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Development of Productivity Measurement and Analysis Framework for

Manufacturing Companies

Article · April 2017

DOI: 10.22094/joie.2017.274

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 Journal of Optimization in Industrial Engineering 22 (2017) 1-13
DOI: 10.22094/joie.2017.274

Development of Productivity Measurement and Analysis Framework for

Manufacturing Companies
Yitagesu Yilma Goshua,*, Daniel Kitawb, Amare Matebuc
a
PhD candidate, Addis Ababa Science and Technology University, Addis Ababa, Ethiopia
b
Professor, Addis Ababa Institute of Technology, Addis Ababa University, Ethiopia
c
Assistant Professor, Bahir Dar University, Bahir Dar, Ethiopia
Received 13 October 2016; Revised 24 November 2016; Accepted 28 January 2017

Abstract
The purpose of this research is to present an alternative approach for measuring productivity in manufacturing companies. To achieve the
research objective, an in-depth investigation into the existing productivity measurement and analysis practices of the case of manufacturing
company has been carried out through both qualitative and quantitative approaches. The investigation result has shown that there are
serious problems in measuring and analyzing productivity at company level. Following the existing practices of analysis result, a new
productivity measurement and analysis framework has been developed. The developed productivity measurement and analysis framework
is found to be simple to understand, detects problem easily and realistically, compatible with modern management systems and tools, and
potentially adaptable to similar manufacturing companies.
Keywords: Productivity measurement, Productivity analysis, Manufacturing company, Manpower.

1. Introduction

Productivity is a key concept, which has been long and analyzing of the system is a pre-requisite. The use of
practiced as a means of companies’ resource utilization appropriate performance and productivity measures and
assessment. To date, at least three field areas have analytical techniques should be the quest of the industries
dominated the field of productivity, namely economics, so that the real and representative of the actual system
industrial engineering, and administration (Grunberg, 2004; performance will be measured. Otherwise, an ultimate
Susan, 2007). These fields of studies have complicated a wrong decision will be practiced.
search for any exact definition of the concept of Therefore, this research focuses on the productivity
productivity. Regardless of the type of production, measurement and analysis of production systems. The
economic or political system, the simple definition of research has been conducted while taking an Ethiopian
productivity, which is the ratio of output to input, remains leather footwear manufacturing case company. As a
the same. The intent of measuring productivity is to come response to traditional and weak productivity measurement
up with a quantified measurement value. The ultimate goal practices observed in the case manufacturing company,
of productivity measurement is, indeed, productivity appropriate and practical productivity measurement
improvement, which involves a combination of increased framework that can detect waste and inefficient resource
effectiveness and a better use of available resources. utilization has been developed.
To this end, though the complexity is there, companies’ Therefore, in this study, the existing measurement problem
self-initiation for improvement is, therefore, a crucial in the company has been investigated and a solution has
element for coping with the highly competitive and been proposed.
alarming global focused threat. This can be ensured through
better performance of the actions run to meet the objectives
of the companies and productivity of the company’s 2. Research Methodology
resources including: input materials, labor, energy,
machineries and available space, among others. This, in The objective of this research is to address issues in
turn, demands the effective, efficient, and integrated use of measuring and analyzing productivity of production system
the production factors so that controlling of the production at company level. For this to come about, an appropriate
system aligning with the goal of the firm will be possible. way has been adequately devised, so that it can ensure its
Nonetheless, to control the production system, measuring outcome as per the desired objective. Productivity

* Corresponding author Email address: [email protected]

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 Yitagesu Yilma Goshu et al./ Development of Productivity...

measurement and analysis literature were considered to three months. The interview was also carried out onsite,
define the concepts and identify gaps in measurement and with the company’s functional managers, division heads,
analysis of manufacturing companies’ productivity. experts and individual workers covering 20 % of the
Following this, investigation of the existing practices using company workers, to investigate the current productivity
a case manufacturing company was carried out. management system of the company. Performing document
The case manufacturing company is a private owned and records review was the fundamental task in this
company and was selected on the basis of its research process. Therefore, the company’s annual
representativeness for Ethiopian medium and large performance reports including production and technique
manufacturing companies. The case company has a annual performance, finance and accounting annual
relatively plentiful data required for this research purpose. performance, human resource development and general
Ease of accessibility for frequent data collection is service annual performance, and marketing and sales annual
attributed to the company with respect to the researcher. performance were collected for different years. Company
The company is also trying to implement different modern profile documents and anniversary bulletins and others,
management tools and systems including bench marking such as the company’s brushers, were among the
and quality management systems. company’s documents reviewed. With these documents and
The required data for this research purpose were collected records, it had been possible to see the existing productivity
through various appropriate methods. Both qualitative and measurement and analysis system of the firm for about 20
quantitative data, which were essential to investigate the years.
current productivity measurement and analysis system of The next decision in the framework of this research was to
the case company, were gathered. The empirical data were investigate the existing productivity measurement and
collected through observation, interview, and review of analysis of the company. Having analyzed the existing
documents and records. productivity measurement and analysis system, its shortfall
Data collected through direct observation were carried out was identified based on some defined criteria; for that
on the company through frequent and whole sites visits, matter, fan improved productivity measurement and
starting from raw material and spare parts storages to analysis framework was proposed.
finished products warehouses and sales shops for nearly

