Productivity in Operation Management

Productivity in Operation Management has a major role to play in increasing the competitiveness of  a firm, industry or country.

Production and Productivity in Operation Management

Production is concerned with conversion of input to operating under system (production system). A management tool called "Productivity" measure the efficiency of this conversion. Productivity is the relationship between the "output" generated by a production system and the "input".

Productivity = Output/Input 

Some times higher production is assumed as the higher productivity and other are used synonymously. However this does not always become true The productivity improvements can be observed from the following:

• Increase output / Decrease Input
• Increase output/constant input
• Constant output/ Decrease input
• Increase output more/ Decrease input less
• Decrease output less/Decrease input more.

Definition, measurement, unit and utility of both production and productivity are shown on following table.

Productivity Measurement

Productivity measurement is derived from the ratio between output and input. Productivity is usually defined as follows: 

Productivity = Output/ Input

Symbolically, P = O/I

Where;

P = Productivity

O = Output

I = Input

There fore productivity measure how well input or resources are utilize to obtain the desired output. The higher ratio, the greater will be the productivity. Given similar situation entrepreneur or an enterprises should try to improve this ratio over time which indicates productivity improvements. Before productivity measurement can be calculated both the Output and input should be measured.

Measurement of Output

Output can be measured in three ways. It can be measured in:

• Production quantity
• Production value
• Value added

Production Quantity

This requires expressing output in physical volume. These however can be done only if the output is homogeneous. If not then weighing system must be adopted to include all types of products.

Production value

In case of several different type of product, expressing them in money terms would be appropriate. This comprises the sales value of the units of finished products during a specified period of time. It can be calculated by multiplying the physical output by its sales price.

Value added

Value added is the wealth created by an enterprise through its production or service process. Value added is generally regarded as the best output measurement when dealing with heterogeneous output. The more productive an organization is, the more is the value added. Value added is shown in diagram below. Value addition can be derived in two different methods getting the same results. They are:

• Subtraction method
• Addition method

Subtraction method: Value addition in this case is derived by deducting purchase made from outside such as materials, energy and others from net sales and by adding change in inventory of work in process and finished goods. Purchase of materials from outside includes raw materials used in operation process.

Energy refers to energy and utilities power, light and water. Other purchase includes office supplies, repairs and maintenance, insurance, advertising, consultants etc. This method shows how value add is created.

Value addition = Net sales - Value of purchase from outside + Change in Value addition inventory. Addition Method: As the name implies value addition is calculate this case by adding all the expenses items such as personnel e financial cost, rents, depreciation, taxes, net profit before tax non operating expenses.  

Value added = Personnel expenses + financial cost + rent + taxes + net profit before tax +non operating expenses. 

Further illustration of these expenses could be done as follows:

• Personnel expenses: A  This includes expenses like salaries bonuses, allowances etc.
• Financial cost: This includes interest from loans.
• Rent: This include rent fee charged for use of land, building machinery, equipment and other fixed assets.
• Depreciation: This includes reductions in the original value machinery and equipment over time.
• Taxes: This includes import taxes, tariffs, duties, excise taxes (excluding income tax)
• Net profit: Net income before income tax
• Other non operating expenses: Expenses not directly related to operation such as donation/charitable contributions, bad debts, losses etc.

Measurement of Input

Input refers to resources both tangible and intangible necessary to produce goods or services. Inputs can be classified into labor, capital and intermediate input. One of the important inputs is the labor calculated in three ways:

• Number of Employees  
• Personnel Expenses
• Total man hour worked

Capital input can be measured either in physical volume terms hour used for machinery or equipment) or in money (machinery and equipment, fixed assets, total assets) value terms intermediate impart consist of purchases of materials, energy and services in physical volume terms or in money value terms (value of and services purchase, material purchase etc).