BUS 644 Discussion responses needed

3

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Enhancing Productivity

Learning Objec�ves A�er comple�ng this chapter, you should be able to:

Define produc�vity. Describe why produc�vity is the key to an increasing standard of living. Discuss how the rela�onship between produc�vity and the nature of work has changed over �me. Explain labor, capital, and material produc�vity. Calculate produc�vity in single and mul�ple factor cases. Discuss important trade-offs among the factors of produc�vity. Explain the rela�onship between wage rate and produc�vity. Describe ways to enhance produc�vity.

Produc�vity improvements have a profound impact upon living standards for people around the world. Although completely cut off from society, a group of people stranded on a tropical island would likely employ these same improvements to increase their quality of living.

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3.1 Understanding Productivity

Produc�vity is a term that is men�oned o�en in the news. It is a term that many believe is important, but they are not sure why. Produc�vity is o�en associated with increasing efficiency and lowering costs, which have posi�ve connota�ons. In fact, increasing produc�vity is an essen�al factor for improving living standards. Produc�vity is the level of output achieved from an ac�vity divided by the inputs consumed to make the output. While produc�vity is defined by a mathema�cal equa�on, efficiency is a general descriptor of the �me or effort required to complete work. Generally, efficiency is used to mean achieving an outcome with a minimal amount of effort, that is, no waste; it has a similar meaning as produc�vity.

Produc�vity = Output/Input

The above defini�on, while accurate, does not convey the central role that produc�vity and produc�vity improvements have in determining living standards for people in the United States and around the world. To understand this impact, imagine that seven people are stranded on an island, completely cut off from the rest of society. The island has abundant natural resources. The immediate problems are ge�ng fresh water to drink and gathering fruits and vegetables to eat. Appropriate shelter and clothing come next. The amount of water that seven castaways are able to drink (the output) depends upon how much effort (the input) they place on loca�ng, collec�ng, transpor�ng, and storing it. As the group becomes be�er at gathering an adequate supply of water with less effort, members of the group have more �me for gathering food, building shelters, and making clothes. For example, rather than going to the water source each �me a person is thirsty, the group could build buckets and barrels to transport and store large amount of water that is easily and quickly accessible. This investment in designing and building tools to make collec�ng water faster and easier frees �me for other ac�vi�es. Eventually, as shelters are built, they could be designed and constructed so that the roofs could collect rainwater and funnel it into water barrels. This system would eliminate the labor required to collect water, thus providing more �me for other ac�vi�es, such as growing a large variety of food, building transporta�on devices, swimming, and devising forms of entertainment.

As the seven castaways become more produc�ve, they meet their basic needs (outputs) with less �me and effort (input). This provides free �me, which can be used to create new products, develop be�er ways to make exis�ng products, and enjoy leisure ac�vi�es. Put in the simplest terms, the seven castaways can only consume what they produce. The more they produce, the more they must consume. In this simplis�c example, the castaways clearly benefit by finding ways of "doing more with less," which is a phase that is synonymous with cost cu�ng, and may have a nega�ve connota�on. Doing more with less is the way to achieve an improved living standard.

A 21st-century economy with more than six billion people is similar to the castaway economy because the concept of produc�vity does not change. Produc�vity s�ll measures the ability to produce goods and services (outputs) compared to the inputs or resources used in the process. The primary difference is that most work in the economy is done by groups of people working in organiza�ons. As discussed earlier in this text, organiza�ons exist to meet the needs of society that people working alone cannot. It is through these organiza�ons that people achieve the coopera�on and coordina�on to produce the array of services and goods consumed each day. First, organiza�ons allow individuals to specialize in work, such as produc�on, engineering, and sales. Second, they support the development and implementa�on of technology and automa�on to achieve greater produc�vity. Third, organiza�ons provide a mechanism to coordinate work toward a common set of goals. Examining and redesigning organiza�onal processes and ac�vi�es is a key source of produc�vity improvement. The following examples illustrate these points.

1. Specializa�on—Product design for life insurance requires an es�mate of life expectancy. This effort is cri�cal to se�ng the terms and condi�ons of the policy, including the premium. Actuaries are sta�s�cians who specialize in making this es�mate. Their produc�vity (ability to make the es�mate quickly and accurately) is greatly enhanced by specializa�on. They are well trained in the techniques required to do the job. An employee of the life insurance company with training and educa�on as a general manager, sales manager, or accountant would require significantly more �me and effort to do actuarial work, and the es�mate would probably be much less accurate. Similarly, the actuary would likely make a poor accountant or manager.

2. Technology and Automa�on—At today's universi�es, students have the op�on of paying fees using electronic funds transfer (EFT) via the Internet rather than standing in line at the cashier's office—the approach used a genera�on ago. Not only is EFT more convenient for the student (improves the student's produc�vity by requiring less �me to make the payment), it also increases the produc�vity of the workforce at the university. From the university's perspec�ve, each transac�on that shi�s from paying in person to paying using EFT reduces the amount of �me university employees spend accep�ng the payment and entering informa�on into the computer system. This presents an opportunity to cut costs and to do more value-added work.

3. Process Redesign—In many organiza�ons, marke�ng and sales are responsible for gathering informa�on about customers and their orders. When a customer makes a request that requires special processing, such as a special finish on a piece of steel or a major change to a so�ware module, that informa�on is relayed from the customer through sales to the people who do the work, and takes extra �me and effort, thereby increasing the risk of errors. Changing the process so that the customer can communicate directly with the people doing the work increases the produc�vity of all par�cipants. This can be accomplished in a number of ways, including having the customer visit the facility and meet with the employees, or sending employees to meet the customer. It can also be done by sharing feedback from customers in a video format and providing "made by" informa�on so the customer know who made the product. Providing customer with the employees' email or other points of contact is helpful. Employees tend to respond be�er when the contact with the customer is personal.

Real World Scenarios: Procter & Gamble Work With Walmart

Some�mes, process improvements involve working across organiza�ons. In many cases, retailers are working with suppliers to develop innova�ve ways to improve the replenishment process and reduce the resources devoted to manage this rela�onship.

Procter & Gamble (P&G) supplies Walmart with disposable diapers—a bulky, inexpensive, high sales-volume and low profit-margin commodity—so Walmart must keep inventory low and product availability high. To accomplish this, Walmart has changed its replenishment process. Rather than placing orders with P&G, Walmart provides sales data for each individual store. It is P&G's responsibility to track inventory, schedule produc�on, and deliver diapers to the store.

How does this shi�ing of responsibility improve the process? P&G receives sales data from Walmart each day. P&G uses the data, along with orders from other customers, to schedule its produc�on processes more effec�vely and generate orders for its suppliers more quickly. P&G can more easily balance its produc�on process to reduce spikes in produc�on, which can lead to higher costs through the need for over�me produc�on and similar effects. P&G suppliers, in turn, can improve their response �me and reduce their in-process inventory. Walmart spends less �me tracking inventory, deciding how much and when to order, and placing the order. As responsibili�es shi� between P&G and Walmart, overall costs decline, product availability increases, and the amount of unnecessary communica�on and interac�on between organiza�ons is reduced.

Money Versus Productivity

Produc�vity is more important than money when improving the standard of living, because produc�vity determines the level of output and, therefore, consump�on, whereas money measures the value of the output. Money in the form of revenue, profits, and income is a way for organiza�ons and individuals to track performance. Refer to the castaway example men�oned earlier. Suppose that each castaway landed on the island with $1 billion in gold. The money does not create a single glass of water or one bit of food. It is only through the work of the castaways that these commodi�es are gathered and produced. Methods to increase produc�vity, such as specializa�on of labor, automa�on, technology, and process improvement, create be�er living condi�ons and a society with a higher living standard.

