Productivity and Examples

In simpler terms, productivity is a measure of the efficiency of a person, machine, factory and system in converting inputs into useful outputs. Technically, “Productivity” is about how well people combine resources to produce goods and services. It is about creating more from available resources such as raw materials, labour, skills, capital equipment, land, intellectual property, managerial capability and financial capital. With the right choices, higher production, higher value and higher incomes can be achieved for every hour worked. Productivity in a business is the ability of an organization to utilize its available resources in order to produce profitable goods or services as desired by customers or clients. It is the productivity that measures the performance of an organization and it can also be used for companies themselves in order to assess their own progress.

Productivity is a critical determinant of cost efficiency. Productivity is computed by dividing average output per period by the total costs incurred or resources (capital, energy, material, personnel) consumed in that period. Basically, it is the measure of output (products) from a production process per unit of input (labor and capital). Productivity is an overall measure of the ability to produce a good or service. More specifically, productivity is the measure of how specified resources are managed to accomplish timely objectives as stated in terms of quantity and quality. Hence, there are two major ways to increase productivity, increase the numerator (output) or decrease the denominator (input). Of course, a similar effect would be seen if both input and output increased but output increased faster than input or if input and output decreased but input decreased faster than output. Organizations have many options for use of this formula, labor productivity, machine productivity, capital productivity, energy productivity and so on. A productivity ratio may be computed for a single operation, a department, a facility, an organization, or even an entire country. Productivity is an objective concept. As an objective concept it can be measured, ideally against a universal standard. Organizations can monitor productivity for strategic reasons such as corporate planning, organization improvement or comparison to competitors. It can also be used for tactical reasons such as project control or controlling performance to budget. Productivity is also a scientific concept and hence can be logically defined and empirically observed. It can also be measured in quantitative terms in which qualify it as a variable. Therefore, it can be defined and measured in absolute or relative terms. However, an absolute definition of productivity is not very useful, it is much more useful as a concept dealing with relative productivity or as a productivity factor. Productivity is useful as a relative measure of actual output of production compared to the actual input of resources, measured across time or against common entities. As output increases for a level of input or as the amount of input decreases for a constant level of output, an increase in productivity occurs. Therefore, a “productivity measure” describes how well the resources of an organization are being used to produce input. Productivity is often confused with efficiency. Efficiency is generally seen as the ratio of the time needed to perform a task to some predetermined standard time. However, doing unnecessary work efficiently is not exactly being productive. It would be more correct to interpret productivity as a measure of effectiveness (doing the right thing efficiently) in which is outcome-oriented rather than output oriented. Take for an example, in a factory productivity might be measured based on the number of hours it takes to produce a good while in the service sector, productivity might be measured based on the revenue generated by an employee divided by his or her salary. Moving along to the in-depth of equation of productivity, as I have mentioned, productivity measures how well resources are used. It is computed as a ratio of outputs (goods and services) to inputs (labor and materials). The more productive a company is, the better it uses its resources. The equation is as follows:

This measure of productivity can be used to measure the productivity of one worker or many, as well as the productivity of a machine, a department, the whole firm, or even a nation. Total productivity is used when measuring productivity for all inputs combined, such as labor, machines, and capital. For example, let’s say a company produces weekly the equivalent of RM10,000 in output in the form of finished goods. Let’s also say that the weekly value of all the inputs combine, including labor, materials and other costs is RM5,000. Total productivity for the week for the company is

Although total productivity is valuable to give a company a sense of how it is doing on the whole, it is often much more useful to measure the productivity of one variable at a time. This allows a company to evaluate how efficiently various resources are being used. Partial productivity or single factor productivity is when an organization compute productivity as the ratio of output relative to a single input. For example, they can compute machine productivity or labor productivity. For machine productivity a company can see how many units a machine is processing over a certain period of time. Similarly for labor productivity they can compute how many units a worker can process over a certain period of time, such as a day, hour or even month. The interpretation of productivity is not as easy as most people might think. Productivity is a relative measure that should be tracked over time. Just looking at the number, such as the 2.0 in the previous computation of total productivity, does not reveal much. Consider, for example, if one worker at a sub shop produced 20 subs in 2 hours, the productivity of that worker is 10 subs per hour. This number by itself does not tell us much. However, if it’s to compare it to the productivity of two other workers, one who produces 8 per hour and another 5 per hour, it is much more meaningful. Although this is a simplistic example, it illustrates or shows the point that performance expectations are relative and they need to be benchmarked and compared over time.

By comparing our own productivity over time and against similar operations, we have a much better sense of how high our productivity really is. Another criteria for evaluating productivity and setting standards for performance is considering the company’s strategy for competing in the marketplace. This is called a competitive priority and it defines how a company competes. A company completely based on speed would probably measure productivity in units produced over time. However, a company that competes based on cost might measure productivity in terms of costs of inputs such as labor, materials and overhead.

On the other hand, a company that competes on quality may measure productivity based on the number of errors made. The important thing is that the productivity measure selected provides information on how the company is doing relative to the competitive priority it defines as most important.