Notes Chapter 1 Productivity—Concept and Definitionnovella.mhhe.com/sites/dl/free/933922423x/1080777/Prod_Mgmt_IMT_01.pdf · Productivity is a measure of output from a production

Notes

Productivity—Concept and Definition

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L E A R N I N G O U T C O M E S

After reading this chapter, you will be able to:

LO 1.1 Understand the concept and definition of productivityLO 1.2 Explain factors influencing productivityLO 1.3 Describe the importance and role of productivityLO 1.4 Understand the concept of productivity in India

IntroductIon

Productivity is a scientific concept. It can be logically defined, empirically observed, and measured in quantitative terms. Productivity is useful as a relative measure of actual output of production compared to the actual input of resources, measured across time or against common entities. Productivity describes optimum utilisation of the resources of an organisation to produce output. Productivity is often confused with efficiency. Efficiency is a ratio of output by input. Efficiency is the ratio of the time needed to perform a task to some predetermined standard time. However, productivity is interpreted as a measure of effectiveness, which is outcome-oriented rather than input-oriented. Productivity is doing the right thing efficiently.

Learning OutcOme 1.1

defInItIonS

The first time the word ‘productivity’ was mentioned in an article by French economist Quesnay in the year 1766. After that in the year 1883, Littre defined productivity as the ‘faculty to produce,’ that is, the desire to produce. In 1950, the Organisation for European Cooperation and Development (OECD) offered a more formal definition of productivity as the quotient obtained by dividing output by one of the factors of production.And productivity is defined as:

Productivity = Output

Input

Productivity is computed by dividing average output per period by the total costs incurred or resources (capital, energy, material, and personnel) consumed in that period. Productivity is a critical determinant of cost efficiency.

Chapter 1Productivity—Concept and Definition

ProMan_IMT_01.indd 1 11/19/2015 1:28:03 PM

Productivity Management

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Productivity is an economic measure of output per unit of input. Inputs include labour and capital, while output is typically measured in revenues and other GDP components such as business inventories.

European Productivity Agency (EPA) has defined productivity as, ‘Productivity is an attitude of mind. It is the mentality of progress, of the constant improvements of that which exists. It is the certainty of being able to do better today than yesterday and continuously. It is the constant adaptation of the economic and social life to changing conditions. It is the continual efforts to apply new techniques and methods. It is the faith in human progress.’

Productivity can be defined as, “Volume of output attained in a given period of time in relation to the sum of the direct and indirect efforts expended in its production”.Productivity is the multiplier effect of efficiency and effectiveness.

Productivity is never an accident. It is always theresult of a commitment to excellence, intelligentplanning, and focused effort.’ Paul J. Meyer—

A productivity measurement is the best yardstick forcomparing management of different units within anenterprise, and for comparing managements ofdifferent enterprises. Peter Drucker—’

‘

‘

Productivity = ValueTime

= Productivity equals value divided by time.

Productivity is a measure of output from a production process, per unit of input.Productivity is a measure relating a quantity or quality of output to the inputs required to

produce it.Labour productivity can be measured by quantity of output per time spent or numbers

employed. It could be measured in, for example, Rupees per hour.

Benefits of productivity

● Higher the productivity, more the income. ● Higher the productivity, the lower the operational cost. ● Higher the productivity maximises the usages of organisational resources. ● Higher the productivity is a sign of organisational growth, creates goodwill. ● Higher the productivity, smoother the operations.


factorS InfluencInG productIvIty

Productivity describes optimum utilisation of the resources of an organisation to produce output. Productivity is the outcome of several interrelated factors. The factors influencing productivity are given below.

1. Human FactorsHuman resource is very important in productivity measures. Human behaviour is the most significant determinant of productivity. Human factors include both their capability as well as their willingness: (a) Capability: Productivity of an organisation depends upon the competence and calibre of

employees of the organisation. Capability could be developed by education, training, experience, aptitude, etc. of the employees.

(b) Willingness to Work: Motivation and morale of people are very important factors that determine productivity. These are affected by wage incentive schemes, labour participation

Check Your Progress

In Priayadarshni AutoComp, standard time per piece is 2 minutes. The output is 500 pieces per shift of 8 hours. Calculate productivity.