Start

Investigation of the exiting productivity

Introduction
measurement and analysis system
 Research brief introduction
 Briefing research objective and
methodology

Development of productivity
Literature review measurement and analysis Framework
Theoretical and empirical views, concepts  Meeting defined set of
and findings on criteria
 productivity
 production system
 Productivity measurement systems

Concluding research result

Selection of case manufacturing company

 Required data availability
 Representativeness (for large to End
medium-sized footwear Companies)
 Ease of accessibility for frequent data
collection

Data collection
 Interview
 Observation
 Document and records review

Fig. 1. Research Framework

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 Journal of Optimization in Industrial Engineering 22 (2017) 1-13

3. Literature Review understood that managing productivity is a way to assure

the performance of a company as it is the major component
3.1. Productivity and Productivity Management in for the achievement of the competitiveness of an
Manufacturing System organization.
The definition of productivity is simple and complex at the
A manufacturing system is a set of machines, transportation same time, and this is because it is both a technical and
elements, computers, storage buffers and other items used managerial concept (Thomas G. , 2004). Productivity is
together for producing goods (Gershwin, 2005). People are defined and analyzed in various ways, and there is lack of
also part of the system. It is a process that receives various consensus on a specific definition. Various professionals
inputs and transforms it to the desired outputs; it can from different fields of study, including economists,
explain the simple model of a manufacturing system (see accountants, behavioral scientists, engineers, managers,
Fig 2). On the other hand, the least contentious definition of etc., define the term in relation to their own perspectives
productivity is that there is a quantitative relationship (Mohanty & Rastogi, 1986), but even within the same
between output and input (Harold Siow, 2014). The concept discipline, there are multiple definitions. (Tangen, 2005)
of productivity is so vital that it is generally agreed that forwarded the definition of the frequently used terms
productivity represents one of the major areas reflecting the ‘Efficiency’, ‘effectiveness’, ‘productivity’, ‘profitability’
term performance, especially for an organization or a and performance in relative ways (Fig 3).
production unit (Phusavat & Photaranon, 2006; Helo, 2005;
Hoehn, 2003; Sumanth D. , 1985). It is, therefore,

Inputs Transformation Process Outputs

 Men  Product design  Products
 Material  Process planning  Services
 Machine  Production control
 Information  Maintenance
 Capital

Continuous
 Inventory
 Quality
 Cost

Environment
Feedback Information

Fig. 2. Schematic production system (Kumar & Suresh, 2008)

Tangen argues that there is no single accepted view about

the terms, ‘efficiency’ and ‘effectiveness’ in literature, and 3.2. Productivity measurement types and methods
they are frequently confused with one another (Tangen,
2005). The definition of the terms were proposed by several The central part in managing productivity is productivity
authors including (Jan van Ree, 2002; Kurosawa, 1991; measurement. Commonly speaking, productivity
Neely, Gregory, & Platts, 1995; Sink & Tuttle, 1989; measurement is the quantification of both output and input
Sumanth D. , 1994). According to (Sink & Tuttle, Planning resources of a productive system. The goal of productivity
and measurement of in your organisation of the future, measurement is improvement of productivity, which
1989), the terms ‘effectiveness’ and ‘efficiency’ are defined involves a combination
in simple words as ‘doing the right thing’ and ‘doing things of increased effectiveness and a better use of available
right’, respectively. The relationship with the rest of the resources. According to (Kendrick, Productivity Trends in
terms has also been proposed by (Tangen, 2005) in the United States for NBER, 1961), productivity type has been
triple P-model, (Fig 3). The term productivity is classified in economic terms as: 1. Partial Productivity, that
straightforward. Operationally, it is the relation between is, ratio of gross or net output to a single factor input.
output quantity (i.e., correctly produced products which Partial productivity is further divided by the type of input
fulfils their specifications) and input quantity (i.e., all type as: labor productivity, capital productivity, material
of the resources that are consumed in the transformation productivity, and energy productivity; 2. Total Factor
process). It is in the central part of the Triple P-model. Productivity, that is, ratio of gross or net output to total
Profitability is also seen as a relation between output and labour and capital input expressed in monetary equivalents.
input, but it is a monetary relationship in which it includes 3. Total Productivity, which is, ratio of gross or
price factors (i.e., price recovery) on top of productivity
span.

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 Yitagesu Yilma Goshu et al./ Development of Productivity...

