a consolidated approach to productivity assessment

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Journal of Industrial Technology • Volume 18, Number 2 • February 2002 to April 2002 • www.nait.org

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The Official Electronic Publication of the National Association of Industrial Technology • www.nait.org© 2002

A Consolidated Approach toProductivity Assessment

By Dr. Bruce Marsh

Volume 18, Number 2 - February 2002 to April 2002

Reviewed Article

ManagementManufacturing

ProductionQuality

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A Consolidated Approachto Productivity AssessmentBy Dr. Bruce Marsh

IntroductionVarious factors are impacting the

way manufacturing and servicecompanies operate today, factors suchas an interconnected and interdepen-dent world, shifts in economic demo-graphics, global markets and competi-tion, ecological concerns, and asustainable future. According toSumanth (1998), the impact of thesefactors is motivating companies tofocus additional efforts on:

• long-term results over short-termgains,

• global markets in addition todomestic markets,

• strategic activities over opera-tional activities,

• strategic visions along withpractical actions,

• external stakeholders along withinternal employees,

• product and service quality overproductivity, and

• employee participation over pureindividualism.

Although one of the identifiedtrends indicates a greater emphasis onproduct and service quality instead ofproductivity issues and concerns, this isnot to say that these issues and con-cerns should be dismissed. In actuality,productivity assessments and evalua-tions should be continued to include amore holistic focus of the organizationsas a whole instead of a narrow focus onselective aspects such as labor andcapital productivities and time andmotion studies. Interestingly, manyIndustrial Technology programs aroundthe country have recognized theimportance of productivity-relatedissues and concerns within manufactur-ing and service activities and havetaken it upon themselves, both past andpresent, to introduce students toproductivity-based concepts andprinciples such as time and motion

studies, cost-based productivityassessments and evaluations, andproduction planning and control. Anexpected understanding of productiv-ity-related principles and concepts hasalso been integrated into the NAITCertification Examination.

Assessing ProductivityProductivity is a measure of the

efficiency and effectiveness to whichorganizational resources (inputs) areutilized for the creation of productsand/or services (outputs). This defini-tion was clarified further, (Sumanth,1998; Chambers and Pope, 1996; andIndustry Canada, 2001), by indicatingthat productivity measurement(change) is aggregate and is concernedwith measuring how the ratio Y/Xchanges over time, where Y measuresan aggregate output and X measures anaggregate input. It was further indi-cated that productivity measurement isboth a measure of input utilization andan assessment as to whether or notinput utilization is growing faster thanoutput. production.Much of thefoundation upon which productivityassessments have been conducted hascentered on cost ratios. Deo andStrong (2000) provided additionalsupport for cost-based productivityassessment when they indicated “ . . . .those who are involved in manufactur-ing and are responsible for reducing thecost of production should considermeasuring productivity in terms ofcost. Measuring productivity in thisway can help identify resources andoperations that could be improved toraise productivity at functional andfirm-wide levels” (p, 21). They furtherindicated that the cost-based approachnot only helps technical professionalsevaluate their decisions and actions interms of money saved in production butalso works as a motivating force forpeople involved in improving the

Dr. Bruce Marsh is an Associate Professor with theDepartment of Industrial Technology at Texas A&MUniversity in Kingsville where he teaches courses inFluid Power, Energy and Power, Dimensional Metrol-ogy, Quality Assurance, Manufacturing Productivityand Data Analysis and Decision Making in IndustrialTechnology. He is also the academic advisor for theStudent Chapter of the Fluid Power Society.

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effectiveness of manufacturing sys-tems. Sumanth (1998), who alsosupports cost-based productivityassessment, indicated that gains inproductivity could be achieved byfollowing one or more of the followingfive strategies and one or more of fourassessment methodologies:

• Strategy 1: Increase output forthe same level of inputs;

• Strategy 2: Increase output andalso decrease inputs;

• Strategy 3: For the same outputlevel, decrease inputs;

• Strategy 4: Increase output at afaster rate than inputs;

• Strategy 5: Decrease inputs at afaster rate than output.

