PRODUCTIVITY MANAGEMENT AND

RE-ENGINEERING

Unit – 1
PRODUCTIVITY

Dr. P. Malliga ,
Professor
Department of Industrial Engineering
College of Engineering
Anna University
What is Productivity
 The ratio between “Output of Work” and “Input of
resources” used in the process of creating wealth. –
ILO
 Productivity (within a defined time and good
Output quality)
Land
people
capital
facilities
Input Goods

equipment Process and

services
tools
energy
materials Waste
information (Muda)

 It is the ratio between the amount produced and

amount of resources used in production
 This definition applies to an industry or an economy
as a whole.
Basic Concept And Meaning
 Productivity is one measure of the effective use of
resources within an organization, industry, or nation.

 The classical productivity definition measures outputs

relative to the inputs needed to produce them. That is,
productivity is defined as the number of output units per
unit of input

Output
productivi ty 
Input
• This definition applies to an enterprise, an industry
or an economy as a whole.
• Productivity is simply the ratio between the
amount produced and amount of resources used in
the course of production.
• These resources can be: (Unit of resources is in
brackets.)
1. Land (Hectares)
2. Material (Metric Tonne)
3. Plant and Machinery (Machine Hours)
4. People (Man Hour)
5. Capital (Rupees)
Productivity Improvement

Productivity Improvement (PI) is the result of

managing and intervening in transformation
or work processes.
PI will occur if:

O O O O O
I I I I I
Measuring Productivity
 Static:
P=O/I in a given period of time (t). Useful for
benchmarking purposes.
 Dynamic: p(1)=O(1)/I(1); p(2)=O(2)/I(2); then
p(2)/p(1) yields a dimensionless index that reflects
change in productivity between periods.
((p(2)-p(1))/p(1))*100 yields the percentage change
between periods.
Measuring Productivity (Continued)
 Partial-Factor: Uses a single “I” factor; e.g.,
output/labor-hour, sales/employee
 Multi-Factor: Uses more than one “I” factor; e.g.
output/direct costs (labor, materials, and overhead).
 Total-Factor: Uses all “I” factors.
(Note: Total-Factor captures “trade-offs” between
input factors.)
Measurement Problems

 Multiple products/services (aggregation-O)

 Varied categories, types, and levels of input
resources (aggregation-I)
 Price/cost changes of outputs & inputs
 Redesigned products, services, processes
 “Hard-to-measure” factors (e.g., quality)
Application of Productivity Measures

 Individual level
 Group level
 Department level
 Corporate level
 National level
 Global level
Factors affecting productivity
 Controllable or internal factors
◦ Product – extent to which it meets requirements
◦ Plant and equipment – availability and reduction of idle
time
◦ Technology – automation
◦ Material and energy – reduce material and energy
consumption
◦ Human factors – motivation and training
◦ Work methods – improvement in the way of doing things
◦ Management style – communication, policy and procedure

 Uncontrollable or external factors

◦ Natural resources – manpower land and raw materials
◦ Government and infrastructure – government norms.
Transport, power, etc.
 Difference between productivity and performance

Productivity Performance

 Output in relation to  Considers output alone

input  Performance Index
 Productivity = Output
= Actual work done
Input expected or standard work
Eg:

It takes 3mts. Of cloth to make a coat. In a day Prashant

is expected to make 50 coats. He makes 40 coats from
111mts. of cloth.

Performance Index = 40/50 * 100 = 80%

Prashant’s productivity = 120/111*100 =108%
Cloth productivity = 40/111=0.36 coats/mt.
Benefits of increased productivity
 To workers:
◦ Yields more wages
◦ Better standard of living
◦ Improved morale
◦ Satisfied worker
◦ Resulting into goodwill
 To the organisation:
◦ Higher production of goods and services.
◦ Reduction in costs
◦ High turnover, More profits and dividends
◦ Cheaper goods to customers
◦ Revenue to government
◦ Wide spread markets and overall prosperity
To the nation
◦ High employment opportunities
◦ Increased Gross National Produce
◦ Improved utilization of resources
◦ Expansion in international markets

To Consumers and Society in General

◦ Increase in supply of quality goods and
services
◦ Reasonable cost of goods and services
◦ Greater customer satisfaction
Partial Productivity
 Measurement of partial productivity refers to the
measurement solutions which do not meet the
requirements of total productivity measurement, yet,
being practicable as indicators of total productivity.
 In practice, measurement in production means measures
of partial productivity.

