Why should we Measure Productivity?

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Why should we Measure Productivity?

In this issue we delve into the measurement of productivity and the importance of measuring productivity by organisations. We interrogate the critical role productivity measurement plays especially in relation to productivity improvement within companies. Whilst there are a number of performance indicators which can be used to evaluate a business such as profitability, return on capital employed and gearing ratio among others, productivity remains the most useful indicator particularly in determining the long run growth path of any company.

There are various ways in which productivity is measured within organisations and these may be partial, multifactor or total factor productivity. Partial or single factor productivity is where output is expressed as a ratio of one input factor. These inputs can be  labour, capital and materials. A simple illustration for single resource productivity is given in the diagram below.

Figure 1.0 Single Resource Productivity Measurement.

For multifactor productivity measurement, it is combination of at least 2 factors being measured against the corresponding output realised. If the multifactor constitutes all the factors used in producing output, then it will be called total factor productivity. Figure below illustrates the basic measurement of total factor productivity.

Figure 2.0: Total Factor Productivity Measurement

 The choice of the measurement criteria is usually determined by the feasibility of accurate measurement of the inputs employed. Total factor productivity turns to be more accurate when compared to partial factor productivity in case where both factors are employed in similar proportions. This is because total factor productivity takes into account all the factors of production unlike partial factor productivity which attributes one factor to the total output. However for industries which are intensive in one factor, such as the construction sector which is labour intensive, partial factor productivity may be equally useful.

The productivity figures calculated for a single period may intrinsically exhibit little value to the users. The single period productivity figures only assist in production planning as the production manager will be able to deduce how much on average each factor input produces in terms of output. For example, if 1 employee produces 3 pairs of shoes per day, the planners will be able to know the exact amount of workers needed if they are to produce say 12 pairs in a single day, in this case 4 workers.

However the single period productivity figure will be more useful if compared with other periods productivity figures. When compared on a like-for-like basis to those of the previous period(s), a general trend depicting a decline, an increase, a constant or an oscillating growth in productivity can be observed. It is therefore imperative to ensure that there is consistence in measurement so as to allow for effective period to period comparisons. Necessary strategies can then be taken in relation to the trend which will be prevailing.

In making period to period comparisons, there is need to account for inflation especially when the incremental rates of both output price and input price indices are inconsistent. In inflationary environments, productivity figures may vary in nominal terms though no change will be realised in real terms and this turns to be misleading. There is therefore need to deflate nominal figures so as to eliminate the effects of price changes from the real input and output figures.

For productivity practitioners, the thrust is to continuously increase the level of productivity from one period to the other, a process also known as ‘kaizen’. Before one aims to improve productivity, there is need to ascertain the current prevailing levels of productivity. Understanding the current level of productivity serves to create a yardstick against which future productivity results will be measured. Whether the productivity intervention strategies will be successful or not can only be determined if the initial conditions are recorded. Therefore productivity measurement forms the basis for productivity management system.