Ini�ally, the small island economy may use a barter system in which a castaway gathering water would trade water for food with another castaway gathering or growing food. As the economy grows in complexity, a currency will likely emerge to facilitate the exchange of goods and services, because bartering can be cumbersome. Suppose a currency is in place, and it is based on the gold that the castaways brought with them. Now suppose the castaways discover gold on the island. They divide the gold up evenly, so now each castaway has twice as much gold as before and wants to buy more goods and services. The immediate impact is to increase the price for items because the quan�ty of available goods and services has not changed. There would be no increase in the goods and services available unless produc�vity is improved or the castaways work more hours at the same level of produc�vity. For the island economy, it does not ma�er whether or not more gold is found, the castaways could do either of these ac�vi�es: increase produc�vity or increase the number of hours worked.

As the popula�on grows and the island economy develops, income for each individual would be determined by the value of the work they could do. If medical care, for example, is determined more valuable than educa�on, doctors would receive a higher income than teachers. This would allow a doctor to consume more than a teacher because the value of the doctor's labor is judged to be higher. If an individual in a developed economy finds $1 million worth of gold in his or her backyard, that s�ll does not generate more output. It does, however, allow the person to outbid others for the outputs of the economy and consume more. Someone else, in turn, must consume less un�l produc�vity increases.

Productivity and the Nature of Work

Many individuals believe that produc�vity applies primarily (or exclusively) to the blue-collar workforce. People think of the number of laptop computers produced by workers on an assembly line, or the amount of paper produced in a mill as key produc�vity data. While the produc�vity of blue-collar workers is important, blue-collar workers represent a small and declining por�on of the workforce in developed countries.

During the 20th century and con�nuing today, there has been a substan�al shi� in the nature of work. Early in the 20th century, nearly 80% of the workforce in the United States performed manual work, with the balance doing intellectual work, such as designing, planning, and managing. Today, that percentage has reversed. In addi�on, about 80% of the workforce in the United States is employed in service organiza�ons. Of those employed in manufacturing, many work in management, sales, and other staff ac�vi�es, such as quality control and engineering. Like the seven castaways, the produc�vity of everyone is important because each impacts the living standard of all. Because a large por�on of the U.S. workforce does intellectual work, its impact upon living standards is very important. Table 3.1 presents some examples of people doing intellectual work, key measures of their produc�vity, and possible methods to improve that produc�vity.

Table 3.1: Produc�vity measures and methods of improving produc�vity

Worker Ac�vity Measure Method of Improving Produc�vity

University faculty

Educates students or educates them be�er

Student credit hours taught. This does not take into account what students have learned or other du�es of faculty, including curriculum design, research, and service.

Increasing class size leads to more student credit hours Assigning more sec�ons per faculty also leads to more student credit hours Distance learning provides access to educa�on that may not otherwise be available Innova�ve teaching methods can improve the quality or the quan�ty of what is learned

Postal worker Oversees the opera�on of an automa�c sor�ng machine

Number of pieces of mail sorted in an hour Equipment improvements that speed up the sor�ng process Job training

Case worker for children's services

Manages the care of children in foster homes

Number of cases under management at any �me. This does not consider the degree of difficulty of the cases, or the quality of the service provided.

Informa�on systems, including databases that support care Communica�on technology that gives access to foster parents, service providers, and support services

Productivity in Service Organizations

Through the last half of the 20th century, as the U.S. economy shi�ed from a manufacturing-based economy to a service-based economy, produc�vity improvements lagged because produc�vity gains in the service sector were more difficult to achieve. With rapid advances such as the Internet, telecommunica�on, and mobile devices of all types, the ability to improve the produc�vity of the intellectual labor force has increased dras�cally. Companies that are able to apply these technologies are gaining a compe��ve edge. For example, Northwestern Mutual has a processing cost of $.063 cents for each dollar of premium collected from its policyholders while its compe�tors' costs range from $.15 to $.20. It is logical to argue that these companies have not managed their resources and technology effec�vely. Costs for telephone access, both wired and wireless, are declining as technology is applied to reduce equipment and labor costs.

The Quality Condition

While the importance of quality may be obvious, it is worth discussing. Produc�vity calcula�ons are based on the assump�on that quality levels are maintained. If an organiza�on produces more output with the same level of resources, but the quality of the output is lower, then produc�vity may not increase. If a company produces more computer so�ware, but the so�ware is defec�ve and must be corrected, then the company has gained li�le. In fact, produc�vity may actually have been reduced. If a lower quality product reaches the consumer, and the product's value to the consumer is reduced, or the consumer must spend addi�onal resources to prepare the product for use, produc�vity is affected. The same ideas apply to a research laboratory or an inner-city mission. If researchers' output is higher quality, the people that use their work will benefit because the output has more value. If the mission provides be�er nutri�on and preven�ve health care screening, the people using the services will feel be�er and the cost of health care should decline. This frees health care resources for others.

Conversely, quality may be another way to boost produc�vity. If firms find ways to make a higher-quality product, using the same or fewer resources, then produc�vity increases because the output has greater value. Following the so�ware example, if a firm purchases new so�ware development tools that are easier to use and result in fewer errors, the produc�vity of its programmers and analysts increases.

It is essen�al to define and measure the inputs and the outputs of an ac�vity to calculate produc�vity. If a manufacturing opera�on makes a single product on an automa�c machine, it is simple to calculate the produc�vity of that machine.

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3.2 Assessing Productivity

To calculate produc�vity, it is essen�al to define and measure the inputs and the outputs of the ac�vity. In the simplest cases, measurement is a trivial problem. If a manufacturing opera�on makes a single product on an automa�c machine, calcula�ng the produc�vity of that machine is simple. The output over a given period of �me is measured. It is usually be�er to measure a rela�vely long period of �me, days or weeks rather than minutes or hours. The reason is that the outputs may be greatly affected by a short-term occurrence such as a machine breakdown.

Example: Machine Produc�vity

If a machine can make 200,000 roofing nails in 40 hours, then the produc�vity of the machine is 5,000 nails per hour. This is a single-factor produc�vity calcula�on because only the machine is considered.

Machine Produc�vity = 200,000 roofing nails/40 machine hours Machine Produc�vity = 5,000 roofing nails/machine hour

The resul�ng data become a benchmark that the firm seeks to improve. Suppose the firm invests in a new piece of equipment that automa�cally feeds metal to the machine so the machine can run faster. Now, the machine is able to produce 210,000 nails in the same 40-hour period. Produc�vity has increased from 5,000 nails per hour to 5,250. Produc�vity has increased by 5%. Change in produc�vity is the produc�vity a�er the new equipment minus the produc�vity before the new equipment divided by the original produc�vity �mes 100. Make sure that the sign of that number is kept so it can be determined if produc�vity increases or decreases.

Percent Change in Produc�vity = (New Produc�vity – Old Produc�vity)/Old Produc�vity (100) Percent Change in Produc�vity = (5,250 – 5,000)/5,000 (100) Percent Change in Produc�vity = 5%

Inputs and Outputs

While this simple example illustrates the method for calcula�ng produc�vity, it does not consider that most opera�ons have more than one input and more than one output. Economically, the inputs are:

1. Labor by managers and workers (either internally or externally) 2. Capital for land, facili�es, and equipment 3. Materials, including energy requirements

The importance of these factors varies widely for companies producing different products. For example, steel mills require large amounts of energy while Children's Services, a social service agency, uses very li�le. In a steel plant, the significant inputs include managers, laborers, land, facili�es, equipment, energy, and raw materials. The inputs for Children's Services include management and caseworkers. For Children's Services, the investment in land and facili�es would be small compared to labor costs. Equipment investments may be relevant for informa�on technology. Energy and raw material costs would be very small. Material costs would also be low with only small quan��es of office supplies required.

