Are you using productivity performance as a measure of how well you are achieving continuous improvement and as a guide as to where action needs to be taken to further your goals? What is productivity? How should it be measured? Is it best as a process level measure or can it be rolled up into a performance measure at the firm level?
We will answer these questions by key quotes from an article by Goshua, Kitawb, and Matubec (2017) and a video presentation on simpler productivity calculations with associated examples from Dr. Feng Tian, Assistant Professor of Operations/Supply Chain Management at Governors State University.
The Article: 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 -1. We will provide a link to the article at the end of the blog.
What is Productivity?
“The term productivity is straightforward. Operationally, it is the relation between output quantity (i.e., correctly produced products which fulfills their specifications) and input quantity (i.e., all type of the resources that are consumed in the transformation process).”
What makes the measurement more difficult beyond the process level is the number and different types of products for the output and the many resources needed to generate the inputs. How should they be combined?
Why Measure Productivity?
“The ultimate goal of productivity measurement is, indeed, productivity improvement, which involves a combination of increased effectiveness and a better use of available resources.”
The use of appropriate performance and productivity measures and analytical techniques should be the quest of the industries so that the real and representative of the actual system performance will be measured. Otherwise, an ultimate wrong decision will be practiced.”
The Goshua, Kitawb, and Matubec article focuses more on the concerns and the proper way to measure productivity at the firm level.
Before going into more detail about productivity measurement at the firm level, let’s focus on calculating productivity with Dr. Tian.
Dr. Tian discusses how to calculate productivity in three cases:
- Partial Measure: Output/Single Output
- Multifactor Measure: Output/Multiple Inputs
- Output/Labor + Machine
- Output/Labor + Capital + Energy
- Total Measure: Goods and Services Produced/All inputs used to produce them
- Note: Feng’s video does not provide an example of the Total Measure calculation. We will refer to the Goshua, Kitawb, and Matubec article for issues concerning this type of calculation.
You can view Feng Tian’s video here.
Now let’s focus on the Total Measure of Productivity at the firm level. Goshua, Kitawb, and Matubec look at a case study of a privately owned manufacturing company making leather footwear.
They point out the problems of defining Productivity at the Firm Level and give a general approach to rolling up process level productivity to get an appropriate overall Productivity Measure. However, they don’t go on to establish how is was actually done in the case study organization. Nevertheless, they do provide insight and a proposal as to what must be done.
Goshua, Kitawb, and Matubec point out the limitations in calculations that cannot represent a company’s productivity.
A valid firm-level productivity calculation must be:
- “… thoroughness with which outputs or results delivered and all inputs, or resources consumed, are measured and included in the productivity ratio.”
- “By inclusiveness, we mean a system covering all activities of a firm”
- “The company needs to identify its productivity growth by defining a base year and based on that the index will be developed to determine whether it is growing or lagging in productivity with time.”
- Able to identify and prioritize problem areas where improvement actions need to be taken.
The authors point out the importance of productivity measurement at the process level as a key component of a firm-level measure.
The process level productivity measure:
• “… manages to identify the problematic area to take improvement measurement action with little confusion, time, and cost”
• Is “… simple and easily acceptable by managers”
• Is “Easily integrated with the modern management system tools and philosophies”
• Is “Able to compare the effectiveness of the management system tools with that of the productivity measurement and analysis result”
• Must “Enable productivity level comparison among processes in the firm”
• “Makes branches, functional and processes benchmarking possible”
However, as the authors state, process level productivity measures cannot indicate the overall firm level productivity.
Having pointed out the issues, the authors develop a proposal for developing a valid firm-level productivity measure as outlined in the figure below reproduced from their article.
You can access the article here.