With respect to assessment method-ology, one of the best-known measuresof productivity, partial productivity,relates total output to one class of input.Examples of industry-based partialproductivity measures include:

• output per man-hour, a measureof labor productivity,

• annual revenue per employee, ameasure of labor productivity,

• flight hours per employee per year,a measure of labor productivity,

• maintenance hours per techni-cian per year, a measure of laborproductivity,

• output per ton of material, ameasure of material productivity,

• interest revenue generated perdollar of capital, a measure ofcapital productivity,

• output revenue per dollar ofenergy consumed, a measure ofenergy productivity.

A second measure of productivity,factor productivity, relates total outputto the sum of associated labor andcapital inputs. Both Partial and Factorproductivity measures have been usedby governments, industries, andindividual companies to compare andcontrast their economic standing withother countries, documented industrylevels, and benchmarked values.

A third, and relatively new, approachto the assessment of productivity, totalproductivity, relates total outputs to thesum of all tangible input factors (human,

materials, capital, energy, other expenses,etc.). A fourth assessment approach,comprehensive total productivity, is anextension of the total productivityapproach in that it incorporates bothtangibles and company-specific intan-gible factors into the productivityassessment. According to Sumanth(1998), there are approximately 30different intangible factors that can beassessed by companies, all of which fallinto one of seven categories: customer-,market-, society-, process-, employee-,vendor-, and owner-related. Both theTotal and Comprehensive Total ap-proaches consider quantifiable factorsand supply the company with a holisticperspective of the economic health andthe efficiency of the firm’s assets – it’sdivisions, branches, products, process,etc. Both of these two approaches, ifused in conjunction with partial produc-tivity measures, help direct and focusmanagement’s attention toward thestrengths and weaknesses of individualplants and firm operations, as well asareas of equipment investment, employeetraining, and continuous improvement.Examples of the various productivityassessment methodologies and themanners in which they are calculated canbe seen in Table 1. In addition to atabular assessment of productivity,graphic displays of productivity resultscan be seen in Figure 1.

As indicated in Figure 1, there hasbeen a decrease in material productiv-

ity (MPV) with minor deceases inenergy (EPV) and other expenseproductivity (OEPV). On the otherhand, an increase has been achieved inhuman productivity (HPV) with smallincreases in capital (CPV) and factorproductivity (FPV). When the plant isviewed holistically with respect to totalproductivity (TPV), an overall decreasein productivity has occurred.

Benchmarking operations andoperational units

Regardless of the assessmentmethod or mix of methodologiesselected for integration, productivitybenchmarking, is an important aspectfor goal setting decision-making andgoal achievement determination.Benchmarking productivity entails thecalculation of a productivity index (PI

t)

based on a ratio of the current periodproductivity value (PV

t) to a specified,

earlier period productivity value (PVo).

If the (PIt) value is greater than 1.00, an

increase in productivity has beenachieved; if the (PI

t) is less than 1.00,

productivity has decreased. Thepercent change in productivity betweenspecified periods can be determinedusing the following formula:

Percent Change in Productivity =

[ ( PVt / PV

o ) -1 ] * 100 or

( PIt -1 ) * 100

Figure 1. Productivity Comparisons for the Years 2000 and 2001

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Table 1. Productivity Data, Calculations, and Supporting Formulas

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One of the primary purposes forbenchmarking productivity is todetermined if an improvement inproductivity has been achieved after achange or perceived improvement hasbeen made to one or more inputfactors. According to Sumanth (1998),there are 70 different techniquesavailable for improving productivity,all of which fall into one of fivecategories—technology-, material-,employee-, product-, and process ortask-based. In most instances, produc-tivity benchmarking should be inte-grated into the productivity assessmentmethodology or mix of methodologiesselected for integration (partial, factor,total, or total comprehensive) using oneor more of the following criterions:

• change in productivity over afiscal period (ratio of fiscal year2001 to fiscal year 2000 or ratioof 1st Quarter of 2001, 2ndQuarter of 2001, etc to fiscalyear 2000).

