3 : Productivity Models

Productivity in economics is the ratio of what is produced to what is required to produce. Productivity is the measure on production efficiency. Productivity model is a measurement method which is used in practice for measuring productivity. Productivity model must be able to solve the formula Output / Input when there are many different outputs and inputs. Based on the variables used in the productivity model suggested for measuring business, such models can be grouped into three categories as follows

Productivity Index

The only variable in the index model is productivity, which implies that the model can not be used for describing the production function. Therefore, the model is not introduced in more detail here.

PPPV

Variables of the model are > Profitability = f [ Productivity, Price, Volume ]

Profitability is being expressed as a function of above variables. The model is linked to the profit and loss statement so that profitability is expressed as a function of productivity, volume and unit prices. Productivity and volume are the variables of a production function, and using them makes it is possible to describe the real process. A change in unit prices describes a change of production income distribution.

PPPR

Variables of the model are > Profitability = f [ Productivity, Price, Recovery ]

In this model, the variables of profitability are productivity and price recovery. Only the productivity is a variable of the production function. The model lacks the variable of volume, and for this reason, the model cant describe the production function.

Productivity at National Level

In order to measure productivity of a nation or an industry, it is necessary to make the concept operational as in business, yet, the object of modeling is substantially wider and the information more aggregate. The calculations of total productivity of a nation or an industry are based on the time series of the System of National Accounts, formulated and developed for half a century. National accounting is a system based on the recommendations of the United Nations [ UN ] to measure total production and total income of a nation and how they are used. Measurement of productivity is at its most accurate in business because of the availability of all elementary data of the quantities and prices of the inputs and the output in production. The more comprehensive the entity we want to analyze by measurements, the more data need to be aggregated. In productivity measurement, combining and aggregating the data always involves reduced measurement accuracy. Productivity measures are often used to indicate the capacity of a nation to harness its human and physical resources to generate economic growth. Productivity measures are key indicators of economic performance and there is strong interest in comparing them internationally. The OECD publishes an annual Compendium of Productivity Indicators that includes both labour and multi-factor measures of productivity. Labour productivity and Multi-factor productivity Labour productivity is the ratio of [ the real value of ] output to the input of labour. Where possible, hours worked, rather than the numbers of employees, is used as the measure of labour input. With an increase in part-time employment, hours worked provides the more accurate measure of labour input. Labour productivity should be interpreted very carefully if used as a measure of efficiency. In particular, it reflects more than just the efficiency or productivity of workers. Labour productivity is the ratio of output to labour input; and output is influenced by many factors that are outside of workers' influence, including the nature and amount of capital equipment that is available, the introduction of new technologies, and management practices.

Multifactor productivity is the ratio of the real value of output to the combined input of labour and capital. Sometimes this measure is referred to as total factor productivity. In principle, multifactor productivity is a better indicator of efficiency. It measures how efficiently and effectively the main factors of production - labour and capital - combine to generate output. However, in some circumstances, robust measures of capital input can be hard to find. Labour productivity and multifactor productivity both increase over the long term. Usually, the growth in labour productivity exceeds the growth in multifactor productivity, reflecting the influence of relatively rapid growth of capital on labour productivity. Importance of national productivity growth Productivity growth is a crucial source of growth in living standards. Productivity growth means more value is added in production and this means more income is available to be distributed. At a firm or industry level, the benefits of productivity growth can be distributed in a number of different ways to the workforce through better wages and conditions to shareholders and superannuation funds through increased profits and dividend distributions to customers through lower prices to the environment through more stringent environmental protection to governments through increases in tax payments [ which can be used to fund social and environmental programs ]

Productivity growth is important to the firm because it means that it can meet its (perhaps growing) obligations to workers, shareholders, and governments (taxes and regulation), and still remain competitive or even improve its competitiveness in the market place. There are essentially two ways to promote growth in output bring additional inputs into production, or increase productivity.

