Productivity of a single input is typically measured by calculating the ratio of the outputto the input as follows:
Productivity ratio=Output/Input
Because the productivity of only one input is being measured, the measure is called a partial productivity measure. If both output and input are measured in physical quan-
Because the productivity of only one input is being measured, the measure is called a partial productivity measure. If both output and input are measured in physical quan-
tities, then we have an operational productivity measure. If output or input is expressed in dollars, then we have a financial productivity measure. Assume, for example, that in 2006, Nevada Company produced 240,000 frames for snowmobiles and used 60,000 hours of labor. The labor productivity ratio is four frames per hour (240,000/60,000). This is an operational measure, since the units are expressed in physical terms. If the selling price of each frame is $30 and the cost of labor is $15 per hour, then output and input can be expressed in dollars. The labor productivity ratio, expressed in financial terms, is $8 of revenue per dollar of labor cost ($7,200,000/$900,000).
Partial Measures and Measuring Changes in Productive Efficiency
The labor productivity ratio of four frames per hour measures the 2006 productivity experience of Nevada. By itself, the ratio conveys little information about productive efficiency or whether the company has improving or declining productivity. It is possible, however, to make a statement about increasing or decreasing productivity efficiency by measuring changes in productivity. To do so, the actual current productivity measure is compared with the productivity measure of a prior period. This prior period is referred to as the base period and serves to set the benchmark or standard for measuring changes in productive efficiency. The prior period can be any period desired. It could, for example, be the preceding year, the preceding week, or even the period during which the last batch of products was produced. For strategic evaluations, the base period is usually chosen as an earlier year. For operational control, the base period tends to be close tothe current period—such as the preceding batch of products or the preceding week. To illustrate, assume that 2006 is the base period and that the labor productivity standard,therefore, is four frames per hour. Further assume that late in 2006, Nevada decidedto try a new procedure for producing and assembling the frames with the expectation thatthe new procedure would use less labor. In 2007, 250,000 frames were produced, using 50,000 hours of labor. The labor productivity ratio for 2007 is five frames per hour (250,000/50,000). The change in productivity is a one-unit-per-hour increase in productivity (from four units per hour in 2006 to five units per hour in 2007). The change is a significant improvement in labor productivity and provides evidence supporting the efficacy of the new process.
Advantages of Partial Measures
Partial measures allow managers to focus on the use of a particular input. Operating partial measures have the advantage of being easily interpreted by everyone within the organization. Consequently, partial operational measures are easy to use for assessing productivity performance of operating personnel. Laborers, for instance, can relate to units produced per hour or units produced per pound of material. Thus, partial operational measures provide feedback that operating personnel can relate to and understand measures that deal with the specific inputs over which they have control. The ability of operating personnel to understand and relate to the measures increases the likelihood that the measures will be accepted. Furthermore, for operational control, the standards for performance are often very short run in nature. For example, standards can be the productivity ratios of prior batches of goods. Using this standard, productivity trends within the year itself can be tracked.
Disadvantages of Partial Measures
Partial measures, used in isolation, can be misleading. A decline in the productivity of one input may be necessary to increase the productivity of another. Such a trade-off is desirable if overall costs decline, but the effect would be missed by using either partial measure. For example, changing a process so that direct laborers take less time to assemble a product may increase scrap and waste while leaving total output unchanged. Labor productivity has increased, but productive use of materials has declined. If the increase in the cost of waste and scrap outweighs the savings of the decreased labor,then overall productivity has declined.
Two important conclusions can be drawn from this example. First, the possible existence of trade-offs mandates a total measure of productivity for assessing the merits of productivity decisions. Only by looking at the total productivity effect of all inputs can managers accurately draw any conclusions about overall productivity performance. Second, because of the possibility of trade-offs, a total measure of productivity must assess the aggregate financial consequences and, therefore, should be a financial measure.
Partial Measures and Measuring Changes in Productive Efficiency
The labor productivity ratio of four frames per hour measures the 2006 productivity experience of Nevada. By itself, the ratio conveys little information about productive efficiency or whether the company has improving or declining productivity. It is possible, however, to make a statement about increasing or decreasing productivity efficiency by measuring changes in productivity. To do so, the actual current productivity measure is compared with the productivity measure of a prior period. This prior period is referred to as the base period and serves to set the benchmark or standard for measuring changes in productive efficiency. The prior period can be any period desired. It could, for example, be the preceding year, the preceding week, or even the period during which the last batch of products was produced. For strategic evaluations, the base period is usually chosen as an earlier year. For operational control, the base period tends to be close tothe current period—such as the preceding batch of products or the preceding week. To illustrate, assume that 2006 is the base period and that the labor productivity standard,therefore, is four frames per hour. Further assume that late in 2006, Nevada decidedto try a new procedure for producing and assembling the frames with the expectation thatthe new procedure would use less labor. In 2007, 250,000 frames were produced, using 50,000 hours of labor. The labor productivity ratio for 2007 is five frames per hour (250,000/50,000). The change in productivity is a one-unit-per-hour increase in productivity (from four units per hour in 2006 to five units per hour in 2007). The change is a significant improvement in labor productivity and provides evidence supporting the efficacy of the new process.
Advantages of Partial Measures
Partial measures allow managers to focus on the use of a particular input. Operating partial measures have the advantage of being easily interpreted by everyone within the organization. Consequently, partial operational measures are easy to use for assessing productivity performance of operating personnel. Laborers, for instance, can relate to units produced per hour or units produced per pound of material. Thus, partial operational measures provide feedback that operating personnel can relate to and understand measures that deal with the specific inputs over which they have control. The ability of operating personnel to understand and relate to the measures increases the likelihood that the measures will be accepted. Furthermore, for operational control, the standards for performance are often very short run in nature. For example, standards can be the productivity ratios of prior batches of goods. Using this standard, productivity trends within the year itself can be tracked.
Disadvantages of Partial Measures
Partial measures, used in isolation, can be misleading. A decline in the productivity of one input may be necessary to increase the productivity of another. Such a trade-off is desirable if overall costs decline, but the effect would be missed by using either partial measure. For example, changing a process so that direct laborers take less time to assemble a product may increase scrap and waste while leaving total output unchanged. Labor productivity has increased, but productive use of materials has declined. If the increase in the cost of waste and scrap outweighs the savings of the decreased labor,then overall productivity has declined.
Two important conclusions can be drawn from this example. First, the possible existence of trade-offs mandates a total measure of productivity for assessing the merits of productivity decisions. Only by looking at the total productivity effect of all inputs can managers accurately draw any conclusions about overall productivity performance. Second, because of the possibility of trade-offs, a total measure of productivity must assess the aggregate financial consequences and, therefore, should be a financial measure.
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Productivity measurement part of IE Measurement.
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