Outputs can be more difficult to define and measure. For example, how would the produc�vity of a fast-food restaurant be measured? Would it be measured by customers served per hour? If so, that calcula�on is problema�c because customers may order different things. Measuring output as the number of items sold also can be misleading because these restaurants sell various items (such as drinks, sandwiches, and ice cream) that have different value to each customer, which is, therefore, reflected in the prices charged.

These examples illustrate two important issues that can complicate how produc�vity is measured: (1) How can mul�ple inputs with different economic values be included? In the fast-food example, how does the produc�vity of labor relate to the produc�vity of capital or materials?; (2) How can mul�ple outputs with different economic values be calculated? Con�nuing the fast-food example, a pizza shop may produce hot submarine sandwiches, chicken wings, and bread s�cks. How does it value those outputs compared to a pizza? Even if the pizza shop sells only pizza, there are different sized pizzas with different toppings that have different economic value. In cases where there are mul�ple inputs or outputs with different values, dollars rather than item counts or hours worked are used to measure both inputs and outputs.

Labor Produc�vity

Labor is the most obvious input in the produc�vity equa�on. In fact, some businesses are concerned only with measuring labor produc�vity because it is easy to calculate and many managers believe it is one factor under their direct control.

For many service opera�ons, labor is the largest input. In service opera�ons, such as banks, hospitals, and universi�es, labor is o�en 70% or more of total costs. For manufacturing firms, however, it is important to note that direct labor, people who work in producing goods, usually accounts for a small percent of total input costs—10% or less. Indirect labor, which is labor that supports produc�on such as quality, supervision, and maintenance, can be two or three �mes the cost of direct labor cost. If indirect labor, management costs,

Materials and energy are o�en cri�cal inputs to manufacturing processes, but may be insignificant within service opera�ons. For example, laboratory supplies purchased for universi�es and hospitals represent a very small part of the inputs required for the organiza�on.

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Robo�c Technology in the Workplace: Inves�ng

and outside services are added to direct labor costs, the total is usually below 50% of the cost of all inputs. Some service opera�ons may be able to func�on minimally with only labor produc�vity, but a broader perspec�ve on produc�vity may be relevant.

The simplest way to determine labor produc�vity is to measure output per labor-hour. This approach does not account for varia�ons in pay rates among workers. To calculate such rate differences, many companies use labor costs as a measure of inputs. The equa�on for labor produc�vity is:

Labor Produc�vity = Quan�ty or Value of Units Produced/ Labor Hours or Labor Cost

The equa�on for any other individual factor of produc�vity differs only by its �tle and its divisor. For example, to calculate material produc�vity, use material quan�ty or material costs as the divisor.

Capital Produc�vity

Another major component of produc�on is capital, which includes all money invested in land, facili�es, and equipment, as well as working capital, such as inventory. Capital produc�vity can increase when firms invest in new facili�es and equipment that increase output. Capital produc�vity can also be increased if a company can produce the same level of output as it previously had while reducing its inventory levels or other working capital requirements. Many firms invest in new facili�es and equipment in order to reduce labor costs; however, the benefits of making a capital investment may greatly expand labor produc�vity and capital produc�vity may instead decline. These trade-offs are discussed later in the text.

Service and manufacturing firms o�en have very different capital requirements. Service opera�ons o�en have rela�vely small investments in capital. For example, insurance companies require office space, furniture, informa�on systems, and working capital, which represent a small part of their input costs. Hybrid service opera�ons, such as retail, o�en have large investments in retail outlets, distribu�on centers, and inventory in their network of retail outlets and distribu�on centers. Manufacturers usually have very large capital outlays to build produc�on facili�es.

Material Produc�vity

Materials and energy are o�en cri�cal inputs to manufacturing processes, but may be insignificant in most service opera�ons. For manufacturing companies, materials o�en represent more than 50% of the input costs. A university may purchase office and laboratory supplies as materials. A hospital's primary materials include medicine, linens, and food for the cafeteria. For universi�es and hospitals, materials represent a very small part of the inputs to the organiza�on.

Trade-Offs in Productivity

Produc�vity can increase by maintaining the level of output while decreasing inputs, or by increasing output without increasing any input. This is difficult to achieve, so trade-offs are necessary. Companies must contend with trade-offs among the various inputs in order to achieve increases in overall produc�vity, called mul�ple-factor produc�vity. In this case, some individual factors of produc�vity may decrease while others increase.

Trading Capital for Labor

For thousands of years, producers of food and goods have traded capital for labor. These trade-offs date back to the �me when our early ancestors first began using tools to make life easier. The wheel and axle allowed people to carry heavy loads across greater distances. Instead of making many trips to move a certain load, a person could make one trip in a wheeled cart. This trade of capital, the investment in designing and building a wheeled cart, for less labor resulted in substan�al produc�vity increases that are s�ll occurring today. This is why research and development ac�vi�es that design and develop new technologies and devices are important for economic health and improving living standards. In the development and applica�on of the wheel and axle to industrial and transporta�on uses, someone or a group of people had to take the �me to research the concept, create a design, build and test prototypes, and put the idea into produc�on. This investment required a shi� of resources from the labor associated with doing the actual work of moving the item to be transported, to research and development on how to move the item more efficiently. This meant that someone had to take a significant risk, but the benefits have been tremendous. The impact of this investment on living standards can be seen everywhere.

Trade-offs involving capital and labor have focused primarily on automa�ng ac�vi�es previously performed by people. In the construc�on business, trucks and bulldozers move large quan��es of dirt and other materials on construc�on sites. In the automo�ve industry many boring, unpleasant, or dangerous tasks are performed by robots and other automated devices. In retail opera�ons, checkout systems are becoming completely automated as customers check out their items using a scanner, and pay by credit card or cash. The result is high capital costs, low labor costs, and greater overall output—which generate an overall produc�vity increase. Higher capital costs pay for research and development as well as equipment produc�on.

At some retail stores, cashiers are being replaced by technology that allows customers to scan items and make payments themselves. While these jobs are lost, other jobs have been created to design the new checkout equipment, develop the so�ware, manufacture the equipment, and install the system. In addi�on, produc�vity has increased, and the cost of doing business has declined. New, be�er-paying jobs are created, and the

economy con�nues to grow. Produc�vity improvements lower the total number of jobs required. The labor saved can be used to increase leisure �me, u�lize more people working fewer hours, or design and create new goods and services. This is how economies grow and become stronger.

Trading Capital for Material or Energy

It also has become common to make capital investments that improve material or energy produc�vity. The concept and issues are similar to those discussed in the prior sec�on. For example, a plas�c injec�on molding company produces parts for Hewle� Packard's laser printers. By inves�ng in new injec�on molding equipment that reduces scrap, the company can produce the same number of plas�c parts (output) from a smaller number of plas�c pellets (inputs). In addi�on to leading to an increase in material produc�vity, the investment also reduces the amount of energy consumed because substan�al energy is used to melt the pellets prior to injec�ng them into the molding machine. Because fewer pellets are used to make a given number of plas�c parts, less energy is used and energy produc�vity has increased. It is not always the case that both improvements can be achieved with a single investment, but it is not uncommon.