Adding more inputs will not increase the income earned per unit of input (unless there are increasing returns to scale). In fact, it is likely to mean lower average wages and lower rates of profit. But, when there is productivity growth, even the existing commitment of resources generates more output and income. Income generated per unit of input increases. Additional resources are also attracted into production and can be profitably employed. At the national level, productivity growth raises living standards because more real income improves people's ability to purchase goods and services (whether they are necessities or luxuries), enjoy leisure, improve housing and education and contribute to social and environmental programs. Productivity isn't everything, but in the long run it is almost everything. A country's ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker. World War II veterans came home to an economy that doubled its productivity over the next 25 years; as a result, they found themselves achieving living standards their parents had never imagined. Vietnam veterans came home to an economy that raised its productivity less than 10 percent in 15 years; as a result, they found themselves living no better - and in many cases worse - than their parents. Over long periods of time, small differences in rates of productivity growth compound, like interest in a bank account, and can make an enormous difference to a society's prosperity. Nothing contributes more to reduction of poverty, to increases in leisure, and to the country's ability to finance education, public health, environment and the arts. Output measurement Conceptually speaking, the amount of total production means the same in the national economy and in business but for practical reasons modeling the concept differs, respectively. In national economy, the total production is measured as the sum of value added whereas in business it is measured by the total output value. When the output is calculated by the value added, all

purchase inputs (energy, materials etc.) and their productivity impacts are excluded from the examination. Consequently, the production function of national economy is written as follows:

Value Added > Output = f [ Capital, Labour ]

In business, production is measured by the gross value of production, and in addition to the producers own inputs [ capital and labour ] productivity analysis comprises all purchase inputs such as raw-materials, energy, outsourcing services, supplies, components, etc. Accordingly, it is possible to measure the total productivity in business which implies absolute consideration of all inputs. It is clear that productivity measurement in business gives a more accurate result because it analyses all the inputs used in production. The productivity measurement based on national accounting has been under development recently. The method is known as KLEMS, and it takes all production inputs into consideration. KLEMS is an abbreviation for K = capital, L = labour, E = energy, M = materials, and S = services. In principle, all inputs are treated the same way. As for the capital input in particular this means that it is measured by capital services, not by the capital stock.

Productivity at Organizational Level

Organizational productivity usually relates to efficiency and effectiveness. While relatively easy to measure in some environments, such as manufacturing widgets, it is not so easy in service agencies. Yet given the political and economic demands for accountability and resource conservation, public service entities need to address organizational productivity. Efficiency and effectiveness are two words often associated with organizational productivity. Efficiency might be defined as the degree to which a system or component of a system performs its designated functions with minimum consumption of resources. It is generally measured by a ratio of outputs produced to resources used. Effectiveness is the degree to which a goal is achieved and suggests a quality of output measurement against a defined standard. Factors affecting Organizational Productivity A] Environmental The environment in which the organization operates affects its level of productivity. An organizations environment consists of Geographical, Political & Economical factors. These factors are considered as External factors.
Physical Location

Political - Govt. Regulations

Economic External & Internal Stability

B] Organizational Theses factors are considered as Internal factors.

Structure / Size / Complexity

Technology Deree of Specialization

Work Culture / Harmonious Relations

Total Productivity [ Total Factor Productivity ]

Measure of the efficiency of all inputs to a production process. Increases in FTP result usually from technological innovations or improvements. In economics, total-factor productivity (TFP) is a variable which accounts for effects in total output not caused by inputs. If all inputs are accounted for, then total factor productivity (TFP) can be taken as a measure of an economys long-term technological change or technological dynamism. If all inputs are not accounted for, then TFP may also reflect omitted inputs. For example, a year with unusually good weather will tend to have higher output, because bad weather hinders agricultural output. If a variable like the weather is not considered as an input, then weather will be included in the measure of total-factor productivity. TFP cant be measured directly. Instead it is a residual, often called the Solow residual, which accounts for effects in total output not caused by inputs. The equation below [ CobbDouglas Equation ] represents total output (Y) as a function of total-factor productivity (A), capital input (K), labor input (L), and the two inputs' respective shares of output ( and are the capital input share of contribution for K and L respectively). An increase in either A, K or L will lead to an increase in output. While capital and labor input are tangible, total-factor productivity appears to be more intangible as it can range from technology to knowledge of worker [ human capital ].

Technology Growth and Efficiency are regarded as two of the biggest sub-sections of Total Factor Productivity, the former possessing "special" inherent features such as positive externalities and non-rivalness which enhance its position as a driver of economic growth. Total Factor Productivity is often seen as the real driver of growth within an economy and studies reveal that whilst labour and investment are important contributors, Total Factor Productivity may account for up to 60% of growth within economies.