The intent of measuring productivity is to come up with a

quantified monitoring index. Empirically, however, both
measurements of outputs and inputs involve aggregation
problem, and this problem alone has situated productivity
measurement in the sphere of complexity (Oyeranti, 2000).
For example, the question of how to aggregate different
products that do not have constant quality or characteristics
constitutes the veil to be removed from output
measurement. In the same notion, the problem of how to
aggregate the different types of inputs into a well-defined
composite unit remains a critical one on the side of input
Fig. 3. The relationship between Performance, profitability and productivity,
the Triple-P Model (Tangen, 2005) measurement (Grunberg, 2004). To solve output and input
aggregation problem, particularly when heterogeneous
net output to total inputs including labour, capital, material, inputs and outputs are combined, some authors have
energy and others, all expressed in monetary equivalents. suggested that inputs should be added up to money values.
The famous Multifactor Productivity Measurement Model The same thing should be done for output (Oyeranti, 2000).
(MFPMM) that comprises nine components developed by
America Centre of Quality and Productivity (Fig 4) is
suggested to be a comprehensive and analytical model to 4. Investigation of the Current Productivity
measure changes in productivity (Wazed & Ahmed, 2008). Measurement and Analysis of the Case Firm
It uses the techniques to break the total variation into price
and productivity effects 4.1. Profile of the case Company

Change in Change in Change in The case manufacturing company is one of Ethiopia’s

output Revenue output Price biggest company, and it is among Africa’s most
quantity (unit price) experienced manufacturers of leather footwear. It is
believed to be the leading Shoe Factory in the country with
Change in
Change in two main business production lines. The main business line
Change in Price and cost
Profits (Price
is Production of variety of shoes including military boots,
Productivity
recovery) civilian work boots, regular shoes including children’s and
ladies shoes, all in genuine leather and supplied to both
Change in Change in local and international markets. The second one is
Change in
input quantity
Costs input Cost production of glue for various purposes, such as sole glue,
(unit cost) vulcanizing glue, and lasting glue, and supplied to local
market only. The case company has also the capacity of
Fig. 4. Nine basic components for the MFPMM producing 536,000 pairs of various shoes and 200,000 kg of
multi-purpose glue in 8 daily working hours’ basis. The
Productivity measurement models can be classified in many
main processes are cutting, stitching, lasting, bottoming,
ways. (Singh, Motwani, & Kumar, 2000) classified them as
and finishing.
index measurement models, linear programming-based
productivity models, and econometric productivity models.
(Sink & Tuttle, Planning and Measurement in Your 4.2. The Case company regarding the Current productivity
Organization of the Future, 1989) classified them as: measurement and analysis system and its shortfall
partial-factor, total-factor and surrogate measures, which
are used by public or private organizations (Wazed & The case manufacturing company has been measuring and
Ahmed, 2008). A review of literature conducted by analyzing the productivity of the firm for long. The
(Muthiah & Huang, 2006) on manufacturing systems company’s productivity is measured only partially as
productivity measurement and improvement also proposed revealed in the 50-year golden anniversary bulletin (Table-
that the models can be classified on the basis of operation 1). Measurement is done for the purpose of the factory
research, control theory, and system analysis. They production growth status evaluation. Together with
identified 15 operational research studies, 2 control productivity, sales volume is used for the company’s
theories, and 7 system analysis-based models. Having these overall performance evaluation (Table - 1). Productivity in
different and various types of models creates confusion to the company is expressed as the ratio of the number of total
select and use the appropriate technique so that practitioners number of pairs of shoes produced annually to the total
or managers cannot use enthusiastically in their number of employees of the firm.
improvement decision processes in a simple and realistic
Total number of annually
manner.
produced pairs of shoes
Productivity =
Total number of employees

4
 Journal of Optimization in Industrial Engineering 22 (2017) 1-13

This index is similar to Mills's index (Sumanth D. , 1985) distribution, retail trade, defense, construction industry,
developed for measuring productivity at industry level and energy industry, and office and administration industries
given as: (Sumanth, 1985).
The measured productivity index may be used as to be
Mills Productivity Index=Output/(Number of wage earners) indicative of productivity at industry level where
considering other input factors, such as material, capital,
This productivity measurement model, however, has got and energy, is complex.
limitations, in that it cannot represent the company’s ii. The productivity Measurement system lacks
productivity; it is not complete and inclusive and does not completeness
pinpoint problematic areas and opportunities for By completeness, we mean the thoroughness with which
improvement as discussed in detail in the subsequent outputs or results delivered and all inputs, or resources
sections. consumed, are measured and included in the productivity
ratio (Wazed & Ahmed, 2008). In this regard, the existing
i. Mills’s index approach was developed for Industry
productivity measurement system is not complete. The
level of productivity measurement and analysis
company’s major outputs are different types of models of
Primarily, Mills developed this particular index approach pairs of shoes and glues. The inputs are materials, labor,
for measuring productivity index at industry level such as energy, machinery, equipment, and other utilities and
manufacturing industry, services, federal government facilities.
agencies, local government and city, transportation and
Table 1
Manpower, total product output, sales volume, and productivity of the case company (Source: 50 years the company’s anniversary bulletin, company annual
performances and own computations)
S/N Fiscal Manpower Product output Sales amount Productivity
year (Number), X (piece in ‘000), Y (piece ‘000) y⁄x
1 1980/1981 523 673 660 1.3
2 1981/1982 578 714 665 1.2
3 1982/1983 559 729 739 1.3
4 1983/1984 606 730 662 1.2
5 1984/1985 624 745 668 1.2
6 1985/1986 647 716 695 1.1
7 1986/1987 681 763 882 1.1
8 1987/1988 716 892 877 1.2
9 1988/1989 718 906 949 1.3
10 1989/1990 729 919 918 1.3
11 1990/1991 757 749 740 1.0
12 1991/1992 764 449 410 0.6
13 1992/1993 745 500 501 0.7
14 1993/1994 721 427 436 0.6
15 1994/1995 726 475 452 0.7
16 1995/1996 703 456 461 0.6
17 1996/1997 677 375 369 0.6
18 1997/1998 647 493 520 0.8
20 2007/08 512 628 - 1.2
21 2008/09 434 519 - 1.1