Check Your Progress


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in management, communication systems, informal group relations, promotion policy, union management relations, quality of leadership, working hours, sanitation, ventilation, subsidised canteen, company transport, etc.

2. Technological FactorsTechnological factors play a very important role in the improvement of productivity. Technological factors include the following:

● Capacity of plant ● Product nature ● Availability and nature of raw materials ● Automation and modernisations techniques adopted ● Maintenance techniques ● Production planning and control ● Plant layout and location ● Quality control techniques ● Nature and type of machinery ● Research and development

3. Managerial FactorsIn the organisations, productivity is low despite latest technology and trained manpower. This is due to inefficient and indifferent management and lack of leadership. Competent and dedicated managers can obtain extraordinary results from ordinary people. Job performance of employees depends on their ability and willingness to work. Management is the catalyst to create both. Advanced technology requires knowledgeable workers who in turn work productively under professionally qualified managers.

4. Natural FactorsNatural factors, such as physical, geographical, and climate conditions exert considerable influence on productivity, particularly in extreme climates (too cold or too hot) tends to be comparatively low. Natural resources like water, fuel, and minerals also influence productivity.

5. Sociological FactorsSocial customs, traditions, and institutions influence attitudes towards work and job. For instance, bias on the basis of caste, religion, etc. inhibited the growth of modern industry in some countries. The joint family system affected incentive to work hard in India. Close ties with land and native place hampered stability and discipline among industrial labour.

6. Political FactorsLaw and order, stability of government, harmony between states, etc. are essential for high productivity in industries Taxation policies of the government influence willingness to work, capital formation, modernisation and expansion of plants, etc. Industrial policy affects the size and capacity of plants. Tariff policies influence competition. Elimination of sick and inefficient units also helps to improve productivity.

7. Economic FactorsSize of the market, banking and credit facilities, transport and communication systems, etc. are important factors influencing productivity.


Importance and role of productIvIty

While the productivity in an organisation can be improved by better application of materials, improved processes and machinery, faster production lines and application of more energy from the workers, however this is not all. The productivity measures and the techniques of time study,



Notes


methods study, production scheduling, inventory control, etc. are basically efficiency- oriented.

There is nothing wrong in being efficiency-oriented; however, when the prime motive is efficiency rather than effectiveness, the productivity improvements happen to be generally of a short-term nature. More lasting and more appropriate results can only be produced through a change in the attitudinal aspects of the people in the organisation from the top to the lower level.

The attitude of the top management has to be right in order to give the right direction. The attitude of the lower levels of people has to be tuned to that of the higher levels of manage ment, so that the right message is picked up. A right direction leaves a prolonged impact on productivity. Productivity is a vector and not a scalar quantity.

If emphasis is laid only on increasing efficiency, no doubt there will be more action. Machines will work for long hours, surplus quantity will be produced, more papers will be shuffled or filed, more people will be seen running around, and there will be more of everything that you can see. But, such an effort will in fact be worthless. A well-run organisation improves productivity by eliminating such unnecessary exercises and reassigning the persons to needed work. The following Table 1.1 brings out the difference between efficiency and effec tiveness.

Table 1.1 Differences between Efficiency and Effectiveness

Efficiency Effectiveness

Objective: To produce quantity and quality To enhance the value to the customer and, therefore, to the society.

Goal: To improve the process and/or the product

To determine the right direction for the organisation and the value that needs to be generated.

Questions: How to perform a task (whether in production, marketing or any other area)

Why to perform something and, so, what to perform.

Satisfaction Measure: “Is everything running well?” “Are we aiming right?”

Source: Adapted from: Kurt Hanks, Up Your Productivity, Crisp Publications Inc, Menlo Park, California, USA, 1990.

While more output with the same or reduced inputs is good, it must be remembered that all that is ‘put out’ is not output. A product can be truly termed as an output only if it is marketa ble; that is, if the customers want it and are ready to buy it. Too much of quantity orientation entails a danger that one will be so submerged in work, that he/she will not be able view, listen or even think about the customer.

After all, it is the customer for whose satisfaction an organisation works hard. Overemphasis on trivia can drown out critical thinking and acting. It takes constant reaffirmation of “what the business is about” in order to stay at the top.

