PRODUCTIVITY

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The Economic System Transforms Inputs to Outputs

Inputs
Land, Labor, Capital, Management

Process
The economic system transforms inputs to outputs

Outputs
Goods and Services

Feedback loop
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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 =

Output Input
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Productivity measures are useful for

Tracking an operating units performance over time Judging the performance of an entire industry or country

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Why Productivity Matters

High productivity is linked to higher standards of living Higher productivity relative to the competition leads to competitive advantage in the marketplace

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Typical Impacts of Productivity Improvement

As productivity improved
Parts per man hour

Costs were decreased

Cost per unit decreased
$2.25 $2.00 $1.75 $1.50

Wages increased
Average worker's annual cash compensation increased

115 110 105 100 95 Year A Year B Year C

27000 26000 25000 24000 Year A Year B Year C

Year A

Year B

Year C

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Measures of Productivity
Partial measures
Output Labor Output Output Machine Capital Output Energy

Multifactor Output Output measures Labor + Machine Labor + Capital + Energy Total measure
Goods or Services Produced All inputs used to produce them

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Examples of Partial Productivity Measures

Labor Productivity
Units of output per labor hour Units of output per shift Value-added per labor hour Units of output per machine hour Value-added per machine hour
Units of output per dollar input Dollar value of output per dollar input Units of output per kilowatt-hour Dollar value of output per kilowatt-hour
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Machine Productivity
Capital Productivity Energy Productivity

Typical Measures of Productivity in Different Organizations

Restaurant Retail store Paper mill Customers (meals) per labor hour Sales per square foot Tons of paper per cord of wood Kilowatts per ton of coal
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Utility plant

Example 1
7040 Units Produced Sold for $1.10/unit Cost of labor : $1,000 What is the multifactor productivity?

Cost of materials: $520

Cost of overhead: $2000
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Solution 1
MFP = Output Labor + Materials + Overhead (7040 units)*($1.10) $1000 + $520 + $2000

MFP =

MFP = 2.20
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Example 2
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? 2-12

Solution 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

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Solution 2: Multifactor Productivity

MFP = Output Labor + Materials + Overhead (5,500 units)*($35) (500hrs.)*$25/hr. + ($5000) + 2*(500hrs.)*$25/hr.

MFP =

MFP = 4.52
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Example 3
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 weeks productivity = 480/2000 = 0.24, and this weeks productivity is = 560/2400 = 0.23. So, productivity has decreased slightly.
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Productivity Growth
Productivi ty Growth = Current productivity - Previous productivity 100 % Previous productivity

Productivity Growth is a key factor in a contrys rate of inflation and the standard of living of its people

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Example 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?

23 - 25 Productivity Growth = 100% 8% 25

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Productivity improves when firms:

Become more efficient Downsize Expand Retrench Achieve breakthroughs

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Factors Affecting Productivity

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 2-19 Bottlenecks

Factors Affecting Productivity

Methods Design of the workspace Incentive plans that reward productivity Capacity utilization Location Layout Inventory Scheduling
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Factors Affecting Productivity

Shortage of IT workers and other technical workers Equipment breakdowns Part and material shortages Inadequate investment in training & education of the employees

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Key Steps for Improving Productivity

Develop productivity measures for all operations Determine critical (bottleneck) operations Develop methods for productivity improvements Establish(set) 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
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Bottleneck Operation
Machine #1 Machine #2
10/hr

10/hr

Bottleneck Operation
10/hr
10/hr
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30/hr

Machine #3

Machine #4

Service 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)

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Service Sector Productivity

Service sector productivity is difficult to measure and manage because It involves intellectual activities It has a high degree of variability

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