Nevertheless, considering the company’s productivity to the local sales’ amount of the organization as observed in
measurement, only the number of pairs of shoes produced the three consecutive budget years (Table 2), namely
annually as an output and the total workforce the company 2007/08, 2008/09, and 2009/10. Yet, this considerable
employed is taken into account (Table 1). The glue product output of the company was not considered in the
production is neglected from the productivity analysis. The current productivity measurement and analysis system.
glue production is, however, one of the major product In a similar fashion, in the existing productivity
categories of the company. The glue production consists of measurement of the company, it has been observed that
Polyurethane synthetic plastic glue, sole Glue, last glue, and there is incompleteness in considering all factors of
vulcanizing glue. The glue production contributes to an production of the company. These include the raw
average of 45917 kg and 1,141,600 birr of glue as input to materials, machineries, energy and other utilities used in
produce the company shoe products. Additionally, it producing the final product of the firm. These input factors
contributes 1,144,000, 105,000, and 78,000 Ethiopian Birr have key impact on the productivity of the organization.

5
 Yitagesu Yilma Goshu et al./ Development of Productivity...

Table 2
Domestic and export Sales for three consecutive fiscal years (Source: Annual financial performance report of the case company)
2007/08 2008/09 2009/10
S/
Types of product Piece Unit Value Unit Unit
N Piece (‘000) Value (‘000) Piece (‘000) Value (‘000)
(‘000) price (‘000) price price
Military
1 187 120.14 22445 301 136.35 41023 168 143.2254 24113
Local market
Military
2 105 93.9 9859 28 95.14 2664 45 206.4432 9375
Export market
3 Working 142 90.52 12848 134 105.96 14234 131 110.5775 14529
4 Civil 171 104.54 17904 42 112.89 4700 44 102.8216 4526
5 Ladies 9 74.66 674 16 98.51 1618 13 93.19764 1218
6 Children 5 54.76 260 1.4 72.58 98 5 69.59123 349
Total 619 63990 523 64337 407 54110
7 Glue 31 36.73 1144 3 38.1 105 2 41.80064 78
Grand Total 65134 64442 54188

Ignoring these factors while measuring productivity of the produced per unit of labor utilized in the given period of
firm will, in fact, result in erroneous effect and misdirect time.
the company’s improvement effort. This impact was Secondly, the company is measuring its productivity
substantiated in 2007/08 and 2008/09. According to the without considering its product mix. Besides the glue
existing productivity measurement and analysis of the production, the company is producing different types of
company, the productivity of the firm was 1.2 and 1.1 pairs shoes products. Each product has got its own labor
of shoes per employ in 2007/08 and 2008/09, respectively requirement depending upon the process they demand for
(Table 1). This result indicates that the productivity of the production. Moreover, the products’ proportion is variable
firm in 2007/08 fiscal year is better than that of 2008/09. from year to year. In 2007/08, for instance, direct labor
The management of the company, hence, is expected to try hour’s cost per unit for the local market such as military
to identify the success factors of the higher productivity shoe, gents, working, military export shoe, lady shoes and
year in the case of 2008/09 and adopt them to good use in children shoes were 9.36, 6.73, 7.1, 7.21, 12.15, and 8.95
the subsequent years. Ethiopian Birr, respectively (Fig 5). Correspondingly, the
iii. The productivity measurement and analysis system lack selling unit price of the products is highly variable (Fig 6).
comparability This indicates that the resource requirement and value of
The existing productivity measurement system has got the products are variable to one another. On the other hand,
comparability problem. The company needs to identify its the percentage product composition of the firm varies from
productivity growth by defining a base year, and based on year to year (Fig 7). As a result, equal number of either of
that the index will be developed to determine whether it is the different products will not have equal resource
growing or lagging in productivity with time. The existing requirement or value. This is analogous to considering
productivity measurement and analysis system, however, having an equal number of BMW as an expensive
measures productivity only as the rate of pairs of shoes automobile and a Baby Fiat car as an economy model
(though it seems overstated), as if

18
Labour hour unit price

16 15.34
14
12 12.51
10 10.57
9.17 8.74 9.15
8
6
4
2
0
Milittary local Gents Working Military Ladies Children
Export
shoe Product type

unit price(2007/08) unit price(2008/09)

Fig. 5. Direct labour hour unit price requirement for each shoe product types (source: Annual financial performance report of the case company and own
computation)

they had equal values and usability for the company This percentage was lowered to 35.4 % in 2008/09. 24.23
performance or productivity evaluation measurement % difference out of the total number of pairs of shoes the
system. Moreover, the percentage in the number of Military company could produce in the succeeding period was
Shoes produced for local market was 59.63 % in 2007/08. replaced by other products which have got different