• change in productivity betweenquarterly periods (ratio of 2ndQuarter of 2001 to 1st Quarterof 2001).

• change in productivity betweenseasonal periods (ratio of 1stQuarter of 2001 to 1st Quarterof 2000).

• change in productivity beforeand after a specific change orimprovement (ratio of currentperiod to some earlier period).

• change in productivity betweenthe actual period value and theforecasted period value (ratio ofactual productivity to predictedproductivity).

An example of benchmarkingusing indices can be seen in Table 1and its integration with the 2000Benchmark value of 1.00 can be seenin Figure 2.

Before decisions are made on thedirection and priority that should beassigned to productivity improvementefforts, one needs to consider firm- orplant-based input percentages. Inessence, a greater return on improve-ment efforts can be achieved if thoseinputs that possess a greater percentage

of total inputs are emphasized above allothers. Sometimes a significantincrease in an input percent combinedwith a decrease in productivity can alsoindicate areas of concern. For ex-ample, Table 1 and Figure 3 bothindicate that for the year 2000 thematerial input only composed 9.3% oftotal inputs but for the year 2001 thematerial input accounted for 20.0% oftotal inputs. In addition, the materialinput experienced a substantial de-crease in productivity which is re-flected in both its productivity valueand index value (Figures 1 and 2).

Micro Level ProductivityAssessment

One of the unique features of apartial/total productivity assessment isthe ability to provide productivity

indices at not only the firm level, butalso at the most micro level of firmoperations. For example, a computercompany may require productivityassessments (indices) at the productlevel (laptop versus desktop), plantlevel, division level, or at the corporatelevel. This same micro level assess-ment approach can be applied to mostfirms and service companies—bankshave checking accounts, savingaccounts, investment accounts, localbranches, regional branches, andcorporate operations; fluid powerservice companies have sales depart-ments, service/design departments,distribution facilities, local branches,regional branches, and corporateoperations. Examples such as thesecan be found in companies large andsmall within manufacturing, construc-

Figure 2. Productivity Indices and Benchmark Comparison

Figure 3. Comparison of Input Percentages for the Years 2000 and 2001

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tion, and service operations; one suchexample can be seen in Table 2.

In this example, three plants(Plants A, B, and C) are compared andcontrasted to identify their inherentstrengths and weaknesses. In additionto this comparison, a firm-wideassessment has been conducted todetermine the overall impact of thethree plants on corporate operations.The principal advantage of a microlevel assessment is the ability toconduct comparative assessments ofoperational units that possess differingfinancial statures, structures, andproducts and to determine the overallimpact of these units on the firm as awhole. The results shown in Table 2and Figures 4 and 5 provide support forthe following micro level findings:

• Plant A experienced a decreasein partial productivity within thematerial, energy, and otherexpense categories.

• Plant B experienced a decreasein partial productivity within allinput categories except human.

• Plant C experienced a decreasein partial productivity within theenergy input only.

• Plant B experienced a decreasein factor productivity (labor andcapital inputs combined).

• Plants A and B experienced adecrease in total productivity.

• The Firm as a whole experienceda decrease in energy and otherexpenses productivity. Thedecrease in energy productivityis attributable to all three plants,in particular Plant A. Thedecrease in other expensesproductivity is attributable toPlants A and B only.

• Although the Firm as a wholeexperienced an increase in totalproductivity for 2001, thisincrease could be linked tooverall efficiency levels andgains within Plant C (both PlantA and B experienced decreasesin total productivity).

• Note: In Table 2., corporatefinancial data is based on thesum of plant data. In someinstances, corporate operationspossess their own internal set of

inputs and outputs, separate anddistinct from plant operations.In this type of financial structure,corporate financial data forproductivity analysis should bebased on the sum of plantfinancial data and the financialdata of corporate operations.

Based on an analysis of the resultsin Table 2 along with input percentbreakdown of each plant and the firmas a whole, productivity improvementefforts could be directed toward thefollowing areas:

• efforts to improve productivity

should initially concentrate onmaterial, energy, and otherexpenses inputs within all plantsand the capital input withinPlant B.

