The document discusses productivity and how it is measured. It defines productivity as a ratio of output to input. Key points: - Productivity increased annually in the US economic system by about 2.5%, with contributions from capital (38%), labor (10%), and management (52%). - Measures of productivity include output per labor hour, units produced, value added, and multifactor productivity. - Improving productivity leads to lower costs, higher wages, and competitive advantage. It is important for standards of living.

1. 2-1
PRODUCTIVITYPRODUCTIVITY

2. 2-2
The Economic System TransformsThe Economic System Transforms
Inputs to OutputsInputs to Outputs
The economic system
transforms inputs to outputs
at about an annual 2.5%
increase in productivity
(capital 38% of 2.5%), labor
(10% of 2.5%), management
(52% of 2.5%)
Land, Labor,
Capital,
Management
Goods and
Services
Feedback loop
Inputs Process Outputs

3. 2-3
Measures of CompetitivenessMeasures of Competitiveness
 Productivity
 GDP (Gross domestic product) growth
 Market capitalization
 Technological infrastructure
 Quality of education
 Efficiency of government

4. 2-4
What is Productivity?What is Productivity?
Productivity is a common measure of how well
resources are being used or a measure of the effective
use of resources usually expressed as the ratio of
output to input
Productivity =Productivity =
OutputOutput
InputInput

5. 2-5
Productivity measures are useful forProductivity measures are useful for
• Tracking an operating unit’s performance over time
• Judging the performance of an entire industry or
country

6. 2-6
Why Productivity MattersWhy Productivity Matters
High productivity is linked to higher standards of living
As an economy replaces manufacturing jobs with lower productivity service
jobs, it is more difficult to maintain high standards of living
Higher productivity relative to the competition leads to competitive
advantage in the marketplace
Pricing and profit effects
For an industry, high relative productivity makes it less likely it will
be supplanted by foreign industry

7. 2-7
Typical ImpactTypical Impactss ofof ProductivityProductivity
ImprovementImprovement
Parts per man hour
95
100
105
110
115
Year A Year B Year C
Cost per unit decreased
$1.50
$1.75
$2.00
$2.25
Year A Year B Year C
Average worker's annual cash
compensation increased
24000
25000
26000
27000
Year A Year B Year C
As productivity improved Costs wereAs productivity improved Costs were decreaseddecreased Wages increasedWages increased

8. 2-8
Measures of ProductivityMeasures of Productivity
Partial Output Output Output Output
measures Labor Machine Capital Energy
Multifactor Output Output
measures Labor + Machine Labor + Capital + Energy
Total Goods or Services Produced
measure All inputs used to produce them

9. 2-9
Units of output per kilowatt-hour
Dollar value of output per kilowatt-hour
Energy
Productivity
Units of output per dollar input
Dollar value of output per dollar input
Capital
Productivity
Units of output per machine hour
Value-added per machine hour
Machine
Productivity
Units of output per labor hour
Units of output per shift
Value-added per labor hour
Labor Productivity
Examples of Partial Productivity MeasuresExamples of Partial Productivity Measures

10. 2-10
Typical Measures of Productivity in DifferentTypical Measures of Productivity in Different
OrganizationsOrganizations
Restaurant Customers (meals) per
labor hour
Retail store Sales per square foot
Chicken farm Lbs of meat per lb. of feed
Utility plant Kilowatts per ton of coal
Paper mill Tons of paper per cord of
wood

11. 2-11
ExampleExample 11
7040 Units Produced
Sold for $1.10/unit
Cost of labor : $1,000
Cost of materials: $520
Cost of overhead: $2000
Which productivity
measures can be
calculated?
What is the
multifactor
productivity?

12. 2-12
SSolutionolution 11
MFP = Output
Labor + Materials + Overhead
MFP = (7040 units)*($1.10)
$1000 + $520 + $2000
MFP =2.20

13. 2-13
ExampleExample 22
5,500 Units Produced
Sold for $35/unit
500 labor hours are used
Cost of labor: $25/hr
Cost of raw material: $5,000
Cost of overhead: 2 x labor cost
What is the labor productivity?
What is the multifactor productivity?

14. 2-14
Solution 2: Labor ProductivitySolution 2: Labor Productivity
 5,500 units/500 hours = 11 units/hour
Or we can arrive at a unitless figure:
 (5,500 units*$35/unit)/(500 hours * $25/hr) =15.4

15. 2-15
SolutionSolution 2: Multifactor Productivity2: Multifactor Productivity
MFP = Output
Labor + Materials + Overhead
MFP =4.52
MFP = (5,500 units)*($35)
(500hrs.)*$25/hr. + ($5000) + 2*(500hrs.)*$25/hr.

