PRODUCTIVITY MEASUREMENT

Productivity implies development of an attitude of mind and a constant urge to find better, cheaper, quicker,
easier and safe ways of doing a job manufacturing an article and providing a service. Since the beginning of the
industrial era, the manufacturers or producers have been facing the problem of how to use the available resources
and factors of production to the best of their ability and capacity so as to get the maximum output with the
minimum cost of production. Industrial revolution, social, technological and scientific developments, changes in
economic systems is the various efforts made in this direction and the process of development and changes is
still on. New and new machines, methods and technology are being invented and used in the industrial field to
minimise the wastage of men, materials and machines. It is all to increase the productivity.

Productivity is the quality or state of being productive. It is some relationship of outputs to inputs. It is a
concept that guides the management of a production system, and measures its success. It is the quality that
indicates how well labour, capital, materials and energy are utilised. Productivity improvement is sought
everywhere because it supports a higher standard of living, helps control inflation, and contributes towards a
stronger national economy.

Productivity is an indicator reflecting the changes in the performance of the enterprise and having some sort of
input-output comparisons relating to various activities of an organisation. It also facilitates the management to
control and plan its future operations of the enterprise.

A productivity index is a device of expressing the ratio between outputs and the inputs of the resources
numerically. These indices are prepared by comparing the volume of output of goods with the labour employed
on that job or the profits of the firm with the capital employed. If the comparison shows an upward trend in
indices, it is a sign of improved or better productivity or vice-versa. The productivity is a measure of how much
input is required to achieve a given output.

Symbolically: p = O where
I
P = Productivity;
O = Output,
I = Input.

Measurement of Productivity:
The productivity or the performance of various input and output factors can be measured in many ways. These measures
are mainly based on the following two criteria:
(i) change in output per unit of input: indicates the change in the performance of corresponding input during the
given period, e.g., change in output per worker or per man-hour will signify the change in performance of
labour.
(ii) change in input per unit of output: during the given period signifies the change in the performance of the
corresponding input factor, e.g., change in man-hour or workers’ per unit of output will also indicate the
change in the performance of the labour input.

Productivity measurement implies the use of standards set for each input factor in terms of output. In circumstances
where standards are not in use, productivity can be measured only when the output is converted into ‘units or work’
which is defined as the amount of work that can be performed by one unit of input. Thus productivity can be
measured by dividing the output by the performance of each input factor taken together.

Some of the well-known indices of productivity are given below:

(A) Man-hour output: The most widely used index of productivity is to work out the output per man- hour it can be
put as

Productivity = units of output / Total man-hours

 (B) Productivity ratio: The rate of return on capital employed is a valuable and widely used guide to many types of
business decisions. This ratio of profit to capital employed is a valuable means of measuring the performance of
divisions, sections, plants, products and other components of a business, and can be calculated as—

Productivity = Net Profit / Capital employed

(C) Use of financial ratios: There are many situations when time standards cannot be set and therefore, it is very
difficult in such cases to measure the productivity by a direct method. In these cases, financial ratios can be used
to measure the productivity by using its sales turn-over. But ‘added value’ is a more useful approach for
measuring productivity. ‘Added value’ means output - inputs. The most common financial ratio of productivity is—

Productivity = Added Value / Labour Costs

Productivity = added Value / conversion costs

The first ratio gives the financial productivity of labour force and the second ratio gives the financial productivity
of all the resources of the company put together.

(D) Other useful Measures: There are many other useful productivity ratios to measure the productivity of various
input factors. These are: Value of output of goods or services

(i) Manpower Productivity = Value of output of goods or services

No. of workers or man hours used

(ii) Materials Productivity = Value of output of goods or services

Units (or cost) of materials used

(iii) Capital Productivity = Value of output of goods or services

capital assets employed
(iv) Energy Productivity = Value of output of goods or services
Units (or cost) of energy used

A combined measure of productivity can be taken as

Productivity = Value of output of goods or services

Values of (labour+ capital +materials+energy+others inputs)

There may be other input factors such as insurance, taxes, advertising etc. and their productivity can be measured
likewise. Each measure requires different kinds of data and only rarely such information is available for all commodities in
an industry on continuous basis.

Example:

Collins Title Ltd. Want to evaluate its labor and multifactor productivity with a new computerized title search system. The
company has a staff of four, each working 8 hours per day for (for a payroll cost of $604/day) and overhead expenses of
$400 per day. Collins processes and closes on 8 titles each day. The new computerized title-search system will allow the
processing of 14 titles per day. Although the staff, their work hours, and pay are the same, the overhead expenses are now
$800 per day.

Solution:
Labor productivity with the old system: 8 titles per day
32 labor-hours

=.25 titles per labor-hour

 Labor productivity with the new system: 14 titles per day
32 labor-hours

= .4375 titles per labor-hour

Multifactor productivity with the old system: 8 titles per day

$640 + 400

= .0077 title per dollar

Multifactor productivity with the new system: 14 titles per day

$640 + 800
= .0097 titles per dollar

Labor productivity has increased has increased from .25 to .4375.

The change is (.4375 - .25) / .25= 0.75 or a 75% increase in labor productivity.

Multifactor productivity has increased from .0077 to .0097.

This change is (.0097 -. 0077) / .0077 = 0.26 or 26% increase in multifactor productivity

Example 2

Chuck Sox makes wooden boxes in which to shop motorcycles. Chuck and his three employees invest a total of 40 hours
per day making the 120 boxes.

a. What is their productivity?

b. Chuck and his employees have discussed redesigning the process to improve efficiency. If they can increase the rate to
125 per day, what will be their new productivity?
c. What will be their unit increase in productivity per hour?
d. What will be their percentage change in productivity

ANSWER :

a. Productivity = Output = 120 boxes = 3boxes per hr

Input Used 40hrs

b. NEW Productivity = Output = 125 boxes = 3.13boxes per hr

Input Used 40hrs

c. 3boxes per hr-3.13boxes per hr = 0.13 boxes per hr

d. (3boxes per hr-3.13boxes per hr) / 3.13boxes per hr = 4.15% increase in boxes per hr