6
 Journal of Optimization in Industrial Engineering 22 (2017) 1-13

resource requirement and value. Hence, calculating and not include at least the activities, role, and responsibility of
comparing the companies productivity towards the number marketing and sales workers of the firm. One cannot be
of the products only will result in erroneous conclusion. sure that whether the company is selling its products or not
with regard to this productivity measurement result.
iv. The productivity Measurement system is not inclusive
Moreover, the sales workers of the company, being
By inclusiveness, we mean a system covering all activities summed as labour input, are evaluated for their
of a firm (Wazed & Ahmed, 2008). Hence, another productiveness for what they are not working. Their role is
limitation of the current productivity measurement system to sell the product and facilitate the sales of the company,
is that it is not inclusive. The number of pairs of shoes but the number of pairs of shoes used as an output for
leaving the production floor and stored in the company’s productivity measurement is considered before it is sold.
finished product stores or sales warehouses is considered as
an output for measuring productivity. This, however, does

250
200
Unit Price in Birr

150
100
50
0
Military Military working civil ladies children
Local Export
market market
Unit price (2007/08)
Product Type Unit price (2008/09)
Unit price (2009/10)

Fig. 6. Unit price of shoe products (source: Annual financial performance report of the case Company and own computation)

v. Limitation on identifying and detecting problematic company could not produce 108 hours and 13 minutes from
areas and improvement opportunities the total regular working days (241.5 days) of the company,
and this accounts for 31,293 pairs of shoes’ loss of
The productivity measurement is weak in identifying or
production. The fiscal year, however, had a productivity of
prioritizing problematic areas where improvement actions
1.2 (that is, 1200 pair of shoes per a worker per a year) with
are going to be taken. This can be demonstrated by the
the current productivity measurement and analysis method,
material inputs’ shortage created and the substantial loss of
and it is assumed to have better performance when
production interruption observed in the 2008/09 fiscal year.
compared to that of many of the production years of the
Due to rubber shortage, the company could not produce 77,
company (Table 1). These major problems could not be
177 pairs of shoes within 44 and half days. This accounts
detected with the current productivity measurement
for 14.5 % from the total number of pairs of shoes produced
analysis.
in the year. In a similar manner, due to power outage, the
70.00
60.00 59.63
50.00
40.00
35.40
30.00
26.68 25.02
20.00 20.88
17.01
10.00
6.52 3.90
2.87 1.59
0.00 0.10
Military Military working civil ladies children
Local Export
market market
Product mix percentage 2007/08

Fig. 7. Shoes product types composition percentage (source: Annual financial performance report of the case Company and own computation)

7
 Yitagesu Yilma Goshu et al./ Development of Productivity...

Accordingly, in this research, the authors suggest that prior

to carrying out productivity measurement and analysis
5. Development of Productivity Measurement and activities, development of framework that defines how the
Analysis Methodology productivity measurement and analysis is to be pursued and
defining the level at which productivity analysis and
Due to the high level and variety of productivity measurement is going to be carried out would be important
applications, the use and selection of appropriate issues to take into account.
measurement techniques and interpretation of the As noted so far, it is evident that the application of
productivity analysis makes difficult. As a result, the productivity concept ranges from individual or working
concept of productivity measurement and analysis become groups of a company to international economy level. In
vague for managers to use appropriately in their company. addition, many professionals and practitioners, including
Whatever productivity measurement approach pursued, economists, administrators, managers, politicians and
such as frontier or non-frontier, parametric or non- industrial engineers, utilize the concept for their areas of
parametric, dual or primal to use, understanding the concept work and study. Considering and dealing with all levels of
of productivity and its measurement at the desired level productivity measurement and analysis is out of the scope
becomes a crucial element. Productivity measurement and of this research. Consequently, the scope of this research is
analysis can be done at individual level, working group, restricted to deal with productivity measurement and
process or subsystem level, firm level, industry level, analysis at company level; a precise, simple and realistic
sectoral level, national or international economy levels methodology for company level productivity measurement
(OECD, 2001; Sumanth D. , 1985; Thomas & Baron, and analysis is developed and discussed in detail.
1994). Hence, a productivity measurement and analysis framework
Afterwards, once the level of analysis is determined, (Figure- 8) has been developed. The framework guides and
defining the output and input types and characteristics of defines how the measurement and analysis process can be
the production function or system under quest becomes, pursued at company level which will be worth considering.
however, an important step before measurement and This, in fact, will reduce prejudice in implementation of
analysis techniques are dealt with. Because the productivity measurement and analysis system and will
characteristics of the inputs and outputs are so diverse for make measurement continuous and consistent. The
different types of production system and the concept of methodology comprises the following components:
production is applicable to different production types, such 1. Definition of productivity measurement and analysis
as manufacturing or service, small or big, careful level
considerations for selection of productivity measurement 2. Definitions and Identification of the objectives and
technique, analysis and result interpretation need to be goals at the specified performance measurement
searched for. First and foremost, the outputs are usually level
expressed in different forms to the inputs. Outputs are often 3. Identification and determination of input and output
measured in physical words (Groover, 2001) such as units parameters at the defined level
(e.g., number of bottles produced, tones of sugar, 4. Productivity measurement model design and
megawatts of electricity, etc.) or values, such as Ethiopian development
birr. However the inputs are usually physically different 5. Weight assignment and Development of productivity
and include measures of people (numbers, skills, hours index for the defined level
worked or costs) or materials (tonnages and costs). 6. Result analysis and interpretation
Secondly, the ratio by itself tells us little about 7. Implementation and Model maintenance
performance. A ratio of 0.8 is not as such important, unless As commonly known, a business main objective is to make
it is compared with previous time periods, or a benchmark, profit (Thomas & Baron, 1994). Though some argue that
or the potential productivity of the operation unit which is definition of a business in terms of profit making is narrow.
considered to be target. Third, many different ratios can be At the same time, goals and standards are necessary.
used (both financial and nonfinancial, that can be used) to Otherwise, there is no logical basis for choosing what to
create productivity ratios. measure, what decisions to make, or what actions to take.
Another problem associated with productivity measurement Goals can be management directives or can be set in
and analysis, though mainly manifested in productivity response to customer needs or complaints. For each critical
analysis at macro and micro levels (the impact is reduced at activity or process selected for measurement, it is necessary
nano-level) is that the productivity change obtained from to link the performance or productivity measurement with
the residual from production function is not only affected the goal of the firm. Consequently, business firms mobilize
by input factors, but also it can be affected by economy of resources and capitals and adopt a conversion process to get
scale, technical capability, and quality of production factors the desired output by which the profit target is realized.
of a production system (Thomas & Baron, 1994). This is Increased profitability is obtained through increased
why the productivity concept and its practical and proper productivity or price recovery, among others (see Fig 4).
application in companies remain vague. On the other hand, to maintain and obtain the required
growth level of productivity in the company, the concept

