Allocative efficiency & productive efficiency are used as a tool to improve top and bottom lines in a multi product scenario

1. ALLOCATIVE EFFICIENCY &
PRODUCTIVITY AS A TOOL TO
IMPROVE TOP & BOTTOM LINES
BY
K.RAM MOHAN, COO, PUNJAB NATIONAL BANK.
3rd World Emerging Industries Summit
WEIS2015
April, 22, 2015, 14:00-16:30, Keynote speeches
JW Marriott Hotel Zhengzhou, Henan province,
China

2. ALLOCATIVE EFFICIENCY
 BROADLY ALLOCATIVE EFFICIENCY MEANS:
 Allocative efficiency has to do with the degree in
which a given action leads to the production of more
positive results than the creation of negative results.
 This basic approach to measuring benefit derived
comes into play with many different types of business
functions, including the creation of a client base, the
organization of a business entity, and the ultimate
success or failure of that entity.
 In short, allocative efficiency is all about generation of
substantial benefits while producing relatively few
liabilities.

3. Allocative versus Productive Efficiencies
 It is possible to have productive efficiency
without also achieving allocative efficiency.
 A firm may be producing its current level of
output with the best technology and a least-cost
combination of inputs; i.e., it has achieved both
technological efficiency and productive
efficiency. This doesn't mean, however, that the
firm is maximizing profits.
 It may be producing a level of output that is
either too small or too large relative to what will
be optimally demanded in the market.

4. EFFICIENCY
 There are 2 types of static efficiency; productive
efficiency and allocative efficiency.
 Productive efficiency occurs when production is at
an output level where there is the least cost.
 Allocative efficiency is concerned about whether
resources are used to make goods and services that
consumers want to purchase.
 Static efficiency refers to efficiency at a given point
in time whereas dynamic efficiency is related to
the efficiency of resources used over a period of
time.

5. ALLOCATIVE EFFICIENCY – HOW WE
LOOK AT IT IN OUR STUDY
 Allocative efficiency is looked by us as the “gap” in the
“need” perceived by customer/society/market, which
ultimately results in generation of “demand” for the
product.
 The conclusions from this “AE Matrix” is equally
applicable for Productive Efficiency and Allocative
Efficiency.
 These are two sides of the same coin and always co-exist
and these two never merge.

6. WHAT WE LOOK FOR IN OUR STUDY?
 Like a group of blind people touching & feeling
an elephant and describing the same, in
literature the concept of “Allocative Efficiency”
has been mostly looked from perspectives of
each Academicians & Practioners.
 Here for our purpose we are not taking any
segmented view and take it holistically and look
at the possible effective ways to allocate the
resources viz., men, machines and materials to
meet the Efficiency demands.

7. METHODOLOGY FOR OUR STUDY
 In a Multi Product Manufacturing or service
Industry we plotted the top line (Sales) in Y axis
versus Bottom Line (Profit) in X axis.
 In case allocation of cost to each and every
product, especially in a service industry like
Banking is not possible, then in X axis, one can
take net cost, instead of profit also.
 Thus we have relatively measured the top line &
Bottom lines to find out their interse productive
& Allocative eficiencies.

8. DATA POINTS TAKEN
ALLOCATIVE EFFICIENCY - Banking
Sources / Liability products Assets / Application Products
Product 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
top line 25 52 86 180 115 250 165 95 135 45 59 79 194 154 195 28 68 81
net
contibution -6 -9 -18 -7 -21 -22 -4 -8 -6 4 8 7 6 9 11 3 13 10
ALLOCATIVE EFFICIENCY - RODUCTION
Product 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
top line 15 20 32 48 35 42 68 72 100 105 68 36 95 82 102 46 59 60
bottom line 11 8 23 28 21 27 16 7 26 21 21 16 13 24 35 18 7 10

9. ALLOCATIVE EFFICIENCY - MANUFACTURING
0
20
40
60
80
100
120
0 10 20 30 40
Output
Profit
3 rd
Quadrant
1 Quadrant
2 nd Quadrant
4 th Quadrant

10. LOW VOLUME & HIGH PROFIT ZONE
 Quadrant 1 : low volume & high Profit.
Right bottom
 Here allocative efficiency indicates that
there is limited scope to improve profit. So
Prescribe for efforts to improve top line
through effective marketing, rather than
indulging in cost cutting as a first step.
 Allocate resources for marketing &
HIGHER LEVELS OF PRODUCTION.

11. LOW VOLUME LOW PROFIT ZONE
 Quadrant 2: Low volume, low profit zone.
Bottom left.
 These are the products which require immediate
attention by way of cost cuttings, efficiency in
production etc.,
 However, if nothing works, then one has to
take the view whether it is worth continuing
with the product line or not.
 RATION RESOURCES & FOLLOW IT UP
WITH COST CUTTING. REVIEW
FREQUENTLY.

12. HIGH VOLUME & LOW PROFIT ZONE
 Quadrant 3: high volume low profit products.
Top left.
 Since the volume is high, there is an existing
demand for the product, despite acute
competition which has resulted in low margin.
 Here cost cutting, efficiency improvement
through automation, better supply chain
management can be attempted.
 ALLOCATE CAPITAL FOR TECHNOLOGY
IMPROVEMENT/AUTOMATION. MONITOR
TARGETS EFFECTIVELY.

13. HIGH VOLUME & HIGH PROFIT ZONE
 Quadrant 4: High volume high profit products. Right top.
 These are Gold mines, which has to be nourished. Since
these are star performers, do not try to cut cost or capital
rationing etc.,
 Here further scope in the first step should lie with
effective supply chain management and squeezing the
surroundings rather than the system.
 Since going is good, do not disturb the synergy and
successful equilibrium of system but try to influence
supply chain for augmenting the profit, if possible.
 Negotiate with supply chain effectively to augment
profitability.

14. ALLOCATIVE EFFICIENCY - BANKS
0
50
100
150
200
250
300
-25 -20 -15 -10 -5 0 5 10 15
T
O
P
L
I
N
E
Net cost/earnings
Allocative efficiency Banking
Allocative efficiency Banking
3 rd Quadrant
2 nd Quadrant
1 st Quadrant
4 th Quandrant
1 st Quadrant
2 nd Quadrant
3 rd Quadrant
4 th Quadrant
Liability products Asset Products

15. ASSUMPTIONS
 When product profitability can not be
easily drawn, as common resources are
extensively used, say like banking, the
same Allocative Efficiency chart can be
prepared with the following assumptions:
 1. For Liability products, calculate the
service cost and add interest cost.
 2. For Asset products, compute Interest
earned and reduce operation costs.

16. ASSUMPTIONS - CONTINUED
 Since in this Allocative efficiency chart, we are
not measuring any individual contributions, but
only compare the products efficiency, as long as
we use the same measuring technique, interse
comparisons will hold good.
 For Asset side the four quadrants are same as in
case of production. For Liability, it will become a
mirror image Right bottom will become
Quadrant 1 and Left bottom Quadrant 2, Left top
Quadrant 3 and Right top Quadrant 4.(On
Negative side of X axis.