Speaker 1: Facing the need to reduce costs and to improve competitiveness? In this lesson, we will examine the key principles of operational productivity improvement. Efficiency, productivity and competitiveness are linked. Better productivity means increased efficiency, which results in a higher level of competitiveness. Efficiency is about making the best possible use of resources. Efficient firms maximize outputs from given inputs, and so minimize their costs. By improving efficiency, a business can reduce its costs and improve its competitiveness. Productivity is an average measure of the efficiency of production. It can be expressed as the ratio of output to inputs used in the production process, that is output per unit of input. Consider this example. If a factory employing 50 staff, produces 1,000 tables a day, then the productivity of each worker is 20 tables per employee per day. An increase in productivity from 20 tables to 25 tables, without any increasing costs, means the firm has improved efficiency. The resultant lower unit costs increase profit margins. Productivity is a measure of your company's return on investment. Basically, it's an indicator of how efficiently you convert inputs to outputs, in other words, a ratio of what you put in, labor, raw materials or other resources, to what you get out in the form of end products, or value added. Partial productivity measures focus on the output achieved relative to one type of input, for example person hours worked, capital invested or units of energy consumed. In contrast, Total Factor Productivity, or TFP, combines all inputs and outputs involved in the production process. As a result, TFP tends to be a more useful measure, but it can also be more difficult to calculate. An alternative is for companies to use a number of partial productivity measures, based on different inputs. This reflects the fact that productivity is a complex concept, embracing a wide range of influencers. There are of course many benefits to increased productivity. Productivity growth can increase profitability, lower operational costs, optimize the use of company resources, reduce environmental impact, increase competitiveness and market share, and provide opportunities for expansion. The three main productivity levers we will look at in this unit include, Improving Workforce Productivity, Improving Plant and Equipment Productivity, and Reducing Waste. Workforce productivity is the amount of goods and services that a worker produces in a given amount of time. It is one of several types of productivity that economists measure. Workforce productivity can be measured for a firm, a process, an industry, or a country. It is often referred to as labor productivity. Given the generally high cost of labor as a percentage of total operating costs, getting the best out our people is one of the key tasks of every manager, whether in a production environment, or a service environment. Let's look at some of the core concepts in improving workforce productivity. Productivity is the efficiency with which a firm converts inputs into outputs. Since staff represent the largest cost for many firms, labor productivity has special importance and vitally affects competitiveness. Here is an example, firm B pays higher wages than firm A, yet has lower unit labor costs, through superior productivity. A firm with higher productivity can charge lower prices, or increase its profit margin, or choose a combination of the two. It must, however, ensure that production quality is maintained. So how do we measure employee productivity? One standard measurement of productivity is output per worker hour, or the ratio between the number of hours worked, to total output. You can also measure your productivity per week or month, if each unit of production takes more than an hour to create. Output can be measured in terms of volume, or quantity of items produced, or dollar value of items produced, or services provided. For example, a graphic designer's productivity may include, aspects of how many projects he or she completes in a month, as well as how quickly the projects were produced. A company that builds and sells widgets, on the other hand, might measure productivity in terms of, the number of units built and sold over a month's time. If you manufacture goods, consider using output per worker hour or number of worker hours required to produce a single product. For example, suppose the following, you have 5 employees who each work 160 hours per month to produce 100 widgets. The unit cost of a widget is, 5 employees times 160 hours equals 800 worker hours, over, divided by 100 widgets per month, equals 8 worker hours per widget. If you pay each of the workers $5 per hour, then the production cost of the unit is, $5 times 800 worker hours, which equals $4,000 per month. $4,000 per month, divided by 100 widgets per month, equals $40 per widget. It can be a bit harder to measure productivity in the service industry, due to the somewhat intangible nature of the product involved. Service industries can measure productivity by considering the, number of tasks performed, or, the number of customers served in a given time period. Other measures might be, whether the service delivered measured up to company or customer standards, and whether performance deadlines were met. Professional employees can keep personal time sheets, to indicate the number of hours spent on a given task. Relativity of work is a possible measure, such as number of service calls made per day, or number of contracts written. Clerical workers can be given specific amounts of work, to determine the relative time it takes to complete a given task. The most effective means of measuring performance by sales representatives, is by taking into account and measuring each of these factors. The volume of sales in dollars per given unit of time. Or the number of calls made upon existing accounts. Or the number of new accounts opened. Or the dollar amount expended per sale. Note, all of these measures have allumniations, so it is important to use a combination of measures, to ensure validity of your measurement processes. The output of a production process can be increased, by increasing the input of resources, or by changing the process, or by both. Here is an example in which an employee can carry 500 bricks per day, at a cost of $2 per hour. We can increase the number of bricks moved per day by asking the employee to work over time, and we now can move 550 bricks per day. If we increase the input of resources by making the employees work over time, we would increase the output. However, we may not have improved our efficiency. By paying over time at $2.50 per hour, we have increased the output, but also the cost per brick moved by 19%. This is clearly not an efficient use of resources. However, increased output does not need to lead to increased costs. If we can modify the process to enable the man to