OM : SESSION 6

PRODUCTIVITY
 PRODUCTIVITY

 Productivity is a common measure of how well a

country, industry, or business unit is using its
resources ( or factors of production).
 In its broadest sense, Productivity is defined as :

Outputs of the production system

Productivity = --------------------------------------------
Inputs employed in the system
 PRODUCTIVITY

Description Production / Operation Productivity

Definition It deals with conversion It is a ratio of the

process of input outputs of the
resources into output of system and inputs
the production system. employed in the
system.
Unit It is expressed in Nos., It is a ratio ; it does
Kgs., Meter, Tonne, not have any unit.
Liters, etc.

Utility It satisfies the human It is a management

needs and wants. technique to
improve the
efficiency &
effectiveness of the
production system.
 The relationship between Efficiency,
Effectiveness & Productivity

 Productivity is determined by looking at the

production obtained (effectiveness) versus the
invested effort in order to achieve the result
(efficiency); in other words, if we can achieve
more with less effort, productivity increases.
 Resources of an Organization

Whether Public or Private;The resources

that are available to them are:
• Land & Buildings
• Materials
• Plant, Machines & Equipment
• Energy
• People
• Money
 Examples of Output

Whether the organization is public or

private the outputs are ;
• Accomplishment of a task,
• Length of an output,
• Distance traveled,
• Number of pieces produced,
• Weight of production,
Examples of Output (Contd.)

•Volume of output,
•Value of output,
•No. of documents processed,
•Time taken to carry out a
job,
•No of jobs attended,
•No. of customers served.
Productivity as a Measure of Success

• Productivity is the most important long

term resource.
• Not only for the success of the
organizations & individuals but also for
national economic & social development.
• It is also a measure of the efficiency of
the Managers.
 Importance of Productivity
Consumers/Workers:
•At the most micro level, we have improvements in
the standard of living for everyday consumers and
workers as a result of increased productivity.
• The more efficiency captured within a system, the
lower the required inputs (Labour, Land
and Capital) will be required to generate goods.
•This can potentially reduce price points and
minimize the necessary working hours for the
participants within an economy while retaining
high levels of consumption.
 Importance of Productivity (contd.)

Businesses: Businesses that can derive higher

productivity from a system also benefit from
creating more outputs with the same or fewer
inputs. Simply put, higher efficiency equates to
better margins through lower costs. This allows for
better compensation for employees, more working
capital and an improved competitive capacity.

Governments: Higher economic growth will also

generate larger tax payments for governments.
This allows governments to invest more
towards infrastructure and social services.
 Importance of Productivity (contd.)

 Productivity measures provide a means to

managers to ascertain, plan, control and
improve efficiency at different levels of
organization.
 This also facilitate comparison of
performance of different companies within a
market or industry.
 This helps manager set improvement
targets for organization’s long term strategic
plans, and in developing suitable competitive
strategy.
Types of Productivity Measures

• Single Factor productivity

• Multi Factor Productivity
• Total Factor Productivity
 Single or Partial Productivity
 Definition
• Ratio of output to one class of input.
• At a given time it considers only one input
and ignores all other inputs.
• Its significance lies in its focus on
utilization of one resource.
• For instance, labour productivity is
measured using utilization of labour hours;
whereas capital productivity is measured in
Rupees.

14
 Multi-factor Model of Productivity

• Developed by Scott D. Sink Multi-factor

Productivity Measurement Model
considered Labour, Material and Energy as
major inputs.
• Capital was deliberately left out as it is most
difficult to estimate how much capital is
being consumed per unit/ time.
• The concept of depreciation used by
accountants make it further difficult to
estimate actual capital being consumed.
 Total Productivity Model

 Total Productivity Model developed by

David J. Sumanth in 1979 considered 5
items as inputs.
 These are Human, Material, Capital,
Energy and other expenses.
 This model can be applied in any
manufacturing or service organization.
 Total Productivity= Total Tangible
Output÷ Total Tangible Input.
 Measures 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
 Improving Productivity

• Output =
• Input
Methods of improving Productivity
• Increase output while input remains same.
• Decrease input while output remains same.
• Increase input resulting in a very large
increase in output.
• Decrease input by a very large amount
with a resultant small reduction in output.
 Improving Labour Productivity

• Improving working conditions- lighting,

ventilation, noise(music), temperature, work
times.
• Using appropriate and better tools.
• Ergonomics and better work station layout.
• Improving factory, stores & office layout.
• Improving the method/process.
• Improving industrial housekeeping(5S) and
safety.
• Improving welfare facilities and worker
motivation.
Improving Material Productivity

• Cheaper material,
• Alternative material,
• Cheaper sources,
• Better utilization.
Improving Energy Productivity

• Improve power factor,

• Reduce wastage,
• Change processes for less
heating,
• Study working procedures
etc.
 Ways to improve productivity
 There are three levels at which productivity
improvements can be made :
• Scientific, involving research leading to new
knowledge in, for example, materials, process,
IT chips, etc.;
• Technical, which comprises the adaptation or
application of new scientific knowledge to
replace existing ideas or introduce new ways to
complete tasks;
• Operational, where the aim to develop
procedures that make use of developments in
existing processes.
 Ways to improve productivity

 In terms of productivity improvements,

scientific & technical levels will be more
expensive to fund and take much longer to bring
to fruition;
 The operational activities are relatively less
inexpensive but yield quick results;
 Consequently, many organizations are
pursuing productivity improvement solely at the
operational level.
 PRODUCTIVITY

