations and for entire nations.
For non-profit organizations, higher productivity means lower costs; for profit-based
organizations, productivity is an important factor in determining how competitive a company is.
Productivity growth is the increase in productivity from one period to the next relative to the
productivity in the preceding period. Thus,

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Formula:

For example, if productivity increased from 80 to 84, the growth rate would be;

Given:

Current Productivity : 84

Previous Productivity : 80

Solution:

Formula:

1.1 Computing Productivity

Productivity measures can be based on a single input (partial productivity), on more

than one input (multifactor productivity), or on all inputs (total productivity). The choice of
productivity measure depends primarily on the purpose of the measurement. If the purpose is to
track improvements in labor productivity, then labor becomes the obvious input measure.
Partial measures are often of greatest use in operations management. The units of output used
in productivity measures depend on the type of job performed.

Some examples of different types of productivity measures:

Partial measures: Output Output Output Output

Labor Machine Capital Energy

Multifactor measures: Output Output

Labor + Machine Labor + Capital + Energy

Total Measure: Goods or Services produced

All inputs used to produce them

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Problem 1:
Determine the productivity for these cases:
a. Four workers installed 720 square yards of carpeting in eight hours.

Formula:
Partial Measures:
Productivity= Output
Input
Given:
Yards of carpets installed : 720 yards
Labor Hours worked : 4 workers
Number of hours worked per laborer: 8 hours
Solution:
Productivity = Yards of carpet installed
Labor hours worked
= 720 square yards
4workers X 8hours/worker
= 720 yards
32 hours
= 22.5 yards/hour

b. A machine produced 68 usable pieces in two hours.

Formula:
Partial Measures:
Productivity= Output
Input
Given:
Usable Pieces : 68 pieces
Production time : 2 hours

Solution:
Productivity = Usable pieces
Production Time
= 68 pieces
2 hours
= 34 pieces / hour

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Calculations of multifactor productivity measure inputs and outputs using a common

unit of measurement, such as cost or value. For instance, the measure might use cost of inputs
and price of the output:

Quality of production at standard price

Labor cost + Materials cost + Overhead

Problem 2:
Determine the multifactor productivity for the combined input of labor and machine time
using the following data:
Output : 1,760 units
Input : Labor: $1,000
Materials: $520
Overhead: $2,000

Formula:
Multifactor = Output
Productivity Labor + Materials + Overhead

Solution:
Multifactor = Output
Productivity Labor + Materials + Overhead
= 1,760
$1,000 + $520 + $2,000
= 0.50 units/$
Productivity measures are useful on a number of levels. For an individual department or
organization, productivity measures can be used to track performance over time. This allows
managers to judge performance and to decide where improvements are needed.

Productivity measures also can be used to judge the performance of an entire industry
or the productivity of a country as a whole. These productivity measures are aggregate
measures.

Problem 3

Long Beach Bank employs three loan officers, each working eight hours per day. Each officer
processes an average of five loans per day. The bank’s payroll cost for the officers is $820 per
day, and there is a daily overhead expense of $500.

a. Compute the labor productivity.

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b. Compute the multifactor productivity, using loans per dollar cost as the measure.

Answer:
Formula:
a. Labor productivity is simply the ratio of loans to labor-hours:
output (loans)
input (labor-hrs.)
Given:
Number of Workers : 3 officers
Working hours of worker per day : 8 hours
Number of loans processed per day : 5 loans
Solution:
Productivity = output (loans)
input (labor-hrs.)

= 3 officer’s × 5 loans/day
3 officer’s × 8 hrs./day

= 0.625 loans/labor-hr.

Formula:
b. Multifactor productivity accounts for both labor cost and overhead:
output (loans)
input (labor cost + overhead)
Given:
Number of Workers : 3 officers
Working hours of worker per day : 8 hours
Number of loans processed per day : 5 loans
Salary of officers per day : $820
Overhead Expense : $500

Solution:
Productivity = output (loans)
input (labor cost + overhead)

= 3 officer’s × 5 loans/day
$820 + $500

= 0.0113 loans/$.