Subs�tu�ng Materials for Labor

In some instances, there may be advantages to spending more for materials in order to achieve a reduc�on in labor costs. Some�mes it makes sense to have a supplier do extra work, which is reflected in the price of the materials. This reduces labor costs or processing �me for the manufacturer. Outsourcing work has become a common prac�ce in both manufacturing and service opera�ons. Apple's approach to manufacturing is to concentrate produc�on to achieve economies of scale and to outsource produc�on to keep costs low and produc�vity high. Economies of scale refers to the ability to produce more goods at a lower cost by be�er u�lizing the same fixed costs. This can be achieved by making facili�es larger, which requires less fixed costs per unit produced. Health care providers use disposable medical supplies to avoid the cost of collec�ng and cleaning. It is more economical to incinerate or recycle these items than it is to clean and reuse them. In some instances, such as vehicle produc�on, assembly plants want a completely finished subassembly delivered by its supply so that the plant's employees only insert the assembled part into the vehicle. An instrument panel is only one example of this. The cost of the component purchased from the supplier is higher, but the in-house assembly costs can be greatly reduced. The net impact for suppliers and manufacturers is greater produc�vity and lower costs. Many service opera�ons will purchase supplies that cost more, but increase the produc�vity of their workforce.

Improving Produc�vity Through Be�er Maintenance

Any�me equipment is involved, whether it is mechanical devices making automobiles, furniture, or telecommunica�on equipment moving voice or data, failure in the equipment leads to lower levels of equipment and labor u�liza�on. When a pizza oven is not working because it was not properly maintained, the pizza shop loses the ability to make and sell pizza pies. The equipment cannot be used and the labor is idle; therefore, produc�vity declines. When a so�ware developer must wait for informa�on because equipment is not working, both the developer's �me and the equipment are unused. As a result, a lack of effec�ve preven�ve maintenance could lead to a reduc�on in both labor produc�vity and equipment produc�vity. Performing preven�ve maintenance when equipment is idle is cri�cal; otherwise produc�vity is disrupted.

Multiple-Factor Productivity

To cope with the trade-offs that can occur when produc�vity improvement efforts are made, mul�ple-factor produc�vity must be considered. Mul�ple-factor produc�vity accommodates more than one input factor and more than one output factor when calcula�ng overall produc�vity. For example, if the owners of a pizza shop want to increase the produc�vity of their ovens, they may consider decreasing the �me that a pizza cooks in the oven. To compensate for the reduced �me, the oven's heat is increased. A single-factor produc�vity calcula�on based on oven u�liza�on would show an increase in capital produc�vity because more pizzas are moving through the oven in a given period of �me. However, there would also be an increase in energy consump�on, which would not be factored into the calcula�on. With mul�ple-factor produc�vity, the outputs can be measured in dollars or the number of units produced, provided that all the units have approximately the same value.

Mul�ple-Factor Produc�vity = Quan�ty or Value of Output (Units Produced)/ (Labor + Capital + Materials + Energy + Other (Measured in Dollars))

Example: Life Insurance

Freedom Insurance Company processes claim applica�ons. The average output in one week is 600 applica�ons. Currently the staff includes six full-�me employees who work 40 hours per week and earn $24 per hour including benefits. Management has invested in computer technology, which has a weekly cost of $1,200. Materials and energy are not used in significant amounts. What is the produc�vity of the applica�on process?

Mul�ple-Factor Produc�vity = 600 applica�ons/ ((6 employees) (40 hrs/wk) ($24/hr) + 1,200) Mul�ple-Factor Produc�vity = 600 applica�ons/$6,960 Mul�ple-Factor Produc�vity = 0.086 applica�ons/dollar

In this case, the units of produc�vity are applica�ons-per-dollar. The number of applica�ons can be used because the value of each applica�on is approximately the same. The inverse of this number, $11.60 per applica�on ($6,960/600 applica�ons), is the cost of processing each applica�on. Suppose Freedom decides to invest in addi�onal computer equipment that will drive the weekly cost of informa�on technology to $1,800. One of the applica�ons evaluators is leaving the company and will not be replaced. The remaining five processors should be able to complete 650 applica�ons per week with the new technology. What is the impact upon produc�vity?

Mul�ple-Factor Produc�vity = 650 applica�ons/ ((5 employees) (40 hrs/wk) ($24/hr) +1,800) Mul�ple-Factor Produc�vity = 650 applica�ons/$6,600 Mul�ple-Factor Produc�vity = 0.098 applica�ons/dollar of input

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With the new investment, produc�vity increased from 0.086 to 0.098 applica�ons per dollar of input costs. The gain in produc�vity is 14%, which is a substan�al gain. The inverse of this number, $10.15 per applica�on ($6,600/650 applica�ons), is the cost of processing each applica�on. To provide a point of comparison, a 3% to 4% increase in produc�vity per year would be considered strong growth for a developed country.

Percent Change in Produc�vity = (New Produc�vity – Old Produc�vity)/ Old Produc�vity (100) Percent Increase in Produc�vity = (0.098-0.086)/(0.086)(100) Percent Increase in Produc�vity = 14%

Positive Impacts of Increased Productivity

Some have argued that produc�vity has a nega�ve impact upon jobs and the economy because fewer people are needed to complete the same amount of work. This leads to a loss of income for the worker, and high unemployment costs and lower tax revenues for the government and the economy. This would be an accurate assessment if there was no growth in the demand for goods and services and there was no demand for new and innova�ve products. Developed na�ons such as the United States have seen substan�al growth in demand for goods and services and for new, innova�ve products. Developing countries including the BRIC countries (Brazil, Russia, India, and China) have rapidly growing economies. Countries such as Vietnam and Thailand are poised for substan�al economic growth.

The impact of produc�vity improvements upon cost can easily be illustrated using the investment in computer technology in the prior example. Produc�vity increased by 14% because more work was completed using fewer workers due to the new technology. As a result, the cost to process an applica�on was reduced by $1.45 from $11.60 to $10.15 (1.45/11.60), a reduc�on of 12.5%.

The impact on workers is not as clear. If a worker is re�ring, that worker has more leisure �me and the work that was being performed is s�ll ge�ng done, at a lower cost, by another worker. The result is posi�ve for the worker, the company, and the economy. If the same worker resigns to take another job, the worker, the company, and the economy s�ll benefit. The worker moves on to a be�er job, processing costs decline for the company, and the work is s�ll being performed.

If a worker does not voluntary leave a firm, the situa�on is not as clear. The company s�ll benefits because processing costs decline. What effects impact the worker and the economy, though? If the right economic circumstances are in place, they will benefit as well. When the business environment is conducive to innova�ons and an overall growing economy, this job loss is posi�ve rather than nega�ve because it creates slack in the labor force, or unemployment in the economy. Slack in the labor force can be put to work crea�ng new ideas, new products, and new companies. Slack can be used to staff businesses that must hire and train new employees because a company is growing faster than its produc�vity growth rate. At a macro level, this is precisely what has happened many �mes as the U.S. economy transi�oned from an agricultural, to a manufacturing, to a service- based economy. Informa�on technology, the Internet, cloud compu�ng, and mobile devices are the forces driving the current transforma�on under which more people will work from home and will change jobs more frequently as the process for crea�ve destruc�on accelerates. Crea�ve destruc�on is when new ideas or technologies replace outdated ideas or technologies, as in the case of online video streaming replacing DVDs and DVD rental shops. Typically, during crea�ve destruc�on, jobs are gained in one area and lost in another. To help with such transi�ons, governments offer unemployment insurance and federal and state retraining programs. Some colleges and universi�es reach out to non-tradi�onal students in an effort to increase the educa�on and skills needed to compete in a new job market.