Quantity orientation

Our Indian industry is replete with quantity orientation. There are always AOPs (Annual Operating Plans) or targets to meet. The activity during the year-end (February and March) is feverish. Again, during April and May there is a lull. Obviously, market is not asking for this pattern of production. Production volumes are not driven by the market but by the ‘targets’ or the numbers themselves. Several managers, from the top to the junior level, are busy saving their skins because, their productivity or per formance is measured by the numbers without relating to the ultimate objective of the organisation of providing value to the customer. The real objectives and goals lie in the background and the ‘appearance’ of managerial productivity takes the front seat. Sometimes even the modern management techniques/procedures become the victim of the following ‘appearance’ orientation—‘In our unit we have been doing ‘Business Process Reengineering’. ‘We believe more in TQM for which we have begun a Small Group Activi ty.’ ‘Through ERP (Enterprise Resource Planing) we are going to cut down our late deliveries by one-third (from the present level of about 80 per cent)’.


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While the techniques are good, the ‘intent’ behind the usage of the buzz-words is missing. Therefore, the application takes place half-hazardly, if at all. The buzz-words have become status symbols of the managerial class in a large number of Indian organisations. In several cases, unnecessary work evolves because of wrong orientation at the top. Efforts to increase productivity need to focus more on managerial work. ‘Hard-working’ and ‘efficient’ managers may be really unproductive or, worse. They may create useless work for themselves and others. In order to make an organisation more productive, it becomes wise to reduce the organisational levels or managerial levels. Productivity does not mean production.

It must be emphasised that elven if the quantita tive measures were implemented in all seriousness, these measures by their own merit shall produce results only upto a limited extent and for a certain duration. Emphasis on mere ‘Houskeeping’ may divert the organisation’s focus from the very purpose of a business, which is to provide value to the customer. More lasting and better results require combining both the approaches viz. efficiency and effectiveness. If any, the latter approach should dominate between the two.

Efficiency, by its very description, is reactive. It cannot be pro-active. It has to be measurable; but, what happens in the future is not measurable. Efficiency has to be more historical. The future of efficiency is designed from the past. It is based on only what is presently known. It deals with things that are present here and now. When the future turns out to be different, efficiency is not of any use. In fact, in some cases it may get the organisation into trouble because the organisation has spent all its time in problem-solving and fire-fighting, rather than on conceptual thinking. It has all along looked at problems and not at seeking and/or creating opportunities. True productivity calls for a managerial ‘vision’. Figure 1.1 is illustra tive.

Figure 1.1 ‘Danger of Thinking only about Problems’

Adapted from Edward de Bono, Sur/petition, Indus imprint of HarperCollins Publishers India, New Delhi, 1993, Fig. 1.2, p. 7.

With kind permission from HarperCollins Publishers Ltd, London, UK.

Business process reengineering

In the recent past, companies have sought to increase organisational productivity through radical changes by means of Business Process Reengineering (BPR). BPR is about taking a hard look at why the organisation does the things the way it does. It involves fundamental rethinking. It is not about incremental or continuous improvements; also, it is not about some work study or process study here and there yielding 5 or 10 per cent improvements. Business process reengineering is about revamping or overhauling the existing processes and redesigning them from a clean slate, in order to achieve significant improvements in critical measures of performance.

BPR requires that the firm gets out of its institutionalised or rigid thinking (‘We have always been doing it this way’) and do rethinking. The business process, which consists of all tasks that create outputs of value to the customer should be looked afresh. The analysis is not limited to functional areas or to departments. It involves organisational changes, redesign of the work, rationalisation and integration of all the tasks and work-flows, use of information technology to bring in the speed of response, creating the information base and bringing in connec tivity between various tasks, functions, areas and departments at different levels so that ultimately the customer benefits through a superior service/value provided to him. In BPR parlance, ‘pro cesses’ mean all



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those actions that lead to results in terms of the customer satisfaction. It brings in the people and tasks to achieve the ultimate organisational objective.