16. 2-16
ExampleExample 33
 You have just determined that your service employees
have used a total of 2400 hours of labor this week to
process 560 insurance forms. Last week the same crew
used only 2000 hours of labor to process 480 forms.
 Which productivity measure should be used?
 Answer: Could be classified as a Partial Measure.
 Is productivity increasing or decreasing?
 Answer: Last week’s productivity = 480/2000 = 0.24,
and this week’s productivity is = 560/2400 = 0.23. So,
productivity has decreased slightly.

17. 2-17
U.S. Multifactor ProductivityU.S. Multifactor Productivity
U.S. Multifactor Productivity
(1975 - 2007)
80
85
90
95
100
105
110
115
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
Year
MFP(Index,2000=100)

18. 2-18
Productivity GrowthProductivity Growth
%100
typroductiviPrevious
typroductiviPrevious-typroductiviCurrent
=GrowthtyProductivi ×
Productivity Growth is a key factor in a contry’s rate
of inflation and the standard of living of its people

19. 2-19
Example 4Example 4
Labor productivity on the ABC assembly line was 25
units per hour in 2006. In 2007, labor productivity was
23 units per hour. What was the productivity growth
from 2006 to 2007?
%8%100
25
25-23
=GrowthtyProductivi −=×

20. 2-20
MFP Growth - Non-FarmMFP Growth - Non-Farm
MFP Growth in the Private Non-Farm Business Sector
1,9
0,4 0,6
1,1 1,3
0
1
2
3
4
5
1948-1973 1973-1990 1990-1995 1995-2000 2000-2007
AverageAnnualPercentChange

21. 2-21
MFP Growth - ManufacturingMFP Growth - Manufacturing

22. 2-22
Measurement ProblemsMeasurement Problems
 Quality differences may distort productivity
measurements
 External elements may cause an increase or
decrease in productivity
 Precise units of measure may be lacking
 Technological differences may lead to
misleading results.

23. 2-23
 Become more efficient
 Downsize
 Expand
 Retrench
 Achieve breakthroughs
Productivity improves when firms:Productivity improves when firms:

24. 2-24
 Standardization
 Technology
 Use of Internet, fax machines, e-mail, computerized
billing, software
 Searching for lost or misplaced items
 Scrap rates
 Labor turnover, layoffs, new workers
 Safety
 Bottlenecks
Factors Affecting ProductivityFactors Affecting Productivity (1 of 3)(1 of 3)

25. 2-25
Methods
Design of the workspace
Incentive plans that reward productivity
Capacity utilization
Location
Layout
Inventory
Scheduling
Factors Affecting ProductivityFactors Affecting Productivity (2 of 3)(2 of 3)
Methods Quality
Technology Management

26. 2-26
Factors Affecting ProductivityFactors Affecting Productivity (3 of 3)(3 of 3)
Shortage of IT workers and other technical
workers
Equipment breakdowns
Part and material shortages
Inadequate investment in training & education
of the employees

27. 2-27
Key Steps forKey Steps for ImprovImprovinging ProductivityProductivity
 Develop productivity measures for all operations
 Determine critical (bottleneck) operations
 Develop methods for productivity improvements
 Establish reasonable goals
 Get management support (make it clear that management supports
and encourages productivity improvements.)
 Measure and publicize improvements
 Invest on labor force by training and education
(Don’t confuse productivity with efficiency)

28. 2-28
Bottleneck OperationBottleneck Operation
Machine #2Machine #2
Bottleneck
Operation
Bottleneck
Operation
Machine #1Machine #1
Machine #3Machine #3
Machine #4Machine #4
10/hr
10/hr
10/hr
10/hr
30/hr

29. 2-29
Service ProductivityService Productivity
Typically labor-intensive as in teaching
Frequently individually processed (doctors)
Often an intellectual task is performed by
professionals (medical diagnosis)
Often difficult to mechanize or automate
(haircut)

30. 2-30
Service sector productivity is difficult to measure
and manage because
 It involves intellectual activities
 It has a high degree of variability
A useful measure related to productivity is process
yield
Service Sector ProductivityService Sector Productivity

31. 2-31
Productivity in the ‘90sProductivity in the ‘90s
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UUSS
GermanyGermany
JapanJapan