Concept of Productivity
Concept of Productivity
Concept of Productivity
Proceedings of the 7th Asia Pacific Industrial Engineering and Management Systems Conference (APIEMS2002), Taipei change for reasons that have little to do with productivity, the opposite of productivity is represented by waste, which such as inflation and other external conditions that may must be eliminated in order to improve productivity. bear no relationship to the efficient use of resources. Miller So far the term productivity may seem rather easy to argue that productivity is a more suitable measure to understand, however, there are several implications which monitor manufacturing excellence in the long run rather have caused much confussion. A common mistake is, for than profitability, since profits are influenced by many instance, to use productivity synomous to measures of factors in a short-term perspective [6]. production, which refers to the amount of a product or service produced. As a result of this confusion, people tend The term profitability clearly has a productivity component, but it is strongly influenced by the prices a company pays to believe that increased production, means increased for its input and receives for its output. If a company can productivity. This is not necessarily true. An important recover more than the cost of its input from rising prices for point to keep in mind is that productivity is a relative its output, its profitability can be increased even in times concept, which can not be said to increase or decrease when its productivity is decreasing, see figure 1. That is unless a comparison is made, either of variations from also a strong argument for productivity being expressed in competitors or other standards at a certain point in time, or physical units (in quantities) instead of monetary units. In of changes over time. Basically, improvements in conclusion, productivity can be separated from profitability productivity can be caused by five different relationships by the price recovery [6]. [5]: ? Output and input increases, but the increase in input is proportionally less than the increase in output. Change in Change in Change in product quantity revenue product price ? Output increases while input stays the same. ? Output increases while input is reduced. ? Output stays the same while input decreases. ? Output decreases while input decreases even more. Change in Change in Change in
productivity profit price recovery
It is also important to understand the ambiguous nature of productivity, since there exist several types of productivity as well as different hierarchical levels which productivity can be discussed within. Almost any transformation process within a manufacturing company is fed with several types of input (e.g. labour, capital, material and energy) and emits more than one output (e.g. product A, product B). In turn we must be able to separate partial productivity (i.e. output related to one type of input) from total productivity (i.e. output related to multiple types of input). Moreover, considering all the different hiarchical levels that exist in a company it is not difficult to comprehend that, for example, the management strategical perspective of productivity s will usually differ from the more operational view of productivity among operators at an assembly line. The literature show that the concept of productivity should be distinguished from four other similar terms: profitability, performance, efficiency and effectiveness, which will now be explained [3-8]. Profitability Perhaps the reason why companies tend to ignore the importance of productivity is that they often link productivity and profitability as one issue. Profitability is the overriding goal for the success and growth of any business, and is generally defined as a ratio between revenue and cost (i.e. profit/assets). However, profitability as a performance measure mainly addresses shareholders as the interest group and many researchers therefore claim that using monetary ratios as productivity measures will result in several shortcomings, for instance, induce short-termism and discurage the customer perspective. Profitability can
Change in cost
Figure 1. Productivity relation to profitability s Performance Many people who claim to be discussing productivity are actually looking at the more general issue of performance. While productivity is a fairly specific concept related to the ratio between output and input, performance is a term which includes almost any objective of competition and manufacturing excellence such as cost, flexibility, speed, dependability and quality. However, as illustrated in figure 2, various performance objectives can have a large effect on the productivity in an operation [7]: ? High-quality operations do not waste time or effort having to re-do things, nor are their internal customers inconvenienced by flawed service. ? Fast operations reduce the level of in-process inventory between micro operations, as well as reducing administrative overhead. ? Dependable operations can be relied on to deliver exactly as planned. This eliminates wasteful disruption and allows the other micro operations to operate efficiently. ? Flexible operations adapt to changing circumstances quickly and without disrupting the rest of the operation. Flexible micro operations can also change over between tasks quickly and without wasting time and capacity.
Proceedings of the 7th Asia Pacific Industrial Engineering and Management Systems Conference (APIEMS2002), Taipei External effects of industry. However, it is the combination of high values of the five performance objectives Low price, both efficiency and effectiveness in the transformation high margin, or both process that leads to high productivity. Thus, is it possible for an effective system to be inefficient; it is also possible Cost for an efficient system to be ineffective. Short delivery
lead time
Speed
Dependable delivery
High total productivity Fast throughput Reliable operation Internal effects of the five performance objectives Ability to change
Flexibility
Dependability
3. THE TRIPLE-P MODEL Based on the earlier descriptions of the terminology sourrounding productivity, the Triple-P model (figure 4) has been developed to give a schematic view of how the different terms are suggested to be used [10]. The model includes five terms; productivity, profitability, performance, effectiveness and efficiency, and explains how they are related to each other. Through the Triple-P model, the main differences between these terms can easily be captured.
Effectiveness
Error-free processes
Quality
On-specification product/services
Frequent new products Wide product range Volume and delivery adjustments
Some researchers and managers see performance objectives, especially quality, as a part of the concept of productivity, while they instead should se them as factors affecting productivity. It is believed in this research that the confusion surrounding productivity will be even more complicated with a too broad view of productivity. If productivity measures should include all types of performance objectives, they are in grave danger of becoming so complex that their usefulness as meaningful measures of improvement become questionable. Efficiency and effectiveness
Input
Efficiency
The two terms effectiveness and efficiency render the terminology even more complicated. There is no single accepted view about these terms; however, effectiveness is usually described as doing the right things while , efficiency means doing things right [8]. Most researchers agree that efficiency is strongly linked to the utilisation of resources and mainly influence the input of the productivity ratio. This means that efficiency in manufacturing can be seen as the minimum resource level that is theoretically required to run the desired operations in a given system, compared to how much resources are actually used (see figure 3). The efficiency ratio is rather simple to measure, whether it is based on time, money or other.
