Productivity Measurement

In Productivity measurement, we identify the factors affecting productivity and divide them into two major categories: external and internal. We identify the various components making up these factors and briefly outline the way in which they affect productivity. Productivity is a widely used (and abused) term, normally associated with either national productivity, for example reports of rising and falling national and international gross national product (GNP) values or with company productivity, for example how competitive one industry or another has become over a period of time. Often television reports refer to productivity in relation to labour efficiency. In particular direct labour may be highlighted. Despite the amount of media attention that the term productivity receives, the concept is not widely understood. Let's try out some popular (mis)conceptions. Do you consider the following statements to be accurate or inaccurate?

• 'Productivity equals labour intensity'- meaning where there is high labour input, there must be low productivity or where there is a high degree of automation there must be high productivity!
• 'Productivity is solely a measure of labour productivity' - meaning, usually that we use the term productivity in relation to direct labour.
• 'Performance can be measured solely by output' - meaning if the company made a profit, then this is a sufficient measure of performance - assume the profit were $2m - is this good? If you were told the company was IBM what would your reaction be then?
• 'Productivity equals profitability' - meaning that one term is synonymous with the other.
• 'Cost cutting improves productivity'.
• 'Productivity applies only to the manufacturing sector'.

These statements expose some of the misconceptions surrounding productivity. All of the above statements are wrong except one. 'Cost cutting improves productivity' is in fact correct. By reducing costs we can increase productivity. It is a very common strategy adopted by many companies. As profit margins reduce due to flattening or reducing sales, attention turns inwards to reduce costs. It is not unusual to see or hear statements related to manufacturing industry or labour productivity when the media (particularly TV) reports national economic performance usually referring to 'manufacturing productivity'. There has yet to be equivalent attention paid to the service sector which constitutes around 75 per cent of GDP in most developed countries. It might be the same inside a manufacturing company if one considers the shop floor staff. They might have the term productivity used to refer to their collective output, but the office professional staff have no such measure, despite the fact that direct labour costs might be 5 per cent while overhead costs constitute as much as 40 per cent of all costs.