Cloud compu�ng companies offer ways to reduce investment in IT equipment and facili�es, while providing a flexible and inexpensive pla�orm through which to engage and serve customers.

iStockphoto/Thinkstock

Importance of HR Management: Human Resource Func�on

3.3 Current Trends in Productivity

Over �me, produc�vity growth in the U.S. economy has been inconsistent. There was strong growth in the 1960s, followed by low and in some cases nega�ve growth in the late- 1970s and early-1980s. As the 1990s began, produc�vity growth began to accelerate and has con�nued to show posi�ve growth. The rate of growth in produc�vity tends to be stronger when the economy is strong and weaker when the economy slows down.

Increasing produc�vity o�en drives business performance. As organiza�ons achieve more output with the same resources, the economy grows. Refer to the island example men�oned earlier in the text; more is produced so there is more to consume. At the same �me, profits expand even if the selling price of the product does not increase. For Apple, profits grow dras�cally even when the selling price of its products declines because the quan�ty sold increases. The cost structure of the firm (at least the labor por�on) does not change, and there is more revenue from increasing sales. Therefore, bo�om-line profits can expand dras�cally. For example, as Microso� finds ways to produce and distribute more copies of its so�ware while maintaining the same resources used in these ac�vi�es, it will generate greater revenue and profit.

In many cases, produc�vity improvements are driven by investments in technology, and these investments drive economic growth. For example, as retail companies such as Walmart invest in Internet applica�ons for sales transac�ons, repair parts and service, and adver�sing, demand for technology from companies such as Cisco Systems and Intel accelerates. Cloud compu�ng companies such as Salesforce.com and Brocade offer ways to reduce investment in IT equipment and facili�es while providing a flexible and inexpensive pla�orm to engage and serve customers. As the U.S. economy con�nues to shi� away from manufacturing and toward services, investments in informa�on technology for service opera�ons become more important for produc�vity growth and economic expansion.

Productivity and Wage Rates

Generally, wage rates and produc�vity are posi�vely correlated. This posi�ve correla�on means that organiza�ons with high produc�vity can afford to pay their workers be�er wages because their workers produce more output. This correla�on has implica�ons for companies that are selec�ng loca�ons for their opera�ons. A country with a low wage rate does not necessarily have low unit labor costs because workers in the country may have low produc�vity. For example, if someone was asked to move a pile of dirt from one point to another and was given a shovel and a wheelbarrow to do the work, the produc�vity would be rela�vely low. On the other hand, if the person was given a bulldozer and proper training, produc�vity would be much higher. The bulldozer operator is paid a higher wage because the operator moves more dirt faster. Wage rate is not the sole determinant of unit labor cost. The other important factor is produc�vity, or the number of units produced.

To provide a context for the dirt-moving problem, suppose that a person with the wheelbarrow and shovel is paid $2 per hour and can move 1 cubic yard of dirt in one hour. The bulldozer operator makes $24 per hour and can move 20 cubic yards in one hour. The labor cost to move the dirt by wheelbarrow is $2 per cubic yard ($2/hr) / (1 cubic yard/hr). The labor cost to move the dirt by bulldozer is $1.20 per cubic yard ($24/hr) / (20 cubic yard/hr). The owner of the construc�on company is able to pay higher wages and achieve lower costs because the investment in equipment and training has boosted produc�vity dras�cally. A�er paying the higher wage, the owner is able to save enough labor cost to pay for the bulldozer, buy fuel to operate it, and pay to train the employee.

Productivity and the Workforce

Some people would argue that produc�vity improvements such the one described in the previous sec�on take jobs away from workers. A construc�on company that once employed 20 manual laborers employs only one bulldozer operator with the introduc�on of the new technology. Their claim is based on the fact that the construc�on company now employs one bulldozer operator who does the work of 20 laborers. While this is true, it is only one component of produc�vity. Refer once again to the example of the castaways; they could only consume what they produced. The same is true for society. If wheelbarrows and shovels had been used to build highways, there would not have been sufficient labor to build the vast interstate systems and other road networks unless workers were taken from appliance manufacturing, teaching, medicine, and other occupa�ons to move the dirt. In addi�on, the highway system would have cost much more to build. Produc�vity improvements, such as earth-moving equipment, are essen�al for designing and building more goods and services at a lower cost, which increases the standard of living.

In addi�on, the net job loss in this example is not equal to 19 jobs because new jobs are created to design and manufacture the bulldozer. Jobs are also created to sell and service the equipment. Workers and equipment are needed to transport the bulldozer from one job loca�on to another. As a result, new jobs are created, and most of these jobs require higher levels of educa�on than moving dirt with a wheelbarrow. Will this subs�tu�on generate enough new jobs to make up for the 19 that were lost? The answer to this ques�on is easier to understand when viewed broadly. Society would not have a net produc�vity gain if the same or more work is required to design, build, sell, and service the bulldozer than was saved by the subs�tu�on of capital (the bulldozer) for labor. Society benefits because more work is completed with fewer total resources. Also, the remaining bulldozer operator is paid substan�ally more than wheelbarrow operators. The jobs created to engineer, manufacture, and sell the bulldozer are also likely to carry higher salaries than the wheelbarrow operator. Higher wages must offset the savings generated from increasing produc�vity. As a result, there are displaced workers who become available to create new products that grow the economy.

Productivity and Leisure

Produc�vity increases do not always result in greater output. As produc�vity in the United States increases, some of the benefits include more leisure �me for workers. In the United States, the "nominal" workweek has been 40 hours for several decades. In the first half of the 20th century, however, the workweek was much longer—50 to 60 hours and a six-day workweek was not uncommon. During that �me period, �me off for holidays and vaca�on was substan�ally less than what is considered normal today. Drama�c increases in produc�vity allowed the U.S. economy to experience an expanding living standard and a contrac�ng workweek.

Today, employees in many countries in Europe have shorter workweeks and more generous vaca�ons than employees in the United States. However, such choices have implica�ons for the people in these European countries. If they want to work fewer hours, there is less for them to consume unless they can find ways to increase produc�vity.

Importance of HR Management From Title:

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Health care produc�vity can be increased and quality enhanced when hospitals specialize in different areas such as pediatrics or neurology. In this way, they avoid duplica�ng expensive equipment, highly trained staff, and administra�ve overhead.

Ryan McVay/Digital Visions/Thinkstock

3.4 Enhancing Productivity

Produc�vity increases sound ideal, but how can a company achieve them? Some managers view produc�vity improvements narrowly and a�ribute improvements to a�en�on to the details of the produc�on process. For example, changing the height of a desk so that an administra�ve assistant has easier access to the keyboard may increase produc�vity. This adjustment can be an important contribu�on in elimina�ng physical stress and reducing fa�gue, which could lead to greater output. This narrow view, however, is far from the whole picture. Produc�vity is affected by:

Design of opera�ons including the number, size, loca�on, and capacity of the facili�es providing the service or producing the good. Equipment and methods used. Detailed analysis of the individual jobs and ac�vi�es.

