Productivity (Encyclopedia of Business and Finance)
Productivity is the result or the sum of all effort that it takes to deliver a product or service. Productivity is frequently referred to as output and, to some degree, can be measured. The output generated by a person, organization, or other entity is measured in terms of (the number of) units or items produced and services performed within a specified time frame. Thus, productivity is the economic value of goods and services. It becomes the value or result of the "price" of a product or service minus all "costs" (supplies, materials, human labor, etc., which frequently are monetary) that go into the effort.
PRODUCTIVITY PERFORMANCE MEASURES
Productivity is a performance measure that indicates how effectively an organization converts its resources into its desired products or services. It is a relative measure in that it is used to compare the effectiveness of a country, organization, department, workstation, or individual to itself over time for the same operation, or to other countries, organizations, departments, workstations, or individuals. From a systems perspective, productivity indicates how well an organization transforms its inputs into outputs. In manufacturing, productivity is generally stated as a ratio of output to input. Productivity may be expressed as partial measures, multifactor measures, and total measures. Partial productivity measures are used to analyze activities in terms of a single input (e.g., units produced per worker, units produced per plant, units produced per hour, or units produced per quantity of material). Multifactor productivity measures take into account the utilization of multiple inputs (e.g., units of output per the sum of labor, capital, and energy or units of output per the sum of labor and materials). A total measure of productivity expresses the ratio of all outputs produced to all resources used.
SYSTEM AND SUBSYSTEM PRODUCTIVITY
An important point in seeking productivity improvements in a subsystem of an organization is to link the subsystem improvements to the total system productivity. Optimization of a subsystem operation that does not affect the overall productivity of the organization is a waste of resources. For example, a manufacturer might improve the productivity of its machining operations, as measured by number of units produced per dollar. But if these units cannot be sold and are warehoused, the productivity of the organization has not increased, since the goal of the manufacturer is to generate revenue through the sale of its products. Activities intended to improve productivity must be carefully selected, and the appropriate measures must be developed to ensure that the organization's efforts result in the improvement of its overall productivity.
Numerous specific components are involved in contributing to and measuring productivity. The most important of these are discussed below.
Return on Investment Productivity is closely related to, but not dependent on, profit. It can be measured by return on investment (ROI). ROI is determined after the sale of a product or service minus the deductions for the total amount of effort (resources, etc.) put into its design, development, implementation, evaluation, and marketing. The formula for determining ROI is: "Price" minus "Cost" divided by "Sales."
Productivity Measures for Individuals and Teams An individual's productivity is measured by that person's potential to reach the highest level of productivity possible. That is, a person has certain skills that determine his or her level of capability (an engineer's skills, banker's knowledge, etc.). An individual's experiences and education usually determine his or her skill level regarding a particular job. Other factors, such as a positive environment (working with a good team, having a good boss, liking the physical surroundings in the workplace, being appreciated, etc.) and how motivated one is to do a job, also contribute to productivity. When several individuals come together to work as a team, the team's productivity or the effectiveness of the team is the sum of individual efforts toward achieving a desired goal. Several factors (motivation, expertise, working conditions, team compatibility, potential, etc.) influence the level of productivity achieved.
Productivity Gap A productivity gap (or capacity gap) is the difference between what a person can do and what that person actually does. That is, every person has the ability to achieve at a certain level. If a person is not motivated and is not working up to potential, that person's productivity gap is usually quite large. The same principle applies to a work team, organization, and so on. It is desirable to estimate potential (of a person, work unit, company, etc.) to determine where productivity gaps exist (and how large they are) and find ways to close them. By looking at a person's ability in conjunction with other motivational factors, it is possible to estimate a person's (or a group's) potential to achieve desired results. When all factors operate at optimum, the productivity is said to be at its highest levelhe productivity gap has been filled or is minimized.
Motivation Productivity is directly related to how motivated a person is to perform a task or activity. Many businesses devote much time and effort to finding ways to motivate employees. Worker enhancement programs (for an individual, team, company, etc.) that are built on ways to motivate workers (toward self-motivation and long-term motivation) can optimize productivity. Organizations that are most successful in motivating workers provide a variety of programs (formal and informal avenues within and outside the organization) to meet the needs of their employees. Some organizations offer employees sports and recreational activities, fitness and leisure activities, and family-oriented programs (work-/job-augmented incentives). Incentive programs may be totally separate from or incorporated into work-team meetings, seminars, and education/training programs. Such a comprehensive approach toward enhancing worker performance may capitalize on quality measures (such as value, total quality management [TQM], quality circles, innovation, etc.) and performance standards (such as profitability, efficiency, customer satisfaction, on-time delivery, etc.) and include a wide range of personal and team rewards and incentives.
