Productivity is a relative measure of how efficiently the inputs are changed into output. Specifically, it is the ratio of outputs to inputs in a production process during a given time period.
In other words, productivity is the rate of output of a worker or machine – number of units of output produced for every unit of input.
What are two main types of productivity in a business?
The most common measures of productivity are Labor Productivity and Capital Productivity.
A. LABOR PRODUCTIVITY
Labor productivity is a measure of the efficiency of the workers by calculating the output per worker. It is calculated using the following formula:
Labor Productivity = Total Output in Time Period / Workers Employed
How to improve labor productivity?
There are two main ways to increase labor productivity. Increase Total Output with the same number of workers meaning that each worker needs to produce a greater output. Or, keep Total Output at the same level but with fewer workers.
It is also possible for a business to increase labor productivity, but to reduce Total Output too. Reduce the size of the workforce, but by a smaller proportion than the reduction in output, when demand is falling.
Increasing the productivity of workers could be achieved by:
- Offering training of staff to improve skill levels. Workers who have higher skill level should be more productive, able to perform tasks more efficiently and become more interested in work due to flexibility of doing different jobs. However, training costs might be high and training will be time consuming. Additionally, highly qualified staff might leave the firm to join rival businesses.
- Improving motivation of employees. This can be achieved in many ways including both financial methods such as pay increases and additional bonus for performance as well as non-financial methods such as involvement in decision-making, Kaizen groups, delegation and quality circles. Ideally, increasing productivity without any increase in labor pay would drive unit costs down. However, it does not make any sense to raise pay by higher percentage than an increase in productivity.
B. CAPITAL PRODUCTIVITY
Capital productivity is a measure of the efficiency of the capital employed in a business by calculating the output per USD$1. It is calculated using the following formula:
Capital Productivity = Total Output in Time Period / Capital Employed
How to improve capital productivity?
There are two main ways to increase capital productivity. Increase Total Output with the same number of machines meaning that each machine needs to produce a greater output. Or, keep Total Output at the same level but with fewer machines of better quality.
In both ways, improving productivity will add to a business’s costs. This includes the cost of training programs for workers and schemes to motivate workers to operate machines faster, or simply the cost of purchasing better machinery.
Increasing the productivity of capital could be achieved by:
- Using automation and better technology. Purchasing more technologically advanced modern equipment such as office computers and robot-controlled production machines will increase output with fewer staff. However, spending money on expensive technology will only be justifiable when high production levels can be maintained over a long period of time. Additionally, some employees will need to be trained while others might feel less secure fearing of losing their jobs.
- Improving quality of management decisions. High quality of the management will guarantee the overall success of improving productivity levels. Business managers should involve workforce at every step of the strategy, seek their views and welcome contributions from staff. At the same time, they should avoid ineffective management practices that can reduce the overall productivity such as failure to purchase correct raw materials, poor maintenance schedules for machinery or insensitive management of staff.
What are other types of productivity?
In addition to these traditional measures of productivity, there are also a number of other types of productivity that are becoming increasingly important, such as:
- Material productivity. This is the measure of how much output is produced per unit of material input. It is typically calculated by dividing the total output by the total quantity of materials used.
- Total Factor Productivity (TFP). This is a measure of the overall efficiency of a production process. It takes into account all inputs, including labor, capital and materials. Total Factor Productivity (TFP) is typically calculated by dividing the total output by the weighted average of all inputs.
- Knowledge productivity. This is the measure of how much output is produced per unit of knowledge input. It is a critical measure of productivity in the knowledge economy, where knowledge is a key factor of production.
- Innovation productivity. This is the measure of how much output is produced per unit of innovation input. It is a measure of how well a company is able to convert new ideas into new products and services.
- Customer productivity. This is the measure of how much value is created for customers per unit of input. It is a critical measure of productivity in service industries, where the customer is the focus of the production process.
By improving productivity, individuals and organizations can achieve more with fewer resources. This can lead to increased profits, reduced costs, and improved customer satisfaction.