8
 Journal of Optimization in Industrial Engineering 22 (2017) 1-13

and application of productivity management should be  And establishment, implementation and

given emphasis. Consequently, the success of a productivity maintenance of productivity programs
management process depends upon high degree of
involvement and participation by all levels of management are among the roles of management for effective
and employees. Because the role of management in productivity measurement and analysis initiatives in a
productivity decline is a major factor (Sumanth D. , 1985), company.
the need and commitment of managers towards productivity As a result, the productivity measurement and analysis
measurement and analysis have to be established. result will be a shared language; employees, managers,
 Assignment of dedicated productivity function or and other stakeholders or parties will collaborate towards
champions, the measurement, growth, and improvement of the
 creation of awareness on the importance of productivity of the company.
productivity,

Need for productivity Management commitment

 Ensuring resource
measurement and
analysis availability
 creating Awareness

Determining productivity
measurement level

Identifying and defining the

vision, mission and values of the
firm.

Identifying input Identifying Output

factors/parameters parameters

Developing productivity
measurement models

Selecting base period Weight assignment

Developing productivity index for the defined level

Result analysis and interpretation

Verifying analysis result

appropriateness
No
Yes
Developing improvement actions

Ok
Methodology implementation
maintenance

Fig. 8. Company level productivity measurement and analysis methodology proposed

9
 Yitagesu Yilma Goshu et al./ Development of Productivity...

5.1. Defining productivity measurement and analysis judgments and costly mistakes (Sumanth D. , 1985).
level Therefore, the use of partial productivity measures, such
as labor productivity or capital productivity, may
Productivity measurement and analysis of a company has misrepresent the level of integrated productivity and
traditionally been determined by employing productivity misdirect the improvement efforts (Thomas & Baron,
models such as Kendrick-Creamer (Kendrick & Creamer, 1994; Liang & Liaw, 2006; Sumanth D. , 1985). It would
Measuring Company ProductiVity: Handbook with Case be very important to investigate the overall and specific
Studies, 1965), Craig-Harris (Craig & Harris, 1973), and improvement potential areas to obtain the benefit of
David J. Sumanth (Sumanth, 1985) in which productivity productivity analysis. At the same time, measurement of
index is developed for either total productivity, total productivity and analysis at a company level can be
factor productivity or partial productivity. Following this approached systematically to make more realistic,
approach, these productivity measurements are used by complete, and simple evaluation that can detect problems
companies for monitoring and development of the daily and growth of the company and can go with modern
operations and long-term strategic considerations. management tools and systems whose companies
The productivity index is measured usually based on nowadays implement improved performance and
values only or physical counts of the outputs and input competitiveness.
factor or factors considered (Grunberg, 2004). This, Hence, measuring and analyzing productivity by
however, has got limitation, in that identification of employing system approach is deemed important. First,
problems at the specified point in the firm is difficult. If this calls for defining the productivity measurement unit
materials as input factors, for example, are identified or level in the company. The potential productivity
poorly productive, since the productivity of materials for measurement units in a typical production firm could be
a product is affected by different parties and points in the individuals, working groups, processes, functions and the
firm including activities, such as supplier selection, organization as a whole (Sumanth D. , 1985; Thomas &
proper storage, proper handling, appropriate sourcing with Baron, 1994). Since labour productivity at individual
the right quality and price, correct processing and proper level is usually estimated from the whole output, physical
checking, testing and verifications, taking improvement or value added on average base, considering individuals
actions demand further investigation works. This lowers as a productivity measurement unit in a firm could either
management enthusiasm to measure productivity meant be costly or biased result. Rather, this issue could be
for improvement. The use of total productivity addressed for further investigation and productivity
measurement or partial productivity has only got improvement action by employing different productivity
inadequacy. It would be better to investigate the total improvement tools including: motivational methods based
productivity and partial productivity measurements used on industrial psychologists and performance appraisals for
separately at this point. salary structure/workload analysis extended by human
Usually, the total productivity at company level is resource specialists, and piece-rate/standard times
measured by taking the ratio of the total output in determined by industrial engineers (Wazed & Ahmed,
physical, invoiced sold goods, or monetary terms to 2008). Use of process level as productivity measurement
monetary value of total or aggregate input factors. Its unit will, therefore, be a very important level for
potential drawbacks could be explained hereunder. productivity measurement within a firm because:
 The interaction between each input and output  It manages to identify the problematic area to take
separately is not shown using total factor productivity improvement measurement action with little
measurement only. confusion, time, and cost
 Since the values of the input factors (capital,  It also makes the productivity measurement and
material, labour, energy, and other factors) are analysis system:
aggregated altogether, prioritizing improvement o be simple and easily acceptable by managers
action (at what point, that is, function, working group o easily integrated with the modern management
or process, and on what factor or factors to take system tools and philosophies