Total Factor Productivity

• It is the ratio of net output to the sum of associated

labor and capital (factor) inputs.

• By net output,‖ we mean total output minus

intermediate goods and services purchased.
Total Productivity
 It is the ratio of total output to the sum of all input
factors.
 Thus, a total productivity measure reflects the joint
impact of all the inputs in producing the output.

Multifactor Productivity
• A multifactor productivity measure utilizes more than
a single factor, for example, both labor and capital.
Hence, multifactor productivity is the ratio of total
output to a subset of inputs.

• A subset of inputs might consist of only labor and

materials or it could include capital.

• Obviously, the different factors must be measured in

the same units, for example dollars or standard hours.
Productivity Benefit Model
 In many companies in the U.S, labor-productivity
improvements often resulted in layoffs, which are certainly
unwelcome, particularly when the workers are given short
notice.
 if the total cost per unit of the product or service is not
reduced and if the quality of the product or service is not
improved, it does not appear that this is a true productivity
improvement.
 Improvement of total productivity of a product results in
two favorable management strategies:
 Reduce the selling price of a product or service without
sacrificing the present profit margin.
The Productivity Benefit Model
• Increase the profit margin without reducing the selling
price.
• Therefore, total productivity improvement in
organizations benefits everyone consumers,
employees, owners/stockholders, the society ,and the
nation as a whole.

Employee (total) profit

earnings productivity

costs prices
Productivity Cycle
 An organization that is in the midst of an ‘productivity
program’ may be involved in one of the four stages or
phases:
 Productivity measurement
 Productivity evaluation
 Productivity planning
 Productivity improvement
• The productivity cycle concept shows us that productivity
improvement must be proceeded by
measurement ,evaluation, and planning.
• All four phases are important.
• Productivity program is a not a one time project, but
rather a continuous, on going process.
 THE PRODUCTIVITY CYCLE

Productivity
measurement

Productivity Productivity
Improvement Evaluation

Productivity
Planning
SCOPE OF PRODUCTIVITY ENGINEERING
AND MANAGEMENT
PRODUCTIVITY ENGINEERING
o Productivity engineering is concerned with the design,
development, and maintenance of productivity
measurement, evaluation, planning, and improving
systems in manufacturing and service organizations.
PRODUCTIVITY MANAGEMENT

 Productivity management is a formal management

process involving all levels of management employees
with the ultimate objective of reducing the cost of the
manufacturing, distributing, and selling of a product or
service through an integration of the four phases of the
productivity cycle, namely, productivity measurement,
evaluation, planning, and improvement.
Productivity measurement
models
Ways and models of calculating
productivity
1. Partial productivity
Ratio of output to one particular class of input.
Partial Productivity =
Often there is a factor which plays an important role.
There is one factor which is an appropriate factor for
comparison, this is called an “apple to apple”
comparison
Such ratios are used for selection of a particular area
of improvement.
Organistions can use this formula to determine
performance of labour, machines, energy, capital,
department, organisation, etc.
Advantages Limitations

 Easy to understand.  Profit control through partial

 Easy to obtain the data. can be a hit-
and-miss approach.
 Easy to compute the
productivity indices  Tend to shift the blame to the
wrong areas of management
 Easy to sell to management
control.
because of the above three
advantages.  Do not have the ability to
explain overall cost increases
 Some partial productivity
indicator data is available  If used alone, can be very
industry wide. misleading and may lead to
costly mistakes.
 Good diagnostic tools to
pinpoint areas for productivity
improvement, if used along
with total productivity
indicators
Examples