• efforts to improve productivityshould be prioritized based on asequential order. Onene possiblescenario could be : (1) energy,(2) material, (3) other expense,(4) capital.

If improvement efforts were directtoward the energy, material, and otherexpense inputs (50% of total inputs),the company should expect an increase

Figure 4. Micro Level Comparison of Firm’s Productivity Values

Figure 5. Micro Level Comparison of Firm’s Productivity Indices

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Table 2. Micro Level Productivity Assessment

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to the bottom line if improvements aredeemed successful. It should be notedthat this same analysis could have beenconducted on the plants and firm on aquarterly basis or on divisions within asingle plant or on departments within asingle division.

Benefits associated with total/partial productivity integration

One of the inherent advantages ofproductivity integration, whetherpartial, total, or a combination of thetwo, is the ability to use existingcompany data with very little modifica-tion to the format in which it is avail-able. In most instances, this informa-tion is available for preceding years,thus, historical and/or benchmarkvalues can be easily established tocreate trendline or seasonal variationcharts and graphs. In many casestudies presented by Sumanth (1998)only two key people were broughttogether to preform the assessment, onefrom accounting and one from informa-tion systems. This is not to say thatthese individuals are required forproductivity integration. In essence,anyone acquainted with accountingprinciples, spreadsheet programs, andtechnological systems could conductproductivity assessments (i.e., indus-trial technologists).

Traditionally, the impact of newtechnologies on productivity is seen interms of their effect on efficiency andlabor productivity. According toSumanth (1998), labor productivity andother partial productivity measuresshould be avoided when studying theimpact or integration of new technolo-gies because these indicators suffer

from an inability to explain the impactof the technology on all resources andall output produced. In many in-stances, there is an interaction betweenthe use of various input resources, aswell as an effect on the output, when-ever a new technologys are introduced.Considering the impact of technologyon only partial productivity measuressuch as labor or capital could lead to adistorted picture. It is the joint andsimultaneous impact of all inputs onthe output that should be consideredwhen studying the effect of any newtechnology before and after installa-tion; in other words, a total productiv-ity assessment.

ConclusionsProductivity rates vary among

individual industries and companies.These differences are reflected bymany factors including the productivitymethod selected for integration, newtechnology integration, employment ofadvanced production methods, andincreased output due to economies ofscales. According to deDecker (1999),the decision to hire additional employ-ees should be linked to the revenuesneeded to pay for the new employees;if not, the productivity of the depart-ment and the profits of the organizationmay realize a decrease.

Through a greater understanding ofpartial and total productivity assess-ment approaches along with a morefocused integration, various benefitscan be realized for an organization,benefits such as, a greater understand-ing of resource utilization; the ability toset, monitor, and evaluate company-specific goals; and the ability to

successfully integrate technologyplanning into decision-making activi-ties. A continued or expanded empha-sis on productivity-based concepts andprinciples by Industrial Technologyprograms around the country is animportant ingredient in preparingstudents for production/ managementpositions within manufacturing andservice activities. An expandedemphasis on the NAIT CertificationExamination with respect to a more in-depth understanding of productivity-related principles and concepts shouldalso be considered. As a final note, thereal value of any assessment system isnot simply the performance datacollected but the value realized whenthe data is used to shape the companyfor a maximum impact on businessresults and overall profitability.

ReferencesChambers, R. G. and Pope, R. D.

(December 1996), Aggregateproductivity measures. AmericanJournal of Agricultural Economics,pp. 1360-1365.

deDecker, B. (July 1999). A measureof productivity. Aircraft Mainte-nance Technology, p. 92-93.

Deo, B. S. and Strong, D. (May/June2000). Cost: The ultimate measureof productivity. Industrial Manage-ment, pp. 20-23.

Sumanth, D. (1998). Total productiv-ity management. Boca Raton,Flordia: CRC Press LLC.

Industry Canada. (2001). A primer onproductivity. In Strategis: Canada’sBusiness and Consumer Site [On-line]. Available: http://strategis.ic.qc.ca/SSG/pr00016e.html.

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