primarily) is difficult. o able to compare the effectiveness of the
 It is too broad and difficult to be used as a tool for management system tools with that of the
improving specific and potential areas. As a result, productivity measurement and analysis result
managers become reluctant towards the productivity o enable productivity level comparison among
measurement index and analysis result. processes in the firm
Similarly, at the company level, the application of a single  makes branches, functional and processes
factor productivity measurement only cannot satisfy the benchmarking possible
objective of productivity. One of the serious dangers of However, the use of process level productivity
relying exclusively on partial productivity measures or on management cannot tell us the overall organization
a single input factor lies in overemphasizing one input productivity level and identify its growth. Additional
factor to the extent that the effect of the other inputs is productivity measurement unit should be employed to
underestimated or even ignored, leading to erroneous have the entire productivity picture of the company to

10
 Journal of Optimization in Industrial Engineering 22 (2017) 1-13

know both the productivity level and growth of the firm.  Identify or prioritize the problematic areas and
This urges us to measure the productivity of the firm as a determine the solutions for improving productivity in
unit. Therefore, measurement and analysis of a such areas resulting in identification of potential
company’s productivity will essentially be carried out at improvements
both process and company levels.  Ensure its completeness; Completeness refers to the
thoroughness with which outputs or result delivered
5.2. Definition and identification of the company’s and all inputs, or resources consumed, are measured
mission and values and included in the productivity ratio.
 Should be inclusive, including all activities of
All activities in a firm are carried out to meet its goal or the company
objectives. The activities are organized into processes  Cost-effectiveness
where each collectively contributes to the fulfillment of  Reduced degree of measurement error and
the company’s strategic goal. The synergic effect of the productivity result in misinterpretations
multi-process efforts of the company ultimately valued  Ability to decide how to reallocate resources
the growth of the firm. Accordingly, each productivity  determining how well previously established
measurement and analysis level effort should be related to goals have been met
the company’s missions and values and be implemented
for the achievement and validation of these targets. By 5.5. Weight assignment and development of productivity
doing so, it would be possible to increase the power of the index
calculated productivity index to detect potential
improvement areas and facilitate the growth and Apparently, all activities, processes, and functions of an
competitiveness of the company.
organization are designed to exist in the firm to meet the
organization goals and objectives. Those processes which
5.3. Identification and determination of input and output have no connection directly or indirectly to the goals and
parameters objectives of the firm need to be eliminated and should
not be allowed to exist in the firm. Similarly, only the
As discussed in the literature review part of the research, desired input factors should be assembled and those
the simple definition of productivity is the ratio of output production factors which have no relation are not ideally
to input. The nature and characteristic of the inputs and collected within the firm. Hence, all processes and input
outputs used for productivity analysis of different factors of the firm are assumed to be essential for the
production system is, however, different. Now, it is time fulfillment of its targets. However, not all processes have
to discuss issues pertaining to outputs and inputs in equal significance for the firm. The relative significance
relation to productivity measurement at process level. It of each factor and processes varies from one another with
can be viewed from the following perspectives that: respect to their value and the goal of the organization
 a manufacturing company is composed of definable (Sumanth D. , 1985). As a result, prioritizing and
and interrelated processes which are value added; weighting system is important.
 a process has got its input and output and Accordingly, the index which will be developed for the
productivity is the ratio of output to input; processes of the firm and their factors of transformation
 Lower level outputs can be established from the final will have a different weighted value for the calculation of
or organizational output (Thomas & Baron, 1994). the processes and the firm’s total productivity. To this
end, depending on the processes and input factors of
5.4. Productivity measurement model selection or design significance level, the following weighting criteria
(Sahay, 2005; Sumanth D. , 1985) are worthy of use:
Once having defined the level at which productivity 1. unit labor costs;
measurement and analysis should be carried out, the 2. unit value added;
selection of appropriate productivity measurement model 3. unit value;
will become the subsequent task. The productivity 4. degree of alignment with company objectives;
measurement and analysis techniques should define the 5. contribution analysis by improvement of individual
criteria for fulfillment. Hence, depending on the objective factors;
or goal of the productivity measurement and analysis for 6. needs and scope for improvement;
the predefined level, setting appropriate productivity 7. characteristics and degree of variability of factors
measurement and analysis criteria will ease the bias on from year to year.
what type of productivity measurement technique or These weighing criteria are used for assigning weighting
model to select or design. Consequently, productivity value at the different stages of the productivity index
measurement analysis should commonly fulfill the calculation. Once experts and management of the firm
following criteria or objectives (Thomas & Baron, 1994; discuss the significance of the processes and its input
OECD, 2001): factors and output with regard to the achievement of the
 Represent the Company productivity.

