Managing Productivity

Defining Productivity

In control management productivity is defined as the overall efficiency and output of a given operational system.

Learning Objectives

Define productivity in the context of management and control

Key Takeaways

Key Points

  • Productivity is defined as a total output per one unit of a total input. In control management, productivity is a measure of how efficiently a process runs and how effectively it uses resources.
  • At the plant level, common input statistics are monetary units, weights or volumes of raw or semi-finished materials, kilowatt hours of power, and worker hours.
  • Output is simply the rate of which goods are being produced and readied for sale. Managing production levels is part of the control process.
  • Productivity growth is important to a business because it controls the real income means needed to meet obligations to customers, suppliers, workers, shareholders, and governments (taxes and regulation).

Key Terms

  • input: Something fed into a process with the intention of it shaping or affecting the outputs of that process.
  • productivity: The rate at which goods or services are produced by a standard population of workers.

Productivity

Productivity–a ratio of production output to the input required to produce it–is one measure of production efficiency. Productivity is defined as a total output per one unit of a total input. Control management must implement control processes to maintain or improve productivity.

Inputs

At the plant level, common input statistics are monetary units, weights or volumes of raw or semi-finished materials, kilowatt hours of power, and worker hours. These are tracked as sets of partial productivity, such as kilowatt-hours per ton or yield (weight of output divided by weight of input), both of which are used in the chemical, refining, wood pulp, and other process industries. Quality statistics like defect rates are tracked in the same way. Summary reports are routinely issued to various departments and department managers are held accountable for managing inputs in their respective areas.

Outputs

Output is simply the rate of which goods are being produced and readied for sale. Managing production levels is part of the control process–management teams must predict demand to avoid market saturation.

From the control manager’s point of view, more outputs from the inputs describe above is a step in the right direction. Finding ways to streamline internal operations to minimize cost, limit resource use, and optimize performance (quality) is the control manager’s central responsibility. Productivity in producing outputs, in short, can determine a control manager’s success or failure.

Productivity and the Firm

Productivity growth is important to a firm because more real income means the firm can meet its obligations to customers, suppliers, workers, shareholders, and governments (taxes and regulation), and still remain competitive or even improve its competitiveness in the marketplace.

Productivity is one of the main concerns of business management and engineering. Practically all companies have established procedures for collecting, analyzing, and reporting productivity data. The accounting department typically has the overall responsibility of collecting, organizing, and storing data generated by various departments.

Improving Productivity

Many companies have formal programs for improving productivity via existing control systems. Companies are constantly looking for ways to improve quality, reduce downtime, and increase inputs of labor, materials, energy, and purchased services. Simple changes to operating methods or processes can increase productivity (think Henry Ford’s assembly line). The biggest gains often come from adopting new technologies or concepts, which requires capital expenditures for new equipment, computers, or software.

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Textile manufacturing: During the Industrial Revolution, productivity increased with the implementation of the assembly line.

The Importance of Productivity

Productivity is the ratio of total output to one unit of total input; high productivity means larger capital gains.

Learning Objectives

Illustrate the critical importance of assessing and managing productivity in the control process

Key Takeaways

Key Points

  • Productivity is a measure of the efficiency of production. High productivity can lead to greater profits for businesses and greater income for individuals.
  • The control managers in a given organization are tasked with maximizing productivity through process-oriented observations and improvements.
  • Five main processes affect productivity: real process, income distribution, production process, monetary process, and market value.
  • For businesses, productivity growth is important because providing more goods and services to consumers translates to higher profits.

Key Terms

  • microeconomic: Relating to the decision-making behavior of individual households and firms that must allocate limited resources. Typically, it applies to markets where goods or services are bought and sold.
  • ratio: A number representing a comparison between two things.
  • macroeconomic: Relating to the entire economy, including growth rate, money and credit, the total amount of goods and services produced, total income earned, the general behavior of prices, and more.

Definition of Productivity

Productivity is a measure of the efficiency of production. It is a ratio of actual output (production) to what is required to produce it ( inputs ). Productivity is measured as a total output per one unit of a total input. Control managers in a given organization are concerned with maximizing productivity through process-oriented observations and improvements.

For businesses, productivity growth is important because providing more goods and services to consumers translates to higher profits. As productivity increases, an organization can turn resources into revenues, paying stakeholders and retaining cash flows for future growth and expansion. Productivity leads to competitiveness and potentially competitive advantages.

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Productivity Gains: Wheat production has increased as the productivity gains improve, particularly since the 1980s.

Processes that Affect Productivity

A producer can be broken down five main processes, each with a logic, objectives, theory, and key figures of its own. The main processes of a company are:

  • Real process
  • Income distribution process
  • Production process
  • Monetary process
  • Market value process

Controllers in an organization are responsible for understanding each of these elements. Real process and production process are often seen as focal points in efficiency, but monetary concerns and market value are also very important. For example, Starbucks must regularly buy a huge volume of coffee beans. Those coffee beans are vulnerable to plant diseases and other factors that could make them scarce. The price of coffee beans in dollars is therefore an enormous monetary risk for the company because resource scarcity could raise its expenses exponentially. Its controllers must hedge against these risks.

  • Real process – Real process generates the production output from input. It can be described by the production function. This refers to a series of events in production in which inputs of different quality and quantity are combined into products of different quality and quantity. Products can be physical goods, immaterial services, or combinations of both.
  • Income distribution – Income distribution process refers to a series of events in which the unit prices of constant-quality products and inputs change, causing an alteration in the income distribution among those participating in the exchange. The magnitude of the change in income distribution is directly proportionate to the change in the price of the outputs and inputs and to their quantities. For example, productivity gains are distribute to customers as lower prices, which may lead to higher sales revenues. Productivity gains can also be distributed to employees in the form of higher wages.
  • Production process – Production process is the real process and the income distribution process. Profitability is both a result and a criterion of business success. Profitability of production is the share of the real process result that the owner has been able to retain in the income distribution process (profits earned). Factors describing the production process are the components of profitability, which are revenues and expenses.
  • Monetary and market value processes – Monetary process refers to financing a business and the inputs of production. Market value process refers to a series of events in which investors determine the market value of the company in the investment markets.