 Bajaj Auto produces 5000 scooters in a shift employing

200 workers, whereas Hero motors manufactures 9000
scooters employing 300 workers. The productivity in
relation to manpower of Hero motors is higher compared
to Bajaj Autos.
 R. petroleum sells its petrol at Rs.30000 with the help of
three pumps in an area of 1000sq ft. whereas Y
petroleum sells its petrol worth Rs.40000 with the same
parameters. Partial Productivity space Y petroleum is
better than R because of better layout and an appropriate
entry and exit system.
2. Total Productivity
 ratio of Total Output and Total Input
 Total Productivity =

3. Total Factor Productivity

 Labour and capital are always considered important
contributors to the process of production.
 In TFP model was developed by John W. Kendrick
 He has taken labor and capital as only two input factors
for calculating TFP
 Data is easy to obtain in TFP
 It does not consider the impact of material and energy
input, even though materials constitute 60% of the cost
Example:
Production worth Rs.80 lakhs was manufactured and
sold in a month. It consumed labour hours worth Rs.12
lakhs and capital worth Rs.48 lakhs

TFP =

= = 1.33
4. Multi Factor Productivity
◦ Scott D. Sink further developed the total factor
productivity model
◦ MFP model considers labour, material and energy as
major inputs
◦ Capital was left out since it is very difficult to estimate
how much capital is being consumed in a unit of time.
◦ MFP =
5. V. Sumanth’s Total Productivity Model
 Itis the ratio of tangible output to tangible input
 Total Productivity (Pt) =
 Pt =
Where,
Total tangible Output (Ot)
01 – finished goods produced
02 – partial units produced
03 – dividends from securities
04 – interest from bonds
05 – other incomes
 Advantages:
◦ All quantifiable inputs are considered
◦ Provides firm level and operational unit level
productivity
 Disadvantages
◦ Data is difficult to compute
◦ Does not consider intangible inputs and outputs
6. APC Model
 American Productivity Center (APC) has been advocating a
productivity measure that relates profitability with
productivity and price recovery factor.
 The price recovery factor takes care of inflation
 Over a period of time changes in this factor indicate:
◦ Whether the firm has been able to absorb the changes in
the cost inputs
◦ Has passed on or has over compensated the same price of
the company’s output
 Profitability =
=
= Productivity * Price Factor
 Ways to improve productivity
 Technology based
◦ CAD, CAM, integrated CAM, Robotics, laser beam
technology, energy technology, group technology, computer
graphics, simulation, maintenance management, rebuilding
old machinery, energy conservation
 Employee Based
◦ Financial incentives, group incentives, fringe benefits,
promotions, job enrichment, job enlargement, job rotation,
worker participation, MBO, Skill enhancement, learning
curve, working condition improvement, communication,
zero defects, punishment, recognition, quality circle,
training, education, role perception, supervision quality.
 Material Based
◦ Material planning and control, purchasing, logistics,
material storage and retrieval, source selection and
procurement of quality material, waste elimination
 Process based
◦ Methods engineering and work simplification, job
design evaluation, job safety, human factors
engineering
 Product based
◦ Value analysis and value engineering, product
diversification, standardisation and simplification,
reliability engineering, product mix and promotion
 Task based
◦ Management style, work culture, communication in
the organisation, motivation, promotion group
activity
Productivity Measurement at International
level
Measurement approaches
1.Rosta’s measures (1955)

Four measures for international comparison of productivity:

 Comparison of the value of the gross output per unit labor

 Comparison of the net output per unit of labor
 Comparison of the physical output (gross as well as net)per
unit of labor
 Comparison of the physical input of materials
Measurement approaches …cont