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Problem 4:

Mance Fraily, the Production Manager at Ralts 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? Show (a) current productivity, (b) new productivity, and (c) the
percent change.
To compute for the actual productivity;
Formula:
Productivity = output (yards)
input (labor cost)
Given:
Number of square yards produced per ton of raw cotton : 1000 yards
Labor hours needed to process raw material : 5 hours
Raw cotton process each operation : 1 ton
Solution:
Productivity = output (yards)
input (labor cost)

1000 sq yds
Current labor productivity =
1 ton x 5 hours
= 200 sq yds per hour

To compute for the new/proposed productivity;

Formula:
Productivity = output (yards)
input (labor cost)
Given:
Number of square yards produced per ton of new raw cotton : 1200 yards
Labor hours needed to process raw material : 5 hours
Raw cotton process each operation : 1 ton
Solution:
Productivity = output (yards)
input (labor cost)

1200 sq yds
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New labor productivity =

1 ton x 5 hours
= 240 sq yds per hour
To compute for the expected productivity growth;
Formula:

Given:
Actual Productivity using old raw cotton : 200 square yds/hr
Expected Productivity if new raw cotton will be used : 250 square yds/hr
Solution:

= (240 - 200) / 200 = .2 or 20%

1.2 Productivity in the Service Sector

Service productivity is more problematic than manufacturing productivity. In many

situations, it is more difficult to measure, and thus to manage, because it involves intellectual
activities and a high degree of variability. Think about medical diagnoses, surgery, consulting,
legal services, customer service, and computer repair work. This makes productivity
improvements more difficult to achieve. Nonetheless, because service is becoming an increasingly
large portion of our economy, the issues related to service productivity will have to be dealt with.

A useful measure closely related to productivity is process yield. Where products are
involved, process yield is defined as the ratio of output of good product (i.e., defective product
is not included) to the quantity of raw material input. Where services are involved, process
yield measurement is often dependent on the particular process. For example, in a car rental
agency, a measure of yield is the ratio of cars rented to cars available for a given day. In
education, a measure for college and university admission yield is the ratio of student
acceptances to the total number of students approved for admission. For subscription
services, yield is the ratio of new subscriptions to the number of calls made or the number of
letters mailed. However, not all services lend themselves to a simple yield measurement. For
example, services such as automotive, appliance, and computer repair don’t readily lend
themselves to such measures.

1.3 Factors that Affects Productivity

Numerous factors affect productivity. Generally, they are methods, capital, quality,
technology, and management.

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Other factors that affect productivity include the following:

a. Standardizing processes and procedures wherever possible to reduce variability can have
a significant benefit for both productivity and quality.
b. Quality differences may distort productivity measurements.
c. Use of the Internet can lower costs of a wide range of transactions, thereby increasing
productivity. It is likely that this effect will continue to increase productivity in the
foreseeable future.
d. Computer viruses can have an immense negative impact on productivity.
e. Searching for lost or misplaced items wastes time, hence negatively affecting
productivity.
f. Scrap rates have an adverse effect on productivity, signaling inefficient use of resources.
g. New workers tend to have lower productivity than seasoned workers. Thus, growing
companies may experience a productivity lag.
h. Safety should be addressed. Accidents can take a toll on productivity.
i. A shortage of technology-savvy workers hampers the ability of companies to update
computing resources, generate and sustain growth, and take advantage of new
opportunities.
j. Layoffs often affect productivity. The effect can be positive and negative. Initially,
productivity may increase after a layoff, because the workload remains the same but fewer
workers do the work—although they have to work harder and longer to do it. However, as
time goes by, the remaining workers may experience an increased risk of burnout, and they
may fear additional job cuts. The most capable workers may decide to leave.
k. Labor turnover has a negative effect on productivity; replacements need time to get up to
speed.
l. Design of the workspace can impact productivity. For example, having tools and other
work items within easy reach can positively impact productivity.
m. Incentive plans that reward productivity increases can boost productivity.

And there are still other factors that affect productivity, such as equipment breakdowns
and shortages of parts or materials. The education level and training of workers and their
health can greatly affect productivity. The opportunity to obtain lower costs due to higher
productivity elsewhere is a key reason many organizations turn to outsourcing. Hence, an
alternative to outsourcing can be improved productivity. Moreover, as a part of their strategy for
quality, the best organizations strive for continuous improvement. Productivity improvements can
be an important aspect of that approach.

1.4 Improving Productivity

A company or a department can take a number of key steps toward improving productivity:

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1. Develop productivity measures for all operations; measurement is the first step in
managing and controlling an operation.
2. Look at the system as a whole in deciding which operations are most critical; it is
overall productivity that is important.
3. Develop methods for achieving productivity improvements, such as soliciting ideas
from workers, studying how other firms have increased productivity, and re-examining
the way work is done.
4. Establish reasonable goals for improvement.
5. Make it clear that management supports and encourages productivity improvement.
Consider incentives to reward workers for contribution.
6. Measure improvements and publicize them.
Don’t confuse productivity with efficiency. Efficiency is a narrower concept that
pertains to getting the most out of a fixed set of resources; productivity is a broader concept
that pertains to effective use of overall resources. For example, an efficiency perspective on
mowing a lawn given a hand mower would focus on the best way to use the hand mower; a
productivity perspective would include the possibility of using a power mower.

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