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Competing with Competing with ProductivityProductivityLeeds School of BusinessLeeds School of BusinessUniversity of ColoradoUniversity of ColoradoBoulder, CO 80309-0419Boulder, CO 80309-0419
Professor Stephen Lawrence
The Value Equation
price
InnovationyFlexibilit
TimelinessQuality
Value
Inputs
OutputstyProductivi
Productivity Defined
Inputs: labor, materials, capital, …Outputs: goods, services
Factor Productivity MeasuresSingle Factor Productivity (SFP)Total Factor Productivity (TFP)
Single Factor ProductivityMeasures increase in productivity in
relation to a single factor of productionLabor, materials, capital, …Productivity = Output / Single InputExample:
Output LaborPeriod 1 1000 units 100 hrsPeriod 2 1100 105
SFP Limitations Problem: too easy to substitute factors
Company purchases casting and machines them Decides to purchase pre-machined parts Lays of skilled, sells machines Output remains constant, labor reduced Labor productivity up 5% (!) BUT: pre-machined parts cost 20% more SO: material productivity declines by 20% (!!)
Total Factor ProductivityMeasures increased in productivity from
all relevant factors of productionProductivity (TFP)
= all outputs / all factor inputsExample:
product sales + internal services TFP Index = ----------------------------------------------------------------------------- labor + material + services + depreciation + investment
TFP Index2002 20031.073 1.126
TFP Limitations Issues affecting TFP measurement
Inflation, currency exchange gains (losses) Depreciation, inventory valuation Product mix changes, choice of base
period, output measures ...Theoretically interesting
Difficult in practice…
Why Productivity is Important
0102030405060708090
100
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Per
cent
of
the
labo
r fo
rce
Year
Why Productivity is Important
05
101520253035404550
Best Average Worst
Japan
U.S.
Europe
Relative Manufacturing Productivity -- Automobiles 1987
Dertouzos, Lester, Solow, Made in America: Regaining the Productive Edge, MIT Press, 1989.
Best US autoplant worse than averageJapaneseplant
Avg US autoplant worse than worstJapaneseplant
Why Productivity is Important
Gene Koretz, “Productivity: Trading Places,” Business Week, April 30, 2001
Factors Affecting Productivity
Product
Managers
LaborCapatilities
R & D
Engineering
Maintenance
Investments
Energy
Capital
Demand
Materials
Regulation
Product Mix
ProductQuality
MaterialQuality
TechnologyEmployed
EquipmentUtilization
OperationsServices
ProductiveCapacity
ResourceEffectiveness
AssetUtilization
OperatingEfficiency
Production
OperatingPerformance
How to Improve Productivity?
?
Specialization Improvement in a worker’s dexterity
Ability to do a task, resulting from a worker’s concentration on one or a few tasks.
Saving in time typically lost in changing from one task (or group of tasks) to another. When workers do not specialize, time is lost from
physically relocating to the new task and from adapting, or orienting, oneself to the new task.
Concentration on or a few tasks Increases the likelihood of discovering easier and
better methods
Adam Smith, Wealth of Nations, 1776
Better Work Practices Work smarter, not harder Scientific Management
Early 20th Century Reaction to management problems of the
industrial revolution Organized approach to improving labor
productivity Standard methods, standard times “Time and motion” studies Championed by Fredrick Taylor, Frank and Lillian
Gilbreth, others
Economies of Scale
Quantity Produced
Co
st p
er U
nit
Learning
Quantity Produced
Co
st p
er U
nit
Automation and Technology
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Agriculture All Business Mfg
Inputs
Outputs
Productivity
Labor Productivity Trends 1948 - 1996
Other MethodsOutsourcing – make vs. buyWorker training Improved qualityFocus – do fewer things betterMore…
Productivity –The Economic Perspective
Labor Used per unit produced
Capital Used(equipment) per unit produced
Production Functions
Allocative vs. Technical Efficiency
Allocative Efficiency: obtaining the best allotment or mix of scarce resources among alternative activities and uses purchasing what is not the best bundle of inputs, given the
prices of various inputs and their marginal benefit in the production process
Technical Efficiency: minimizing the cost incurred to carry on each activity for any given mix of resources obtaining less than the maximum output available from
whatever bundle of inputs has been employed Traditional economic analysis has focused on
allocative efficiency, aka marginal analysis
Caves and Barton, Efficiency in U.S. Manufacturing Industries, MIT 1990.
Allocative vs. Technical Efficiency Capital Used(equipment) per unit produced
AY
B
Labor Used per unit
C
EfficientFrontier
EfficientFrontier
CostLine
OptimalMix ofCapital
Optimal Mix of LaborO
How Much Inefficiency Exists?
Tech efficiency based on gross output
Tech efficiency based on value-added
Mean levels of technical inefficiency for 365 U.S. industries:
Caves and Barton, Efficiency in U.S. Manufacturing Industries, MIT 1990.
Management Findings Oligopoly is detrimental to technical efficiency Import competition is favorable to technical efficiency Enterprise diversification is hostile to an industry’s
technical efficiency Technical efficiency is negatively related to the
presence of trade unions in industries that operate large plants
Capital vintage distributions have an important impact on technical efficiency -- importance of optimizing capital modernization and replacement decisions
Caves and Barton, Efficiency in U.S. Manufacturing Industries, MIT 1990.
Evolving Economic Theory
1. Natural resources
2. Capital
3. Technology
4. Skills
Sources of competitive advantage in international trade for the 21st Century:
Thurow, Head to Head, Wm Morrow, 1992.
A Cautionary Note
US Productivity Growth 1995-2000, McKinsey Global Institute, Washington DC, 2001
“We’ve become fat and happy with our high profitability following the industry recovery in the 1990’s… as a result we’ve spent much less time focusing on operations and productivity.”
Survey respondent