2.Shelton and Chandler’s Measures

The measures most commonly used to compare the
productivities
 Hourly labor cost = E/L
 Output per man-hour= Q/L
 Unit labor cost= (E/L)/(Q/L) = E/Q
Where,
E = aggregate labor cost (or expenditure)
L = man-hours of labor
Q = quantity of output
Methods of measuring unit labor cost
 Three basic approaches are available
Measurement by product
- It considers a typical product and compares labor
costs from plant to plant in different countries by using
actual cost records.
Measurement by industry
- It consists of aggregating the output of all the different
products of individual companies or of an industry into
a combined figure.
Measurement by all manufacturing industries
- Measurement is done on a combined manufacturing
industry basis.
Methods of measuring unit labor cost
Requisites of unit cost labor estimates:
Shelton and Chandler contend that the unit labor cost
estimates used in the international comparisons should take
four factors into account.
1.Labor expenditure (cost)
2.Output(production)
3.Time periods and time trends
4.Currency exchange rates
Problems of productivity measurement at
International level
 In using the exchange rates, comparisons often do not
involve the prices of similar goods and services in all
countries for a given year.
 The ICP data do not permit comparisons of productivity at
the detailed industrial level. The few industrial level
comparisons available are limited in the number or
countries covered.
 The explanation of international productivity differences
is less than adequate, because several factors, including
social, cultural, political, and economic conditions, have
not been studied sufficiently.
Productivity Measurement at National level
Cont,..
 At the national level, productivity measurement efforts
have been primarily from the economists point of view.
 Some of the earliest attempts at measuring productivity in
the national economy were made by Bratt(1939),
wubnig(1939), and clark(1940).
INDEX APPROACH:
◦ Economists have basically concentrated on using
indexes for measuring national productivity.
◦ The various measures of productivity at the national
level may be divided into three are as
 Labor productivity indexes
 Capital productivity indexes
 Labor and capital productivity indexes
Labor productivity indices:

 Labor input forms a relatively large part in most product

costs.
 Labor is measured much more easily than some other
inputs, such as capital.
 Statistical of employment and man-hours are often readily
available.
 The three types of labor productivity indexes are
 BLS indexes
 NBER indexes
 Brookings Institute indexes
Cont,..

BLS indexes:

 Published by Bureau of labor statistics every quarter.

Labor productivity =

 The man-hours are based on hours paid, including sick

leave, vacation, holiday and other time off in addition to
actual time worked.
Cont,..
NBER indexes:
 Kendrick(1961) has published indexes of labor productivity,

Labor productivity =
 Indexes are compiled for the National Bureau of Economic
Research(NBER) adjust for the composition(quality) of
man-hoursby weighting at the industrial level through the
use of average hourly earnings.
Brookings Institute indexes:
 Dension (1962) published, for the Brookings Institute,
indexes that also consider the changes in the quality of
labor.
 The procedure to accomplish this is different from kendricks,
since the adjustments is based on sex, age, education, and
since other changes in the labor force are applied to basic
employment and man-hour measures.
Capital productivity indices:
 Dean(1954) developed some measures for capital
productivity.
 Griliches and Jorenson(1966) studied the relationship
between the structure of capital measured productivity
change in the united states private domestic economy for
the period 1929-1964.
 Capital productivity =
Total labor and capital productivity
indices:
NBER measures by Kendrick:
Kendrick provides annual measures for the periods 1889-
1957 and 1957-1969,covering the private economy and based
on GNP output.
Total labor and capital productivity =
Where,
labor input = Man-hours, adjusted for quality change in
labor.
Capital input = net stock of structure +plant equipement +
inventories + working capital + land
Problems of productivity measurement at National
level
 Direct quantity measures of output and input are difficult
to obtain due to the nature of the output and the input.
Therefore, in many cases some kinds of approximations
or substitutions are employed.
 Most data are not collected and compiled just for the sake
of productivity measurement. Invariably, therefore some
modifications are made to suit the data to such concepts
of productivity measurement as perceived by the
researcher.
Productivity Measurement at Industrial level
BENEFITS OF PRODUCTIVETY MEASUREMENT AT THE
INDUSTRIAL LEVEL
 Economic indicators . Within a given country, it can be helpful as
economic indicators in tracing the economic performance of the
country.
 Manpower analysis: changes in manpower utilization future
manpower projections, trends in labor cost, effects of technological
advances on industry employment and unemployment are all
possible.
 Company performance analysis. Comparison of performance of
individual companies against that of their particular industry.
 To forecast industry growth patterns, future conditions, etc.