Productivity and the Design of Operations

The first issue is not as simple as saying that fewer, bigger facili�es will result in higher produc�vity and lower costs, although that tends to be true and is what conven�onal economic theory conveys. This is generally referred to as the economies of scale argument. Effec�vely designing opera�ons matches the capabili�es of the facili�es to the needs of the customer. For example, health care produc�vity could be increased and quality could be enhanced if hospitals specialize. Currently, many hospitals are merging or forming alliances. These unions permit one hospital to specialize in some areas, such as pediatrics and obstetrics, while another hospital specializes in other areas, such as neurology and psychiatry. In this way, each hospital avoids duplica�ng the cost of expensive equipment, highly trained staff, and administra�ve overhead.

Real World Scenarios: Shouldice Hospital

Shouldice Hospital in Ontario has specialized in the repair of hernias since 1945, when Dr. Shouldice experienced a large number of hernia cases and a shortage of doctors and medical facili�es. Specializa�on allowed the hospital and the doctors to find innova�ve ways to perform hernia repair surgery. The hospital reduced resource requirements and increased produc�vity.

The objec�ve of the surgery is successful repair of the hernia(s) with as li�le discomfort as possible for the pa�ents so they can return to their normal life quickly. Pa�ents frequently return to work in a few days; the average total �me off is only eight days.

The hospital's success has been the benchmark for the medical profession interna�onally. The hospital has repaired more than 270,000 hernias with a success rate greater than 99%. Shouldice pa�ents can walk out of the opera�ng room, and their postopera�ve recovery is rapid. By the following morning, most pa�ents can par�cipate in a gentle exercise program. The process, from surgery to recovery, is fast and effec�ve for both the hospital and the pa�ent.

Productivity and Equipment and Methods

The equipment and methods used to provide a service or produce a good can also have a substan�al impact upon produc�vity. Providing the company's sales force with so�ware to iden�fy prospects, determine their needs, and track sales makes it a more produc�ve work force, just as providing a factory worker with a newer and faster piece of produc�on equipment. Providing faculty with so�ware to manage instruc�onal materials improves produc�vity as well; the tool should fit the job. For example, if an employee is asked to move 1 million gallons of water from one point in a facility to another, an electric pump and a hose is much be�er than a bucket. In turn, neither the bucket nor the pump would be appropriate for moving small amounts of water to make coffee at the corner restaurant.

Real World Scenarios: Segway Personal Transporter

The Segway PT is an example of a technology that could revolu�onize work and dras�cally increase produc�vity. It is the first self-balancing, electric-powered transporter and is designed to enhance the produc�vity of people by increasing the distance they can travel and the amount of goods they can carry. Segway uses electronic gyroscopes for balance and microprocessors to measure the rider's intent (leaning forward or leaning backward) for forward and backward mo�on. Dean Kamen and a group of talented engineers and designers inspired this innova�on.

More than 1,200 police departments and public safety organiza�ons around the world use the Segway PT. The Segway PT allows these officers to create innova�ve community programs, connect be�er with the residences they serve, and patrol more area in less �me. The Segway improves visibility as the officer can see surroundings be�er and people can see the officer be�er, and it is flexible enough to be used inside buildings, such as airport terminals, as well as outside. It also has zero emissions.

Segway PTs are currently used to patrol military bases, allowing soldiers to inspect buildings on the post in less �me. The Segway PT can cover a variety of terrain, is versa�le and maneuverable, and provides effec�ve crowd control.

Paramedics with the Chicago Fire Department use the Segway PT to enhance response �me. They provide shorter response �me for medical emergencies, can carry enough equipment to provide lifesaving treatment before an ambulance arrives, and can access upper floors in high-rise buildings.

When comple�ng tasks, most people will use only their dominant hand. With a small amount of training, a person can be taught to use both hands, enabling the task to be completed in about 70% of the �me it takes using only one hand.

Roger Wright/The Image Bank/Ge�y Images

Segway PT also enables enhanced security in shopping malls in Sonae Sierra, Portugal. The patrols are done more quickly and effec�vely on a Segway PT than on foot, thereby increasing the produc�vity of security personnel who patrol the company's large shopping centers. In turn, shoppers and storeowners no�ce the security personnel, and feel safer and more secure.

Productivity and Detailed Analysis of Work

Detailed analyses of individual jobs and ac�vi�es focus on making people more produc�ve. Analysis may suggest a be�er way to complete more work. For example, most home dishwashers have a removable silverware rack so the rack can be moved to a convenient loca�on and the silverware can be easily removed. When given a task such as this, most people will use only their dominant hand. With a small amount of training, a person can be taught to use both hands. This enables the task to be completed in approximately 70% of the �me it would take for a person using only one hand. When ideas like this are applied to the billions of repe��ve tasks performed each day in service and manufacturing firms throughout the world, produc�vity improvements and cost reduc�ons could be enormous.

Summary of Methods

Innova�on and automa�on change the way work is done and provide important methods to increase produc�vity. When organiza�ons increase the number of customers served, there are opportuni�es to achieve lower cost and higher produc�vity through economies of scale. Addi�onally, as organiza�ons gain experience by serving more customers, they learn how to do the work be�er. This is o�en called con�nuous improvement. There are also opportuni�es to improve how work is done through redesigning business processes, improving how individual jobs are designed, and enhancing a firm's human resources. The following discussion focuses on several approaches that can be used separately or in combina�on to increase produc�vity

Technology Innova�on—Brings new ideas, methods, or equipment to the process of making a product. In banking, computers and informa�on technology have changed the process for reconciling checking account transac�ons and have greatly increased produc�vity. Using technology in distribu�on centers and warehouses has enabled retailers to increase produc�vity and reduce costs. Automa�on—Subs�tutes capital for labor. Automa�on is different from technological innova�on because exis�ng automa�on is merely applied to a new situa�on. Using conveyors to move parts between points in a packaging opera�on can increase produc�vity. Conveyor technology has been available for decades, but it is constantly finding new applica�ons. Economies of Scale—Allow firms to increase produc�vity by making opera�ons larger. Both service and manufacturing opera�ons take advantage of this tac�c to improve produc�vity and lower costs. Consolida�on in the banking industry is being driven by the need to spread fixed costs, such as informa�on systems, credit card processing, bank infrastructure, and management, over a broader range of opera�ons. This consolida�on is also occurring in accoun�ng firms, brokerage houses, and credit card companies. Learning and Experience—Enable firms to achieve produc�vity improvements because the workforce gains knowledge about the product and work processes. From this knowledge, workers find be�er ways to organize work. This concept was first applied in the aircra� industry so firms could es�mate the cost of future orders. The produc�vity improvements and the cost reduc�ons were substan�al. Business Process Redesign—Focuses on the understanding and redesign of processes that already exist within and between companies. For example, how can a company streamline its product development process to create more and be�er product ideas in less �me than the exis�ng process? Job Design and Work Measurement—Enable firms to examine work at a detailed level so that it can be inves�gated and improved. This examina�on o�en occurs at the level of the individual worker or the interface between a worker and a machine. The approach tends to examine individual movement to improve produc�vity. For example, the kitchen setup in a fast-food restaurant is laid out so the cook can make items on the menu with ease. This is the same overall objec�ve used in a manufacturing firm to organize the assembly area to put together a speaker or a keyboard. Human Resources—Enable produc�vity improvements without inves�ng in facili�es and equipment, buying high-quality materials, redesigning jobs and processes, or spending for employee training. In many organiza�ons, the rate of produc�on is labor constrained. If labor is mo�vated to do more work, produc�vity can increase without addi�onal investments or cost increases. For example, when faculty members sign addi�onal students into their classes, they have increased produc�vity with no addi�onal costs. When sales managers add another sales territory to their workload, their produc�vity increases without increases in costs. Mo�va�on is a powerful tool that can be used to increase produc�vity in any job that is labor intensive.