Productivity Management in Manufacturing Sector

Any manufacturing unit would have a production facility where good are produced .Production comprises of man , machine and material .Proper allocation of jobs , layout and material results in cost efficient production. Productivity measures the efficiency with which resources such as labour or capital are employed in the production process. There are two widely used productivity measures; labour productivity and multifactor productivity. Labour productivity is measured as real output per hour worked. Multifactor productivity, a broader measure of efficiency, is measured as real output per unit of combined inputs [ capital, labour, etc ]. In essence, this is the efficiency of all or your factors of production. A business wishing to improve its profitability must undertake certain steps that can guarantee to provide the desired results. One of the things that the management staff must give important notice is the production and productivity of the business as a whole. As has been known, to increase the profitability of an enterprise, certain things must be improved in the workplace. To increase productivity is one of these. Activity can be identified with production and consumption. Production is a process of combining various immaterial and material inputs of production so as to produce tools for consumption. The methods of combining the inputs of production in the process of making output are called technology. Technology can be depicted mathematically by the production function which describes the function between input and output. The production function depicts production performance and productivity is the metric for it. Measures may be applied with, for example, different technology to improve productivity and to raise production output.

Location - Companies now days are shifting base to lower cost of production which make sense production base in cities or metros have become non viable as cost of living , cost of raw material ,overhead cost and transportation cost have gone above the roof . Companies are moving to low cost areas like China, India. Local companies are also moved to areas like SEZ, FTZ, Areas with special incentives etc. Work Standards - All standards for operations should be displayed at working stations in local language s with dos and donts. Autonomous Maintenance - Operators to be trained to do regular maintenance instead of waiting for maintenance personnel to come and attend these breakdowns .Preventive maintenance to be scheduled for better performance of Machines. Allocation of Manpower per Machine - It has to be ensured that the manpower deputed per machine should be adequate and is not low or high. Tools - Necessary tools to be placed near work stations. Work and Measurement Study - Measure the time taken by a worker to complete a job with some industry standards and in case excessive labour is employed then the additional one can be relocated. Reduce Loss of the Time during shift-change over production boards at each work stations. Labour Productivity Handling - The handling of product and raw material should be reduced to minimum by either putting of conveyors or automatic transfer to the machine. Movement - To have minimum movement of manpower for getting material , tools and shifting. Rework - To have zero defective and rework as it is nothing but pure waste. The first step towards elimination is to adopt standards like ISO, QS, TS & OHSAS or own standards. Physical Stress -Study the positions of worker while working and eliminate those position were worker feel uncomfortable or experience stress while working. This would help in better productivity.

Productivity Management in Service Sector

Developing countries in their early stages of development depend largely on the agricultural sector for economic development and employment generation. As a country advances economically, the manufacturing and service sectors become the new growth areas. In developed countries, the service sector is the major (more than 60%) contributor to GDP. It also accounts for the major share of employment. Since the service sector is essential to a nations economic growth, it must continuously enhance its productivity and sustain its competitiveness, especially in view of the global challenges of a more open market. For this reason, productivity- and knowledge-driven strategies, a customer-focused management philosophy, and effective applications of information and communications technology (ICT) are critical to building a productive service sector. Developing Human Resources competency The ability to provide a high level of service quality and an effective productivity and knowledge management process require the involvement and commitment of employees at all levels in an organization. The success of an organization depends heavily on the quality and competency of its human resources. Excellent companies recognize that human resources are their number one asset. This is all the more true in the service industry. Therefore, employees must be adequately trained and retrained to ensure that their knowledge, skills, and competencies remain relevant and useful. With the Internet increasingly relied on as a source of knowledge and with rapid changes in science and technology, the amount of knowledge is doubling every seven to 10 years. This also hastens the obsolescence of skills and knowledge. The shelf life of academic degrees has been estimated to be only one year for computer science, two years for electrical engineering,