The genesis of BPR was in the traditional hierarchical vertical organisations which resulted more often in departmental or func tion-wise efficiencies but did not always result in the achieve-ment of the ultimate organisational objective. It is a known fact that from getting a customer order to its fulfillment, the pro cesses for the order flow more or less horizontally and across various functions and hierarchical structures. BPR takes this lateral view of the organisation rather than the vertical view (Refer Fig. 1.2). The important things in BPR are the pro cesses, which are different from operations, and thus the custo mer-oriented changes. Processes concern with results (i.e. organ isational objective orientation) whereas operations are function/job oriented. Although, in Indian industry we find firms resorting to BPR only when they have reached a stage where only radical changes are required, the use of BPR need not be re stricted to only such ‘critical’ cases where the companies find themselves in a jam. BPR exercise can also be implemented while a company is sailing smooth. The changes in a BPR exercise need not necessarily be radical. Many a time it is thought that the main component of any BPR is information technology; this, also, is an erroneous view. Many BPR actions need not/do not involve IT. IT is not the panacea for all problems. The emphasis of BPR is and should be outside the organisation—at/for the customer. IT, if inwardly focussed, which is generally the case, and only at the internal problems of the organisation, it produces more of the unnecessary (and, therefore, wrong) data about the inside and nothing much about the happenings outside the organisation. In such a case, IT may possibly do more damage than provide help to the management of the enterprise.

Figure 1.2 Processes Flow Horizontally while the Organisation is Vertical

Reengineering literally means to redesign the processes in order to serve the organisation’s objectives. TQM also has the same purpose. However, historically speaking, TQM approach seemed to be more gradual, incremental, continuous and bottom-to-top; whereas, BPR approach was consid ered to be more radical, fundamental, surgical or dramatic and top-down. This kind of distinction gained ground because many organisations had accumulated so much of rust and were so con fused in their orientation that a radical shift was perceived to be essential prior to any gradual change. But, as is evident, the objective and focus of BPR and TQM are the same i.e. providing the customer the appropriate service.

Benchmarking

While carrying out TQM or initiating BPR, the company should have a basis of establishing performance goals. These basis, which should be the best practices in the industry, are called the benchmarks. Such benchmarking should lead the company to superior performance. Xerox Company, USA, which was the leader in the use of benchmarking as a management technique or process, terms benchmarking as, ‘the continuous process of measuring our products, services, and business practices against the toughest competitors or those companies recognised as industry leaders.’

Benchmarking is not a new concept. All of us do benchmarking, in our usual lives. We admire some people for the way they speak, for the way they conduct themselves, or for the way they dress and eat. Many of us have some role models whom we try to emulate. This process is also called as benchmarking.

Check Your Progress

Discuss how productivity can increase competitiveness of any organisation.

Check Your Progress


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Productivity leads to the following results: 1. Assesses efficiency 2. Increases competitiveness 3. Boosts efficient utilisation of resources 4. Maintains performance levels 5. Motivates employees


productIvIty In IndIa

Our national picture on productivity has not been and is not good if we compare it with several other industrialised nations. From the available statistics it is seen that the total factor produc tivity growth (TFPG) in India, during the one score years of 1960 to 1986, has been virtually zero—in fact, – 0.2 per cent (negative) per annum. Many other developing countries seem to fare better. (Refer Table 1.2.)

Table 1.2 Total Factor Productivity Growth, Per Cent Per Annum, Around the Years 1960 to 1985

Korea 4.5 Mexico 0.8

Indonesia 1.9 China 0.7

Egypt 1.7 Hungary 0.6

Turkey 1.5 Yugoslavia 0.4

Argentina 1.5 Philippines – 0.2

Chile 1.3 India – 0.2

Source: Adapted from Isher Judge Ahluwalia, Productivity and Growth in Indian Manufacturing, Oxford University Press, New Delhi, 1991.

Now, with the liberalisation of the Indian economy it has become all the more urgent that our industrial sector rapidly increases its productivity in order to match international competition. With this one not only has to compete with foreign competitors in the international market but also in our own country for many compet itors have arrived, and more are likely to set their shops here.

There may be many viewpoints about the definition of productivi ty. But, whatever may be the definition, the fact remains that we have to do urgent thinking on productivity and the ways of en-hancing it from the abysmal levels that it has been over the past several decades. There is no doubt that in our industries the inventories are of mountainous proportions, averaging from 50–60 days consumption to even several years of consumption or sales. In one of the public sector industries, it has been reported to be of almost 16 years requirement. Our private industry, despite the oft-mentioned ‘profit motive’, is not very much better. The recoveries are poor (60–90 days being common). Professional management systems are near-absent. If at all, lip-service is given to the latest management jargon. Several private sector companies where the ISO 9000 system for quality is in operation, have not shown any significant improvements in the productivity in the elementary aspects of quality such as reduction in per cent defects or defectives, rejection rates, warranty costs, and the like over the past six to seven years. Cycle times for pro duction are very high, so also the cycle times for the develop ment of a product. Delivery times are huge and erratic, almost always in several months.