Chapter Summary

Produc�vity is the ra�o of the outputs achieved from an ac�vity to the inputs consumed to make those outputs. Produc�vity is a key to increasing the standard of living. Produc�vity is more important than money when driving economic growth. During the 20th century, the nature of work shi�ed from primarily manual to primarily intellectual. As a result, the produc�vity of managers, designers, and planners is as important as or more important than the produc�vity of blue-collar workers. Calcula�ng produc�vity involves: (1) assessing the outputs either by coun�ng the number of outputs, or by determining the economic value of the outputs; and (2) assessing the inputs by determining their value. Single-factor produc�vity is used when only one input factor changes. Mul�ple-factor produc�vity is used when more than one input factor changes. Primary inputs are labor (managers, workers, and externally purchased services), capital (land, facili�es, and equipment), and materials, including energy. In many cases, when firms seek produc�vity improvement, trade-offs between the inputs occur. Managers may be trading capital for labor, capital for energy, or material for labor in order to get an overall increase in produc�vity. Wage rates and produc�vity are posi�vely correlated. Organiza�ons with high produc�vity can pay higher wage rates. Produc�vity improvements have two impacts on jobs. First, they tend to shi� jobs from hands-on labor to behind-the-scenes labor. The hands-on jobs usually require manual work, and the behind-the-scenes jobs tend to require intellectual work. Second, they free labor to seek opportuni�es to create new services and goods. Technology innova�on, automa�on, economies of scale, business process redesign, learning and experience, job design and work measurement, and improvements in human resources are all methods of enhancing produc�vity.

Case Studies

All-Right Manufacturing Company Nancy Nelligan just received the following memo from her boss, the president of All-Right Manufacturing Company.

TO: Nancy Nelligan, V.P., Finance FROM: Leo Everi�, President RE: Produc�vity Improvement Program

I am sure you are aware of the importance of produc�vity within manufacturing organiza�ons, and All-Right is no excep�on. However, I am not sure that our company's produc�vity is as good as it could be. As such, I would like you to serve as coordinator of a produc�vity improvement program. As our newest execu�ve, I think this would be a great opportunity for you to become involved and have a substan�al impact upon this organiza�on.

I have already sent memos to the other vice presidents and division managers direc�ng them to cooperate with you on this ac�vity. Please report back to me in two months indica�ng the ac�ons you have taken and the results you have achieved.

Nancy just started working for All-Right one month ago. She had previously held a posi�on in the corporate finance department of a Fortune 500 company. In that posi�on, Nancy was extensively involved in securing capital for expansion and acquisi�on.

In her previous posi�on, Nancy had not been directly involved in any produc�vity improvement ac�vi�es, although she was aware of the produc�vity reports produced by her previous employer and knew how the data were collected and analyzed. To the best of her knowledge, All-Right does not collect any data or perform any calcula�ons to determine produc�vity. The president's vague feeling that produc�vity could be be�er supported Nancy's belief that All-Right was not calcula�ng produc�vity.

Since joining All-Right, Nancy has met most of the other vice presidents and managers. Some of them she knows fairly well, although Nancy is s�ll regarded as the "new kid on the block." She has learned from discussions with the vice president of opera�ons that the company had made an abor�ve a�empt at implemen�ng ISO-9000 a few years ago, an a�empt which had ini�ally been mandated by a memo from the president. She wondered whether the produc�vity improvement program would end the same way.

1. Was the president's approach to produc�vity improvement the correct way to implement such a program? 2. Was the �me frame the president gave reasonable for achieving meaningful results? 3. Pretend you are Nancy and dra� a memo to the president sugges�ng the course of ac�on that you think should be taken to achieve useful results. In the memo, include a summary

of the types of data needed to calculate produc�vity.

Wholesome House Restaurants

Wholesome House Restaurants operates a chain of health-food restaurants located in suburban shopping malls. The company has tried to capitalize on increased public awareness about healthy ea�ng by offering low-calorie, low-fat cuisine to its customers. Instead of the usual fare available at fast-food restaurants, Wholesome House offers its customers dishes that include fish and chicken cooked without fat. In addi�on, the company's restaurants provide fresh fruits and vegetables and whole-grain breads. Since it opened, the company has been doing quite well. However, like most start-up companies, Wholesome House is concerned about its future. The restaurant business has become increasingly compe��ve, and many chains that started out well have gone bankrupt.

Wholesome House's management is concerned about rising opera�ng costs and the company's produc�vity. Presently, its restaurant opera�ons are labor intensive because of the cuisine it offers. Using only fresh fruits and vegetables requires extensive �me and effort for food prepara�on. In addi�on, the sandwiches and most other meals on the menu are assembled by hand. Wholesome House has not adopted any of the assembly-line techniques for producing mass quan��es of food that fast-food restaurant chains such as McDonald's and Taco Bell use. On the other hand, Wholesome House is able to charge more for its products because of its market niche and because most of the restaurant's customers have average or above-average incomes.

Wholesome House has collected the following data concerning its opera�ons.

Two Years Ago Last Year    Net sales and opera�ng revenue $473,286,000  $631,987,000  Labor costs 120,470,000  203,405,000 

Material and supplies 150,032,000  206,783,000  Services 35,991,000  45,276,000  Capital 127,486,000  250,478,000 

1. Based on the informa�on provided, comment on the company's produc�vity. 2. Can you iden�fy inputs in which produc�vity has not followed the company's overall change in produc�vity? 3. Which areas do you think need a�en�on for future produc�vity improvements? 4. Can you suggest how the company might improve produc�vity?

Discussion Ques�ons

Click on each ques�on to reveal the answer.

1. Define produc�vity and describe why it is important. (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644

Produc�vity is the ra�o of the outputs achieved from an ac�vity to the inputs consumed to make those outputs. Produc�vity = Output/Input. For example, the produc�vity of a machine that makes compact discs could be determined by dividing the number of CDs produced divided by the hours the machine worked.

Organiza�ons should strive to increase their produc�vity because it keeps prices low and makes the organiza�on more compe��ve in world markets. Employees benefit because their wage increases are non-infla�onary, which means they can buy more with the extra money they earn.

2. Describe why produc�vity is more important than money. (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644

Produc�vity is more important than money, because as produc�vity increases, more products are available for consump�on. This allows the real standard of living to increase. Money, or increases in the amount of money available without a corresponding increase in available goods and services leads to high prices for the same amount of goods and services. Real consump�on does not increase, but prices do.

3. Explain how the nature of work has changed, and describe how that affects produc�vity. (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644

Over the past 100 years, the U.S. economy has shi�ed from primarily manual labor to primarily intellectual labor. Early in the 20th century, managers focused on the produc�vity of the blue-collar workforce. Today, that part of the workforce is s�ll declining as organiza�ons focus on methods to enhance their produc�vity. Today, most of the workforce is clerical, staff, and managerial (white-collar). To further increase produc�vity, it is essen�al that organiza�ons focus on the produc�vity of this large and growing segment of the economy.

4. What is the difference between single-factor and mul�ple-factor produc�vity? (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644

Single factor produc�vity has only one input factor. Labor produc�vity is a single factor produc�vity measure. Mul�ple factor produc�vity includes more than one input factor; such as labor, materials, and capital. In most cases, more than one input factor may change. As companies invest in equipment, their capital costs increase but labor and/or material costs may decline. When this happens, inputs are usually transformed into dollar costs. In this way, labor, material, and capital can be added to form the denominator of the produc�vity ra�o.