and four years for business studies. Training and skills development must therefore be a continuous process. On average, the training budget of an organization is about 1% of payroll. Excellent companies, on the other hand, spend about 45% and devote an average of 4050 training hours per employee per year. Innovative and creative circles To involve employees in productivity improvement activities, a team-based environment must be developed in which they can participate actively in improving service performance Customer focus and understanding customer requirements Service quality is about understanding and meeting customer needs, requirements, and expectations. The strategy to achieve this is to develop and nurture a close relationship with them through periodic contacts and surveys. Any feedback received should be followed through and acted on. Service quality not only involves meeting service delivery targets. It also necessitates seeking opportunities to delight customers with value-added services that make them feel more satisfied. Customer relationship management (CRM) is an approach that can assist organizations to serve their customers better. CRM helps to identify valuable customers, assess their needs, and provide more personalized service. It also streamlines the handling of enquiries and requests, resulting in higher operational efficiency and more rapid responses to customers. ICT and productivity improvement Most macroeconomic research studies conclude that ICT is a significant contributor to productivity growth and most relevant in knowledge and information - intensive service enterprises. However, a word of caution is necessary: heavy investments in ICT and automation alone may not increase productivity unless a total, integrated approach is taken. This requires complementary investments in organizational restructuring, workplace and work process redesign, and a mindset change among employees, who need to be computer literate. Effective applications of ICT in the service industry will result in higher productivity, leaner service processes, better-quality products and services, lower costs, and shorter delivery times. In short, they lead to better customer service. The areas of ICT application are in software development, system integration, CRM, video and teleconferencing, Web site development, and Internet-based data interchange. Productivity measurement If performance is not measured, we cannot manage and improve it. But measuring performance, especially in the service industry, is far from easy. Despite this, we should measure what is measurable; if something is not measurable, we should try to make it so. Efficiency measures based on the output/input ratio can be supplemented with effectiveness measures in index form. Basically, there are two main approaches to productivity measurement: partial factor productivity measurement and multifactor productivity measurement. The former is a ratio of the output to one of the factor inputs, such as labor productivity or capital productivity. However, partial productivity measures are not comprehensive and, if used alone, can be misleading. Multifactor productivity measurement, on the other hand, considers output in relation to multifactor inputs. A good example is total factor productivity, which measures the synergy and efficiency of utilizing both labor and capital inputs. To supplement the above efficiency measures, the balanced scorecard approach provides additional measurement perspectives by focusing on the reliability and effectiveness aspects. It evaluates business performance in four areas: financial, customers, internal business processes, and learning and growing. The service sector, as one of the prime sectors in a nations economic development, must continuously increase its productivity and resiliency to sustain its global competitiveness. Investment in human resources development, achieving deep customer focus, and effective applications of technology, in particular in ICT, are essentials for growth and sustainability. An appropriate productivity measurement system should be in place to assess performance and highlight opportunities for improvement.

Productivity Improvement Techniques

There are four key productivity improvement techniques. In this article Ill show you what they are and how they can be applied in any business. The employee know-how and training - Better skilled workers will naturally work more productively than those who receive no training. This should be incorporated into each new joiner training program to ensure theyre mentored in the early stages of their work. Additional training may also be required if companys innovation strategy involves taking on new technologies. The processes and programs used in the workplace - These define how effectively team members work with each other. The best source of feedback for this is the employees themselves who should have a chain of command reporting system available so that their impressions of specific work practices, technologies or machinery can be fed back to management. Make decisions on where changes should be made or investment made. The environment within which you work - Of all productivity improvement techniques this is one that can be quite simply changed overnight. Make sure that workers have a safe environment to work in that is also friendly [ i.e. companys policies in place against bullying which may affect some workplaces ]. In addition, simply working in a bright, clean and tidy work environment can help productivity. How employees are being motivated and rewarded ? - This starts with their wages and any bonuses they receive. These should be fairly administered and given to employees based on performance [ which in itself should be transparent ]. However company should think of what other rewards should be given to all employees on a sporadic basis. This can include discounts, funding for third level education, health insurance benefits and non-financial elements.

Productivity Conceptual Model

Increased Volume Able to reach wider Market.

Improved Services Better Delivery, Better Quality, Better Output. Better benefits to customers.

Reduced Costs Lower Unit Cost. More Sales > More Profit

Output

Conversion Process

Inputs

Materials Quality Quantity

Tooling Efficient Work

Equipments Up-to-date, Fit for the purpose

Employees Right Skills, Age

Skills Trained & developed for purpose

Knowledge Appropriate with areas of expertise

Systems capability, capacity, efficiency

Management Ability, Skill, Leadership, Caliber

Processes Validated ~ Technology employed

Attitudes To adapt, motivate, cooperate, Change

The successful management of this process, is ultimately the key to survival of any organization. It should be the concern of and a development goal for all organizational members, irrespective of their pos How productivity is improved ? Using productivity model, improvements can be effected Achieving more output for the same input Achieving the same output from less input Achieving much more output for slightly more input Getting slightly less output for much less input

There are six lines of attack to improve the productivity ratio of an organization, namely Improve basic process by research and development (long term) Improve and provide new plant, equipment, and machinery (long term) Simplify product and reduce variety (medium term) Improve existing methods and procedures (short term) Improve the planning of work and the use of manpower (short term) Increase the overall effectiveness of employees (short term)

If employees are properly motivated, coached, receive the right information at the right time, use simple productivity improvement tools and techniques and are rewarded in an appropriate way.

----- x -----