11
 Yitagesu Yilma Goshu et al./ Development of Productivity...

company’s goals and objectives directly or as cascaded 5.7. Result verification and methodology maintenance
from it, they will then rate and give values based on one
or more of the weighing criteria enumerated here above. The appropriateness of the methodology needs to be
Once the weight assignment is defined, there remains verified against the goal and objective of the firm. This
working for long period, and probably some changes should be a continuous activity. Of course, once the
along with little alignment with regard to the weight productivity measurement and analysis methodology has
assignment might be required. been established in the firm, it will be maintained for
Following weight assignment, base period will be longer time with little adjustment as required.
selected. Base period is a reference period with which the Productivity programs will be one functional aspect of the
productivity of the current period is compared for its firm through which company’s objectives and goals are
growth or decline. It can be any normal period in which ensured to meet. The productivity measurement
the production was not much different from the average. methodology will assure the accountability of processes
A period in which a company laid off workers because of owners, and consistent implementation of the system will
unprecedented shortages of raw materials, for example, assure the continuous improvement of the company’s
cannot be considered as a base period. Thus, the base productivity. This, in turn, results in better growth and
period can be defined by (Sahay, 2005; Sumanth D. , competitiveness of the firm.
1985):
1. Selecting an average period in which any
unprecedented problems are not observed; 6. Conclusion
2. The best value of factors in past three years;
3. The value of factors in the immediate past year; Companies should measure their actions and results to
4. The average value of the factor in previous three control, because without controlling, taking improvement
years; action is usually impossible. When they perform the
5. The moving average value of the factor in previous measurements, they can understand and control their
three years; resources in a better way. This helps them to make a
6. The productivity of the current year to be compared better, realistic and fact-based decision for improvement,
with a fictional value of productivity (best) thereby assuring a better competitive position.
calculated by considering the best value of factors Productivity is one of the important company
in the last three years. performance measurement constructs that enables the
The base period for the weights is changed periodically to company to identify the degree of how much they use
take changing economic conditions into account with the their resources to produce or get more products or
sub periods under study (Sumanth D. , 1985). services.
However, as observed in the case manufacturing
5.6. Result analysis and interpretation company, there are serious problems in measuring and
analyzing productivity at company level in Ethiopia. The
The numbers and ratios or indexes resulting from a measurement models (Table-1) put in place lacks
productivity measurement model give way to nothing completeness, inclusiveness, company objective
more than a set of warning signs. Hence, based on results alignment, comparability, ability to detect problematic
of the productivity measurement obtained in the and/or improvement opportunity areas, and the ability to
preceding steps, analysis of the organization productivity reduce degree of measurement error and misinterpretation
performance will be carried out. The analysis covers the of productivity result. This research, hence, focuses on the
overall assessment of the company’s productivity level productivity measurement and analysis and with the
and growth including identifications of the significance objective defining and devising a methodology (Figure-8)
and severity of the current period performance. that enables production companies to measure and
Comparison and evaluation of the result will yield analyze their productivity to increase global
identification and definition of the major productivity competitiveness at the firm level. Accordingly,
problems of the firm that could be prioritized and methodology which enables to measure and analyze
management will give attention for corrective action. productivity at company level has been developed. The
Appropriate analytical tools, including histograms, Pareto methodology integrates the mission, objectives, and
chart, and bar graphs, could be beneficial, especially for values of the company. It also bridges the shortcomings
proper presentation of the analysis result. Therefore, of the case company’s productivity measurement and
management can easily visualize the productivity analysis system currently put in place. The measurement
problems and prompt to take productivity improvement framework proposed is simple to understand, detects
actions as the required level. problem easily and realistically, and can be adaptable to
similar manufacturing firms.

12
 Journal of Optimization in Industrial Engineering 22 (2017) 1-13

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This article can be cited: Yilma Goshua, Y., Kitawb, D. & Matebuc, A. (2017). Development of Productivity
Measurement and Analysis Framework for Manufacturing Companies. Journal of Optimization in Industrial
Engineering.10 (22), 1-13.

URL: http://qjie.ir/article_274.html
DOI: 10.22094/joie.2017.274

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