Mutual Reward Theory Mutual reward theory (MRT) is based on finding ways for all to benefit. That is, if an organization can assist an employee in reaching some of his or her goals while still meeting the company's production goals, a mutual reward has occurred. When the benefits are at an optimum for all persons involved, the greatest rewards are realized. Productivity is usually directly proportional to the degree of MRT success.
Productivity Benchmarks Factors that enter into productivity benchmarking for an organization include overall operations, worker training, technology, continuous quality improvement, and management philosophy and strategy. Management strategy includes how and at what level decision making takes placesually greater productivity gains are realized when decision making is pushed to its lowest level possible and is still effective. Also, an organization's efficiency may depend just as much on borrowing and lending strategies (e.g., requiring immediate payment on goods sold while practicing delayed payments to creditors) to maximize resource availability as it does on efficient operations and a safe environment. Thus, there are many important factors included in maximizing ROIost factors depend on making the right decisions at the right time. What is a good decision for one company may be bad or devastating for another.
Productivity Growth and Economics Productivity growth is defined as a measure of the amount of goods and services that are produced during a specified period of time. Once a standard has been determined, the standard (benchmark or identified level of production) becomes the measure against which all future production can be compared. Since 1950, the U.S. ten-year annual growth rates have been as follows: 1950s: 2.17 percent; 1960s: 2.85 percent; 1970s: 1.71 percent; 1980s, 2.17 percent; 1990s: (estimate) 1.31 percent. The annual growth rate is of particular interest to individuals, since the productivity growth rate is directly proportional to a person's wealth. That is, as productivity levels go up, so does an individual's buying power. In turn, the total economy benefits from the boost.
Productivity Value Added While productivity is more easily measured in manufacturing (products produced) than in services, most productivity researchers agree that people are the world's most valuable resources. Many productivity re searchers suggest that education and training are the basic foundation for raising productivity levels. The acquisition of expertise through education and training, coupled with the best equipment and resources within an efficient and safe environment, can be maximized by developing employees into people who want to learn, who want to work at their potential, and who want to continuously improve. These factors are best achieved when an employee is motivated to take pride in the work he or she does. A motivated, self-starting employee is one who adds value to an organization and contributes to the overall productivity of him or herself, a work group, an organization, and the economy.
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Productivity (Encyclopedia of Small Business)
In the simplest terms, productivity is the ratio between the quantity of goods and services produced and the quantity of resources used to produce them. Economists have come up with a number of intricate ways to measure productivity, but any business owner knows that if he or she is producing more of a product with the same number of resources, productivity has gone up. Of course, the opposite is true if fewer products are being produced.
Worker productivity is one of the key issues for any business, but for small businesses with limited resources, getting the most out of the least is an essential element in establishing and maintaining competitiveness. Small businesses need to have tools in place to measure productivity and must combine increased productivity with a commitment to quality and efficiency. Innovative goal setting, planning, and organizing are essential to improving productivity. Some of the major threats to productivity, as cited in Industrial Management, include an ineffective use of technology and lack of worker training and support, in addition to "an aging workforce, a declining labor supply, a lack of qualified workers, and rising wage and benefit costs."
STEPS IN MEASURING AND INCREASING PRODUCTIVITY
The first step in improving productivity is putting meaningful methodologies of measurement in place to evaluate and monitor the performance of a business operation. To be meaningful, productivity measurements must show a linkage with profitability; after all, it is the bottom line that is the ultimate barometer of a company's success. Measurements should clearly demonstrate how efficiently (or inefficiently) a company is using its resources to produce quality goods and services.
In the past, productivity was a stand-alone issue company could either improve it, or it could not. For most small businesses, increasing productivity has meant one thingmproving the output rate. When this is the only goal, improving quality is seen as a very expensive proposition that does nothing to boost output. In other words, improved quality and increased output are seen as mutually exclusive ideas. This way of thinking is a mistake. In fact, small business owners need to realize that just the opposite is true. An increase in quality most often results in lower costs as rework is eliminated and unnecessary inspections are eliminated. Improved quality should be seen as a strategic tool that can increase efficiency by improving resource utilization and increasing customer satisfaction while lowering costs.