The way the productivity measures are defined in industry varies with
the type of industry;
therefore, we define the measures separately under each industry
category.
PRODUCTIVETY MEASUREMENT
APPROACHES AT THE INDUSTRIAL LEVEL
1. Industry in general
2. Manufacturing industry
3. Services
4. Federal government agencies
5. Local government and city
6. Transportation and distribution
7. Retail trade
8. Defense
9. Construction industry
10. Energy industry
11. Office and administration.
1. INDUSTRY IN GENERAL

A. Index approach
B. Production function approach
C. Input output approach
A. Index approach

 Several researchers and organizations have attempted to

develop index based measures for industry in general

Mills indices:
Mills productivity index =
BLS indices: the Bureau of Labor Statistics uses two
indices to derive productivity measures for industry
 Unit man hours index
 Deflated value index
Table :

S. No Formula Weighing baisis Name of index

1. Man-hr Base period Unit man hours index

index/pdn

Current period

2. Base period Deflated value index

Current period
B. Production Function Approach

Solow [1957] developed aggregate production

functions, while Lave [1966], Slater [1966] and
Aigner and Chu [1968] dealt with the
measurement of technological change by making
use of the production functions
C. Input output approach

Most of the efforts using input output (I-O)

analysis are at the national and industrial levels
Elliot Jones [1971] applied I-O analysis to
determine the total output and input of an
industry. He used the I-O tables to consider the
inter industry flows. Blackett [1971] illustrated
an application of I-O analysis to determine the
input requirements of an industries.
2. PRODUCTIVITY MEASUREMENT:
MANUFACTURING INDUSTRY
According to Mark [1976], one the earliest studies
undertaken In manufacturing industries was that of
Wright in 1898.
Mills [1938] conducted a study on productively in
manufacturing industries during the period 1923-1929.
INDEX APPROACH

• since manufacturing industries make more than one homogeneous

product, index numbers of these concepts are necessary.

 Index of unit labor cost =

=
=
PRODUCTION FUNCTION APPROACH
Griliches [1968] reported a production
function approach in measuring the output
of the manufacturing industry
3. PRODUCTIVITY
MEASUREMENT :SERVICES
Fischer [1935] and Clark [1940] were
among the first to point out the importance
of the service sector in the national
economy
  Research papers summarized by Fuchs [1969]
Author Major area studied Brief summary
Marimont Finance, insurance, real estate, Measurement of output in current and
services constant prices

Garston Banking, credit, agencies Does not agree that these services have a
negative measurement output

Kendrick Advertising, insurance Measurement of output

Treasway Industry in general Deals with problems of possible bias

introduced by the assumption of equilibrium

Reder Medical care industry Measurement of productivity change and

factors affecting it

Klarman and Medical care industry Criticize Reder’s approach, since it fails to
Feldstein distinguish unit price from total expenditure

Gorman commercial bank Compares the “liquidity approach” with the

“transactions approach”

Hodgman commercial bank Favors transactions approach on the premise

that much of banks work is processing of
checks and other transactions
4. PRODUCTIVITY MEASUREMENT:
FEDERAL GOVERNMENT
Lytton’s measures: Lytton [1959] studied some
seven federal agencies using the following
measures of productivity.
Post office department
productivity = output per person
=
Commodity stabilization service
productivity = output per person
=
Social security administration
productivity = output per person
=
 Veteran’s Administration
productivity = output per person
= items processed
average employment
 Internal revenue service
productivity = output per person
= number of items processed
average employment
 Veteran’s benefits departments
productivity = output per person
= items processed
average employment
 Federal civilian agencies
productivity = total output of 1 through 5
total input of 1 through 5
5. PRODUCTIVITY MEASUREMENT : LOCA
GOVERNMENT AND CITY
Studies pertaining to productivity measurement at local
government and city levels are relatively few

Hatry and Fisk [1971] discuss ways of measuring and

improving productivity in local governments

Hamilton [1972] describes a productivity measurement

approach, specifically for New York City
6. PRODUCTIVITY MEASUREMENT :
TRANSPORTATION AND
DISTRIBUTION
 Barger [1951] conducted a first exhaustive study of
transportation industries