Objectives of Productivity:
 To beat competition – High quality,
 Guide to management – Productivity
indices,
 Measure of Growth & Progress –
Comparison of indices,
 Utilization of resources – Reduction of
wastes,
 Gains due to higher productivity –
Organization / Stakeholders.
Poblem
Collins Little Company has a stuff of 4, each
working 8 hours per day (for a payroll cost of $
640 / day) and overhead expenses of $ 400 / day.
Collins processes and closes on 8 titles each
day.
The company recently purchased a
computerized title search system that will allow
the processing of 14 titles per day. Although the
staff, their works hours, and pay will be same,
the overheads expenses are now $ 800 per day.
Find out the labour productivity & multi-factor
productivity for old & new methods.
Solution:
Labor productivity with the old system:
= 8 titles per day/ 32 labor hours = 0.25 titles per
hour
Labor productivity with the new system:
=14 titles per day/ 32 labor hours = 0.44 title per
labor hours
Multifactor productivity with the old system:
=8 titles per day / (640 + 400) = 0.0077 titles per
dollars
Multifactor productivity with the new system:
=14 titles per day / (640 + 800) = 0.0097 titles per
dollars
Problem
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.
b. Compute the multifactor productivity, using loans
per dollar cost as the measure.
The bank is considering the purchase of new computer
software for the loan operation. The software will enable
each loan officer to process eight loans per day, although
the overhead expense will increase to $550.
c. Compute the new labor productivity.
d. Compute the new multifactor productivity.
e. Should the bank proceed with the purchase of the
new software? Explain.
LEARNING CURVE
 Learning Curves

Principle : The more times a person

performs a task, the quicker they get at it.

Studies have shown that this learning

generally takes place at a predictable rate
 the learning rate (LR).
For example, in the aircraft industry it has
been shown that the typical learning rate
for aircraft manufacturing tasks is around
80%.
 Learning Curve Effect

Time needed to produce a unit decreases

with each additional unit.

Time needed decreases at a decreasing

rate as cumulative production increases.

Decrease in time follows an exponential

curve called learning or experience
curve.
 Learning Curve

the Most Recent Unit Learning Curve

Hours Required
to Produce

Cumulative Production
 What happens when
cumulative production doubles?
The concept of a Learning Curve is motivated by
the observation (in many diverse production
environments) that, each time the cumulative
production doubles, the hours required to produce
the most recent unit decreases by approximately the
same percentage.
For example, for an 80% learning curve,
If cumulative production doubles from 50 to 100, then
the hours required to produce the 100-th unit is 80% of
that for the 50-th unit.
If cumulative production doubles from 100 to 200,
then the hours required to produce the 200-th unit is
80% of that for the 100-th unit.
 Applying the Learning Curve

• For an 80% learning rate

NTH UNIT PRODUCED HOURS FOR NTH UNIT

1 100.0
2 80.0 = (.8 x 100)
4 64.0 = (.8 x 80)
8 51.2 = (.8 x 64)
16 41.0 = (.8 x 51.2)
 Learning Curve Graph

Hours per unit, TN

120
100
80
60
40
20
0
0 100 200 300 400
Cumulative units, N
 Learning Curves Vary by Product and
Industry

Aircraft Assembly (1925-57): 80%

Calculator (1975-
78): 74%

© 1995 Corel Corp.

Heart Transplants (1985-88): 79%

© 1995 Corel Corp.

Factors Affecting Learning Curves

Workers’ Skills
Material Work Methods

Learning
Product Curve Tools
Design

Continuous
Improvement Process Design
Methods
 Strategic Applications
of a Learning Curve
Frequent Decreases in Selling Price.
•As the hours required to produce the most recent unit
continually decreases, the cost to produce the unit continually
decreases. Therefore, you can frequently decrease the selling
price without decreasing total profit.
•Each decrease in selling price increases your market share,
which in turn leads to a “faster ride” down the learning curve,
which in turn makes it tougher for your competitors.
Reinvest Increased Profits
•As the hours required to produce the most recent unit
continually decreases, the cost to produce the unit continually
decreases. Therefore, your profits increase. You can reinvest
the incremental profit to improve the product or the
production process, or you can reinvest the incremental profit
in another area of the firm.
 Learning Curves
Determining Time (Example)
You’re a planner for
Viking Ships. The first
boat took 125,000 labor-
hours to make. Boats 2 &
3 were produced with a
learning factor of 85%.
How long will the 4th boat
take so that raiding can
begin?
© 1995 Corel Corp.
 Arithmetic Approach

• Formula: T2N = L * TN
• 1st unit: T1 = 125,000 hr.
• 2nd unit: T2 = L * T1
= .85 * 125,000
= 106,250 hr.
• 4th unit: T4 = L * T2
= .85 * 106,250
= 90,312 hr.
 Learning Curve
 Learning curve theory is based on three assumptions :
a). The amount of time required to complete a given
task or unit of a product will be less each time the task
is undertaken ;
b). The unit time will decrease at a decreasing rate ;
c). The reduction in time will follow a predictable
pattern.
 Three approaches to learning curve analysis are :
- Arithmetic analysis,
- Logarithmic analysis, and
- Learning curve tables.
 Learning Curve
Estimating the Learning percentage
 If production has been underway for sometime, the
learning percentage is easily obtained from production
records;
 Statistical analysis can be used;
 If production has not started, analyst has three
options :
1). Assume that the learning percentage will be the
same as it has been for previous applications within the
same industry ;
2). Assume that it will be the same as it has been for
the same or similar products;
3). Analyze the similarities & differences between
the proposed start up & previous start up and develop
best one.