Another tool to increase productivity is to improve communications between workers and management. This may be easier in a small firm than a large one since the total number of employees is lower. Managers must sell employees on their obligation to make things work better at the company, both in the work environment and the work product. By gathering input from more and more workers, that job can be made easier.
A business owner or CEO can begin gathering input from workers by starting at the top and letting the process filter down. Off-site retreats with top managers to discuss the company's values and goals are a good place to start. From there, those values and goals can be communicated to the whole work force at the same time it is conveyed to them that their input matters and that direct communication is valued throughout the organization. If something goes wrong, any employee should feel safe in stepping forward and identifying the problem without fear of reprisals. If one person has a conflict with another employee, they should be encouraged to go directly to that other person instead of ignoring the problem or complaining about it to people who cannot solve it. A high-level manager, or even the CEO or owner, can step in to solve disputes if there is still a conflict after communications have been initiated.
This improved and open communication eases tension in the workplace and fosters a cooperative, growth-oriented atmosphere. Employees feel that their problems will be listened to and that their suggestions will be taken seriously, which means they are more likely to work harder and to think creatively when initiating production improvements.
Improved communication can also lead to another step known to enhance productivity in small businessesnabling the work force. Once communication channels are open, upper management may find that employees are as committed to improving the business as they are. They also realize that front-line employees are quite often the best source of ideas on how to improve productivity and the best source for implementing those ideas. In small businesses, employees are often forced to perform a greater variety of tasks than employees at large firmst is up to small business owners to take advantage of that fact by empowering employees. As Jay Nathan observed in the Review of Business, "empowerment in the small business environment enables employees and management to learn and implement new ways of working, thus improving business operations for increased profits and productivity."
True empowerment also requires employers to provide their workers with the skills and knowledge to perform their jobs, as well as the unquestioned support of management. Upper management must provide ongoing training and skills development, while managers should act as coaches and leaders who make needed resources available. Finally, a mutual trust and caring must develop between associates and managersuch trust is essential if positive changes are to occur.
INCREASED PRODUCTIVITY THROUGH INCENTIVES
Another way to get employees to work harder and improve productivity is to let them share in any gains that result from the productivity improvements. Pay-for-performance bonus systems, or gain sharing, became a popular incentive in the 1990s with both large and small businesses. For example, one restaurant in Ohio offered to pay cash incentives to all employees if food costs dropped below 35 percent of total sales. The very first month, employees offered up several money-saving suggestions that resulted in a1.7 percent drop in food costs and a $40 payout to everyone on staff. Payouts since then have gone as high as $95; in the two months where results did not meet the 35 percent goal, no payouts were made.
Gain sharing, and programs like it, have become successful because they increase employee awareness of the company's bottom line and their ability to have an impact on the firm's financial fortunes. From the employer's standpoint, gain sharing is a "win-win" proposition since employees work harder, feel more committed to the business, and profits (or some other measurable goal) improve.
How does a small business institute a gain-sharing program? First, keep things simple. Pick no more than five key business indicators that are important to the business's success. For example, a sales staff might focus on account growth, market penetration, and customer retention. Selecting more than five objectives complicates the issue and makes it harder for employees to understand. Likewise, it is important to select objectives that the employees have direct control over. Meeting goals that require actions outside their sphere of influence demoralizes employees and makes it far less likely that any improvements will be seen. The plan should be written in language that is easy to understand, with the bottom line goal clearly stated.
Once goals are determined, they have to be measured. Choose a realistic means of measuring progress, and, more importantly, choose realistic goals and performance targets that can be reached through productivity improvements. Employees have no problem spotting and ignoring unrealistic goals that they know they have no hopes of attaining. Goals should be both short-term (monthly) and long-range (annual). Also, it is important to note that goals will almost certainly change over time as employees become more efficient and meet the original goals.
Communication is an important part of the gain sharing process. Once management starts measuring productivity, it needs to share the data it gathers with employees so they can see the progress (or lack thereof) being made. This stepharing financial or production data that was once considered confidentialight be new for many companies, but it must occur so that employees can make good decisions and sharpen their problem-solving skills. Communication should continue throughout the life of the program; business consultants counsel clients to use tools such as newsletters or memos to tell employees about success stories throughout the company. This lets employees know that their actions matter and provides other employees with examples of how to make improvements. Very visible means of communication such as large charts tracking progress against the goal are also very effective.