There is no doubt that the Indian manufacturing industry will benefit by the application of even the elementary management concepts such as ABC & VED analysis, variety reduction and simplification, value engineering, improvements in plant layout and materials handling, simple forecasting and business planning, methods and process improvement, simple market research, etc. In the competition with the multinational companies, these simple measures will help our industries to stay at least at the base-line, if not a little above.

In the technological services sector—IT, BT, R&D and ITES—India holds a clear cost advantage and productivities are good enough to attract service work from overseas (outsourcing).



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Key Terms

Productivity: It is an economic measure of output per unit of input.

Labour productivity: It can be measured by quantity of output per time spent or numbers employed.

Capital productivity: It is the ratio of total output to capital inputs.

Material productivity: It is the ratio of total output to materials inputs.

Energy productivity: It is the ratio of total output to energy inputs.

In Review

Productivity means a measure of the quantity of output per unit of input. The input could be the man-hours spent on producing that output or it could be the number of machine-hours spent or the amount of material consumed (in number, kg, litre or Rs, etc.). Managerial control methods form a major part of the techniques for productivity.

While labour productivity has been of much importance since the birth of management science, there are other inputs which are also important, for instance, materials, capital, management know-how, technology and time.

It is right to say that the productivity measure should represent or reflect the overall capability and not focus on only one set of costs. The reason being that with the single factor productivity measures, it is easy to increase the productivity of one factor by replacing it with another. Labour, capital and materials are all potential substitutes for each other.

Productivity in an organisation can be improved by better application of materials, improved processes and machinery, faster production lines and application of more energy from the workers.

The importance of productivity can never be ignored by any diligent business owner. Successful ventures are often those that give priority to productivity compared to solely looking into revenues and profits of the company. On the other hand, businesses that do not pay attention to productivity pay a huge price in terms of reduced production and high cost of production, resulting in reduced sales and low profits. Thus, a productivity level can be considered a measure of success or failure for any business.

Mult ip le Choice Quest ions

1. Productivity is a ____________ concept. (a) Scientific (b) Philosophical (c) Hypothetical (d) All of these (e) None of these 2. Productivity is useful as a/an _____________ measure. (a) Absolute (b) Relative (c) Simple (d) All of these (e) None of these 3. The first time the word ‘productivity’ was mentioned in an article by a/an _____ economist,

Quesnay. (a) English (b) Roman (c) French (d) All of these (e) None of these


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4. The first time the word ‘productivity’ was mentioned in an article in the year ________. (a) 1766 (b) 1866 (c) 1966 (d) All of these (e) None of these 5. ______________ defined productivity as the ‘faculty to produce’. (a) Littre (b) Dalton (c) Neuton (d) All of these (e) None of these 6. Capital productivity is the ratio of total output to materials inputs. (a) True (b) False 7. Technological factors does not influence productivity. (a) True (b) False 8. Productivity is a measure relating a quantity or quality of output to the inputs required to

produce it. (a) True (b) False 9. Productivity is the non-multiplier effect of efficiency and effectiveness. (a) True (b) False 10. Labour productivity is the ratio of the real value of output to the input of labour. (a) True (b) False

Key to mcQs

1. (a) 2. (b) 3. (c) 4. (a) 5. (a) 6. (a) 7. (b) 8. (a)

9. (b) 10. (a)

Concept Quest ions

1. What are productivity measures? Explain various types of productivity measures. 2. Enlist and explain various factors influencing productivity? 3. ‘Productivity is never an accident. It is always the result of a commitment to excellence,

intelligent planning, and focused effort’. Justify the statement. 4. Analyse the productivity scenario in India. 5. Discuss the significance of productivity for any business organisation.

References

http://www.businessdictionary.com/definition/productivity.html


Documents

Notes Chapter 1 Productivity—Concept and Definitionnovella.mhhe.com/sites/dl/free/933922423x/1080777/Prod_Mgmt_IMT_01.pdf · Productivity is a measure of output from a production