Productivity is the central part of the Triple P-model and has a rather straightforward operational definition of productivity as a ratio of output quantity (i.e. number of correctly produced products which fulfils their specifications) divided by input quantity (i.e. all type of the resources that are consumed in the transformation process). Profitability is also seen as the relation between output and input, but includes influences from price-factors (i.e. price recovery). Performance is the umbrella term of manufacturing excellence and includes profitability as well as non-cost factors such as quality, speed, delivery and flexibility. Effectiveness is a term to be used when the output of the manufacturing transformation process is focused, while efficiency represents how well the input of the transformation process (i.e. resources) is utilised. 4. RESULT OF INVESTIGATIONS As expected, the result of the two empirical investigations confirmed previous research and showed that there was no consensus of the view of productivity, neither between the the managers at the five companies nor among the employees at the particularly studied company. However,
Upstream system
Input
Transformation process
Output
Downstream system
Effectiveness, on the other hand, is a more diffuse term and in most cases very difficult to quantify. It is often linked to the creation of value for the customer and affects the output of the productivity ratio. In conclusion, a single focus on efficiency does not seem to be a fruitful way to increase productivity [9]. Unfortunately, this is often the case in
Proceedings of the 7th Asia Pacific Industrial Engineering and Management Systems Conference (APIEMS2002), Taipei Unfortunately, it seems to be practically impossible to the investigations did also reveal a number of other create an exact definition of productivity that is applicable interesting issues. and accepted within all areas of manufacturing. In both studies, the interviewed people agreed in that is was Nevertheless, it vital that the basic features that very important to establish a clear definition of productivity characterize the term are understood in industry as well as within a company as well as within the industry in general. in the academia. Otherwise, the existing misinterpretations A common opinion was that a definition would simplify on the subject will continue to cause problems and declines comminucation and help employees to understand company in productivity. goals, but a definition would also help both managers and employees to take appropriate decisions to improve 6. REFERENCES productivity. Nevertheless, a clear definition of productivity had not been advocated in none of the studied companies. [1] H. Singh, J. Motwani, A. Kumar, A review and In the first investigation, the managers presented various views on the meaning of productivity and numerous of performance measures that the companies used. It was clear that the manager opinions on the meaning of productivity s were strongly influenced by the performance measures used at each company. Many of the managers believed that they fully understood what productivity meant, but at the same time they had difficulties in explaining the differences between productivity and similar terms, for example profitability that was mostly seen as the same thing as productivity. At the particularly studied company in the second investigation, the lack of productivity definition had unfortunately resulted in that the employees did not fully understand the management goals for improvement, even s though the goals had been specified in numbers. Many different opinions of what characterize productivity were emphasized during the interviews, including making money, efficient use of labour or just good performance, however, the term was seldom linked to the relation between output and input. Despite it was agreed that a clear definition would be very useful, allowing people to focus and speak the same language, the management did not show any interest in this issue. A major reason for not defining the term was the difficulties in actually agreeing on what productivity meant. 5. CONCLUSIONS In this paper, the confusion surrounding the concept of productivity and its relation to other similar terms has been explored. Several characteristics features of productivity have been presented as well as a suggested taxonomy (i.e. the Triple-P model) that explains how productivity should be distinguished from the terms; profitability, performance, efficiency and effectiveness. The result of the empirical investigations confirms that there is no consensus in industry of what the term productivity actually means. The absence of productivity definition within a company were also found to cause problems. However, most managers and employees at the studied companies agree that an established productivity definition would be beneficial to a company improvement s work. analysis of the state of the art research on productivity measurement Industrial Management and Data Systems, vol. 100, pp 234-41, 2000. [2] A. Kinnander and P. Grndahl, Productivity development in manufacturing systems a project proposal within PROPER Internal report, Stockholm: The Royal Institute of Technology, 1999. [3] E. Koss and D.A. Lewis, Productivity or efficiency measuring what we really want National Productivity Review, vol. 12, pp 273-95, 1993. [4] J.W. Forrester, Low productivity: it is a problem or merely a symptom? Handbook for productivity measurement and improvement, Cambridge: Productivity Press, 1993. [5] S. Misterek, K. Dooley, J. Anderson, Productivity as an performance measure International Journal of Operations and Production Management, vol. 12, pp 29-45, 1992. [6] D.M. Miller, Profitability = Productivity + Price Recovery Harward Business Review, May-June, pp 145-153, 1984. [7] N. Slack, S. Chambers, R. Johnston, Operations Management. U.K: Pearson Education Limited, 2001, ch 2, pp 38-62. [8] D.S. Sink and T.C. Tuttle, Planning and measurement of in your organisation of the future. Norcross, U.S.A: Industrial Engineering and Management Press, 1989, ch 5, pp 170-184. [9] M. Jackson, An Analysis of Flexible and Reconfigurable Production Systems. Disseration No. 640, Sweden: Linkping University, 2000, ch 6, pp 85104. [10] S. Tangen, A Theoretical Foundation for Productivity Measurement and Improvement of Automatic Assembly Systems. Licentiate Thesis, Stockholm: Royal Institute of Technology, 2002, ch 3, pp 19-30.