In addition to sharing information, management must enable employees to make decisions and act on them without too many layers of approval. Employees are the best source of ideas for improving productivity, and making them feel that they are in control of the program is a key part of making it work. Employees are sure to rebel against any program that they feel is being forced on them by upper management or by an outside consulting firm. One of the best ways to ensure employee buy-in is to form a cross-functional group made up of employees from throughout the company to help design and administer the plan.
Eventually, each department should come up with its own set of goals, but the initial plan must be a company-wide one with a big picture goal. Once that goal is stated, each department can look at its own operations and come up with a set of smaller goals that are all designed to help meet the larger goal. Departments should not set their smaller goals in a vacuumuite often, the performance of one department is directly dependent on the performance of another department, so it is important that those two departments work together in establishing goals.
Once all the goals are set, the reward needs to be determined. The biggest caution that experts offer is to make sure the reward is worth the employee's efforts. If the incentive is too small, the plan might fail because employees simply do not care if they make the improvements needed to get what they view as inconsequential rewards. Experts recommend that employees be able to earn between four and eight percent of their annual salary as a reward for meeting gain sharing goals. Rewards can be paid as an increase in annual salary, or as a one-time bonus.
It should be noted that gain sharing can be an especially successful tool for a small business that is about to grow beyond the owner-several employee stage. When the company consists of the owner and just a few employees, the owner can control all operations and can rewards employees as he or she sees fit. As the company grows and is split into departments with managers who report to the owner, control is decentralized. The owner may step away from the day-to-day managerial responsibilities and therefore lose touch with the workflow. It is at that point that gain sharing can be an important tool to pull employees together and keep them working towards a common goal.
Finally, one note of caution about gain sharing or incentive based pay. Managers must make sure that employees do not become so focused on the targets needed to achieve gain sharing that they neglect other parts of their work or let quality slip. This is the most common criticism of gain sharing, and it is one of the most important reasons that short-term goals must be combined with long-range goals if the plan is to work. That way, workers will be able to see that if they commit too much effort to the short-term goal, the long-term goal may be lost.
USING TECHNOLOGY TO IMPROVE PRODUCTIVITY
From the time of the first factory, using machines to assist or even replace humans and improve productivity has been the norm. Using machines to create interchangeable parts, the creation of the assembly line, the use of robots to take over manual taskshese are just a few of the dramatic improvements in productivity that came about as a result of technology. Today, that practice continues unabated. The giant leaps made in computer and robotic technology in the last decade have given business owners tremendous new options for improving productivity.
What is different about this wave of better productivity through technology is that it is directly impacting small businesses. In the past, leaps in technological know-how most often benefited large corporations that had the money to invest in expensive new systems. Today, when the most inexpensive laptop computer is more powerful than some of the behemoth mainframe computers that existed in the 1960s, even the smallest business can afford to take advantage of technology to make his or her business grow. Computers, voice mail, fax machines, e-mailost people today would not dream of starting a business without these technological aids by their side.
Computers and other advances have simply let small businesses get more done in less timehe very essence of increased productivity. Examples of technological gains include database management software that make it easy to manage inventory, fax-back and e-mail services used by customer service departments to disseminate information that previously had to go through the mail, bar-coding technology that can be used to track customer purchases in a computer database that automatically sends a message to reorder a particular product when in-stock levels drop below a preset point, and "home pages" on the World Wide Web that allow small companies to go global for very little cost.
All of the above are examples of how technology was used to help a company grow; technology can also increase productivity and cut expenses by helping a company "stay small" in other areas. For example, instead of having to outsource bookkeeping operations or hire more customer support people, a small business can now look to computers (easy-to-use accounting software, for example) and communications technology to register significant savings in both time and money.
Communications tools, in fact, are the next wave of technology. Desktop videoconferencing, company intranets which can be linked to manufacturers and suppliers, paging and wireless communicationsll are expected to explode in use in the coming years. At the center of this boom is the Internet. Even the smallest businesses are able to use the Internet to communicate with customers and suppliers, sell products, and advertise to both local and international audiences. Business-to-business communications have also increased as the Internet has expanded, making it easier for small firms to find partners to do business with.
While almost everyone concedes that small businesses must invest in technology to compete, there are still complaints about technology. The two most common are that it is still too expensive in many areas, and thus out of reach to many business owners. The second is that it is still too complicated and difficult to learn. The computer industry seems to be taking this complaint seriously and developing a new wave of "plug and play" products that are easy to install and easy to use. Computer networks designed just for small businesses are being marketed that have fewer bells and whistles, fewer set-up requirements, and more customized software.
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