 Barger [1955] conducted a similar study for the

distribution industry
7. PRODUCTIVITY
MEASUREMENT :RETAIL TRADE
 One of the earliest study involving productivity
measurement was kaiser’s on the Swedish retail trade
[1957]

 Fuchs [1969] reported a study by Swarzman, who

analyzed sales growth in constant dollars per man hour.
He used regression analysis to estimate demand for
retail service
8. PRODUCTIVITY
MEASUREMENT :DEFENCE

Baker [1972] reports some aspects of

productivity measurement in the defence
supply agency
9. PRODUCTIVITY MEASUREMENT :
CONSTRUCTION INDUSTRY
Dacy [1964] develops formulas for price
and productivity indices for that part of
the construction industry that is involved
in a non homogeneous group of structures
10. PRODUCTIVITY
MEASUREMENT :ENERGY INDUSTRY

Du Boff [1966] studies the relationship

between the rise of electric power and
changes in productivity in the American
manufacturing industry.
11. PRODUCTIVITY
MEASUREMENT :OFFICE AND
ADMINISTRATION

Richman [1958] deals with the subject of

productivity measurement of office and
administrative personnel, while Lytton
[1960] reports the measuring of output In
public administration
PROBLEMS OF PRODUCTIVITY
MEASUREMENT AT INDUSTRY LEVEL (MARK)

Relevant detailed product data are not

available for many industries
Quality changes from development of
new products
Appropriate weights are often
nonexistence
PRODUCTIVETY-MEASUREMENT
APPROACHES AT THE COMPANY
LEVEL
1. Economists
1.A. index approach
1.B. productivity function approach
1.C. input-output approach
2. Engineers
2.A. index approach
2.B. utility approach
2.C. servo-system approach
3. Managers
3.A. array approach
3.B. financial ratios approach
4. Accountants
4.A. capital budgeting approach
4.B. unit cost approach
1.A. Index Approach
1.A.i. Kendrick –Creamer Modal
 Total factor productivity index =

1.A.ii. Craig – Harris Modal

 Total productivity measure:
 Pt =
Where Pt= total productivity
L = labor input factor
C = capital input factor
R = raw material and purchased parts input factor
Q = other miscellaneous goods and service input factor
Ot = total output
1.A.iii. Hines’s Model
Oi =
Where
Oi= output for period i (the current period)
Pj= price/ unit for item j in the base period
Ui,j = no of production units of item type j produced in period i.

1.A.iv. APC Model

The American productivity center (APC) has been advocating a
productivity measure that relates profitability with productivity and price
recovery factor. The way this measure is derived is:
profitability =

Profitability =

=(productivity)×(price recovery factor)

1.A.v. The Total productivity Model(TPM)
Recently, sumanth [1979] developed a productivity-
measurement model that considers the impact of all input factors on the
output in a “tangible” sense.

1.A.vi. Mundel’s Model

Mundel [1976] presents two alternative forms of productivity
indices:
PI = ×100
=
where PI = productivity index
OMP = aggregated outputs, measured period
OBP = aggregated output, base period
IMP = inputs, measured period
IBP = inputs, base period
2.A. PRODUCTIVITY FUNCTION
APPROACH
Their basic approach has been to develop some general mathematical
expression for output as a function of input factor, by combining
observation, economic theory and mathematics.
2.A.I. Cobb- Douglas Function

Where
Q= output
L = labor input
K = capital input
u = random measurement error component.
2.A.ii. The constant elasticity of substitution
function:

Where Q= value-added output

L= labor input
K = gross book value of capital adjusted by capacity utilization

coefficient
a= arbitrary constant of proportionality
b =distribution parameter
r= substitution parameter
v = degree of return to scale
e = base of the natural logrithm
2.A.iii.The variable elasticity of substitution
function:
PM approaches at the company level

Input- Output approach

Utility approach
Servo-system approach
Array approach
Financial ratio approach
Capital budgeting approach
Unit cost approach