produce more, without working harder or longer, we may be able to meet our production target, and reduce the cost of output as well. Here we can see that by introducing a wheelbarrow at $8 per day, we can increase the output by 60% and reduce the cost per brick moved by 6%. So, we now have more bricks to help us meet our construction targets faster and more efficiently. Here are 5 basic ways to increase productivity. Firstly, you can increase input, but get a greater increase in output. Secondly, you can maintain input, but increase output. Thirdly, you can decrease input, but with smaller decrease in output. Fourthly, you can decrease input, but maintain output. And finally, you decrease input, but increase output. Which of these approaches would work best for your organization? Productivity can be influenced by many different and complex factors, which can vary according to the nature of the company. Workforce productivity depends on their skills and knowledge. The quality of plant and equipment available, and effective management. Training and investment cost money in the short term, but can raise long term productivity. So, how can we raise employee productivity? Training can improve the knowledge and skills of staff. Improved recruitment and selection may have the same effect. Investment in equipment and new technology, may enable output per worker to increase. Better employee motivation can be the most powerful factor of all. Gaining engagement and loyalty of staff, can bring major gains in output and quality. And better resource management. Monitoring the work of the team to ensure you have the right numbers of people, at the right time in the right place, can significantly improve productivity, without necessarily increasing costs. Productivity can also be measured for plant and machinery. For example, a machine might be available and functioning normally for 85% of an average week. In the remaining time it is being cleaned or repaired. The production manager may consider that this figure could be improved through better and more regular servicing. Additionally, through better production scheduling and resource allocation, the operations team may be able to improve plant utilization. Getting more out of the available time. A firm's productive capacity, is the total level of output or production that it could produce in a given time period. Capacity utilization is the percentage of the firm's total possible production capacity, that is actually being used. Capacity utilization is calculated as follows. Capacity utilization equals the actual output per month, or per annum, times 100%, divided by the maximum possible output per month, or per annum. For example, if a firm could produce 1200 units per month, but is actually producing 600 per month, its capacity utilization is as follows. Capacity utilization equals 600 units per month, times 100%, divided by 200 units per month, which equals 50% capacity utilization. A firm's level of capacity utilization determines how much fixed costs should be allocated per unit. So as a firm's capacity utilization increases, the fixed costs, and therefore also, total costs per unit will decrease. For example, if the firm above had fixed costs of 12,000 pounds per month, the fixed costs per unit would be 20 pounds per unit at 50% capacity utilization, but only 10 pounds per unit at 100% capacity utilization. It therefore follows that a firm should be most efficient, if it is running at 100% capacity utilization. There are a number of reasons why a firm might be experiencing low capacity utilization, including the following. Poor production or operational planning. A fall in market demand due to changes in consumer tastes or new competitors. Or unsuccessful marketing and sales. Or seasonal demand. Workforce scheduling is a vital key to improving operational efficiency. In this diagram, we can see the consequences of uneven staff utilization. The same principle applies to plant and equipment utilization, which when lying idle, can tie up the company's capital and can negatively impact a firm's balance sheet. Higher fixed costs per unit, means reduced profitability. If prices were raised to cover these costs, this would probably lead to reduced sales unless the product was price inelastic. Spare capacity can portray a negative image, particularly in a business where it can be seen that it is no longer busy, such as a shop or a health club, signifying loss of popularity. Additionally, staff can become bored and demoralized, if they don't have as much to do, especially if they fear losing their jobs. Here are some common approaches to improving plant and equipment productivity. Improve plant availability, examine maintenance regimes and locate opportunities for increasing plant availability. Match demand with capacity, know your core business processes, and determine how you will match the flow of demand, to the optimal capacity of the plant or facility. You will also want to improve plant or equipment utilization, ensure that the operators of your plant and equipment are trained to get the best out of the equipment, while minimizing wear and tear, or accidental damage. And you may want to invest in new technologies, which can deliver demonstrable and measurable productivity gains. The third productivity option is reducing waste. Muda is a Japanese word meaning futility, uselessness, idleness, waste, wastage, and wastefulness. Muda is a key concept in the Toyota production system, as one of the three types of variation. Waste reduction is an effective way to increase profitability. The seven wastes provide a central theme to lean methodology. The goal of lean is to maximize value and minimize waste. Ultimately, value to the customer is the top priority, because without value, there won't be a customer. The following are the seven wastes that they identified in lean methodology, as applying to most organizations, transportation, material movement that does not move the products to the customer. Inventory, all idle resources are wasteful, and inventory is one of the most common. Motion, any movement, of people, machines or materials that does not add value to a product. Wait time, whenever materials, people or machines are sitting idle. Over processing, excessive processing includes any activity that provides no additional value to a product or service. Over production, producing more than is needed. And finally, defects, poor quality drives up costs both in wasted materials and labor. Improving productivity is a key means of improving the efficiency of your organization. The three basic approaches discussed here are, improving employee productivity. Improving plant and equipment utilization. And reducing waste. These are highly developed fields of knowledge in themselves. You can learn more about these three techniques, by downloading the articles and case studies from the references. Subscribe now and join us in your career journey.