5. Describe labor produc�vity. What are its components? (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644

Labor produc�vity is a single factor produc�vity measure that assesses the output, o�en units produced, compared to some measure of labor inputs, o�en labor hours. Labor includes workers on the shop floor, managers, staff, clerical, and externally purchased services. It is important to realize that direct labor accounts for the people who work in producing the goods or services, and indirect labor accounts for the people that supports produc�on such as quality control, supervision, and maintenance.

6. Describe capital produc�vity. What are its components? (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644

Capital produc�vity is a single factor produc�vity measure that assesses the output, o�en units produced, compared to some measure of capital inputs, o�en machine hours or capital dollars. Capital includes investments in land, facili�es, and equipment.

7. Describe material produc�vity. What are its components? (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644

Material produc�vity is a single factor produc�vity measure that assesses the output, o�en units produced, compared to some measure of material inputs, o�en materials costs. Materials include items used to make the product as well as energy.

8. What are the important trade-offs involving the inputs to produc�vity? (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644

For centuries, businesses have made a series of trade-offs to improve overall produc�vity. The most significant of these is trading capital for labor. This trade-off has focused on automa�ng ac�vi�es previously performed by people. In both service and manufacturing opera�ons, this shi�s effort from opera�ons to the development of equipment and so�ware that support opera�ons. This has led to a fundamental change in the nature of work. Organiza�ons have also made significant investments in capital equipment and facili�es to save material and energy costs. Finally, organiza�ons trade material costs for increases in labor produc�vity. Some�mes organiza�ons are willing to increase the cost of incoming materials if they can achieve higher output rates from the labor force.

9. How are wage rate and produc�vity related? (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644

Wages rates and produc�vity are posi�vely correlated. This implies that as a worker's produc�vity increases, the organiza�on can afford to pay the worker more because the worker is genera�ng more output. This allows the pay increase to be non-infla�onary.

10. What are the impacts of produc�vity upon the workforce? (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644

The largest impact of produc�vity improvements on the workforce is to shi� the work from manual to intellectual work. Building roads has shi�ed from many workers using shovels to fewer workers using bulldozers. These jobs are replaced in part with white-collar jobs that design equipment.

11. How does quality impact produc�vity? (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644

If produc�vity gains are to be meaningful, the quality level of the output must be the same or increase. Producing more output of lower quality means that the value/usefulness of each item produced is lower. This is not the proper way to increase produc�vity.

12. Describe five ways that produc�vity can be enhanced. (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644

There are a variety of ways that produc�vity can be enhanced. Technology innova�on brings new ideas, methods, and equipment to the process of making a product. Automa�on allows firms to subs�tute capital for labor. Economies of scale allow firms to increase produc�vity by making opera�ons larger. In this way, more output is achieved from the same investment in fixed costs. Business process redesign focuses on understanding current processes and changing them so they produce more output faster and with fewer resources (people and equipment). Learning and experience enables firms and people to work smarter. In quality management this is o�en called con�nuous improvement. Carefully examining jobs at the detailed levels with job design and work measurement allows firms to eliminate wasted mo�on in assembly and clerical jobs. Human resources can enable produc�vity improvements without inves�ng in facili�es and equipment, buying high-quality materials, redesigning jobs and processes, or even spending for employee training. Because the rate of produc�on is labor constrained, labor could be mo�vated to do more work. Mo�va�on allows the workforce to do more even when other elements such as capital investment are unchanged. They want to do more for reasons of self-sa�sfac�on or helping the organiza�on do be�er. Economies of scale allow firms to increase produc�vity by making opera�ons larger, which allows firms to produce more at a lower cost per unit. Job design and work measurement enable firms to examine work at a detailed level so that it can be inves�gated and improved.

Problems

1. A junior accountant working for an accoun�ng firm earned $40,000 last year in wages and benefits. The work this person performed was billed to clients at $200,000 for the year. What is the junior accountant's labor produc�vity?

2. A certain machine makes various-sized screws that have a market value of $50,000 per year. Materials used to make those screws cost $5,000 per year. The annual cost of owning and opera�ng the screw-making machine totals $25,000. What is the produc�vity of that machine? What is the produc�vity of the materials? What is the overall produc�vity?

3. A company that manufactures radios had sales of $3,750,000 last year. Total labor costs for the year were $1,500,000, capital costs were $1,275,000, and materials costs were $750,000. What was the company's produc�vity based on this informa�on?

4. The New City Hospital has recorded its pa�ent billings and labor costs during the last two years. How has the hospital's labor produc�vity changed?

Two Years Ago Last Year    Total billings $10,230,000  $12,450,000  Labor costs   4,375,000    5,200,000 

5. The Electro-Lite Electronics Company has recently automated part of its produc�on process. The labor, capital costs, and value added by this process for the last two years are shown below. Compare the produc�vity of labor and capital for these years.

Two Years Ago Last Year Value added $1,365,000  $1,425,000  Labor costs 870,000  375,000  Capital costs 160,000  924,000 

6. The company men�oned in Problem 3 is considering subs�tu�ng capital for labor by purchasing automated equipment to perform an opera�on previously done manually. This new equipment will cost $200,000 per year to own and operate. What must the labor savings be in order to produce an increase in overall produc�vity?

7. Michael's Manufacturing wants to determine the overall produc�vity of its opera�ons. The company has data for one month last year and good current data. The sales price of the product is $40.00, the wage rate (including benefits) is $18.00 per hour, the resin cost is $.60 per pound, and the energy cost per BTU is $.50. These costs can be applied to both years. What was the produc�vity then and what is it now? At what rate is produc�vity changing?

Last Year This Year Produc�on (units) 2,000  2,150   Labor hours 600  550   Resin (pounds) 100  90   Capital (dollars) 20,000  23,000   Energy (BTUs) 6,000  5,700  

8. Suppose the company in Problem 7 wants to increase produc�vity by 5%. How much labor savings must occur to achieve this? 9. Witkowski Tax Services processes federal income tax forms. This year in April, the company's busiest month, the company prepared 4,500 income tax returns with an average

revenue of $60 each. In April last year, they completed 3,750 returns with an average revenue of $55 each. Below are the average costs, adjusted for infla�on.

Last Year This Year   Labor hours $3,000  $3,200   Management costs 25,000  28,000   Computer technology 15,000  20,000   Rent for office 2,000  2,200   Office supplies 3,000  3,600  

a. What is the produc�vity this year and last year for each factor and overall? b. How has the produc�vity changed for each factor and overall? c. What can be done to further improve produc�vity?

Click here to see solu�ons to the odd-numbered problems. (h�ps://media.thuze.com/MediaService/MediaService.svc/constella�on/book/AUBUS644.13.2/{pdf}bus644_ch03_odd_problem_solu�ons.pdf)

Key Terms

Click on each key term to see the defini�on.

crea�ve destruc�on (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

When new ideas or technologies replace exis�ng products, such as when sales and jobs decline in exis�ng companies and grow quickly in the companies with new ideas.

direct labor (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

People who make a product or provide services; the hands-on workforce.

economies of scale (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

The ability to produce more goods at a lower cost by be�er u�lizing the same fixed costs. There is a most efficient size for a facility and there is a most efficient size for a firm; building sufficient sales and produc�on volume is necessary to maximize the fixed costs of an organiza�on.

indirect labor (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

Labor that supports the produc�on of a good or service such as quality, supervision, and maintenance.

produc�vity (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

Output from an ac�vity divided by total input to the ac�vity.