Productivity

The terms ‘production’ and ‘productivity’ are not inter-changeable and it would be a mistake to assume that higher production will necessarily result in higher productivity.  In the competitive market of today, it is important to the success of your business that you increase productivity levels. 

So what is meant by ‘production’?  Production is the manufacture of goods or provision of services with the help of resources such as buildings, machinery and manpower and transforming raw materials and components or service skills into the required end products.  However, the emphasis is on quantity rather than on how well or otherwise the input is utilised.

What is meant by ‘productivity’?  Productivity is a measure of output for some measure of input: maintenance visits per hour of direct labour; cakes sold per hour of shop assistant labour; boxes produced per square metre of steel or Helpdesk calls closed per man-month.  It can apply to a person, a department, a company, an industry or even a country.  For your business you can choose whatever measures are most useful

Why is productivity important?  Productivity has huge impact on profitability as shown in the table below.  The company has 8,000 hours per year of productive labour.  The budget is based on these hours producing 100 items which results in a 10% profit.

	Budget	Productivity higher	Productivity lower
Volume produced	100	110	90
Sales revenue	£100,000	£110,000	£90,000
Labour hours used	8,000	8,000	8,000
Labour cost	£80,000	£80,000	£80,000
Gross margin	£20,000	£30,000	£10,000
Overheads	£10,000	£10,000	£10,000
Profit	£10,000	£20,000	£0
Productivity	80 hours/item	73 hours/item	88     ours/item

So a 10% improvement in productivity (each person on average producing 10% more in a given period) results in a doubling of profit; a 10% deterioration in productivity results in no profit at all.

The same model would apply if the cost were raw material (the efficiency in this case being yield or, conversely, wastage) or machine time (utilisation).  This approach applies to services as well as to products.

How can productivity be improved?

-          Decide what it is you produce (the output) – this may not be obvious in a service business

-          Identify the main costs or resources utilised in production (the inputs)

-          Define your productivity measure(s) – in the above table it is labour hours/item

-          Monitor productivity over time and between different employees or resources

-          If the main productivity factor is labour then improvements can be made in training, supervision, communication, standardisation, documentation, tools, systems or support

-          For non-labour measures examine product or process design