Productivity

Key What is Productivity

Questions Productivity Measurement

Productivity Increase
Productivity Variables
Key Variables for Improved Labor Productivity
Service Productivity
Solved Problems

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Productivity Challenge
Productivity is the ratio of outputs (goods and services)
divided by the inputs (resources such as labor and capital)
The objective is to improve productivity!

Important Note!
Production is a measure of output only and not a measure of
efficiency

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 The Economic System
Inputs Transformation Outputs

Labor, The U.S. economic system Goods

capital, transforms inputs to outputs at and
management about an annual 2.5% increase services
in productivity per year. The
productivity increase is the
result of a mix of capital (38% of
2.5%), labor (10% of 2.5%), and
management (52% of 2.5%).

Feedback loop

Heizer, J., Render, B., & Munson, C. (2016). Principles of operations management:
sustainability and supply chain management. Pearson Higher Ed.
Improving Productivity at Starbucks

A team of 10 analysts continually look for

ways to shave time. Some improvements:
Stop requiring signatures on credit card
purchases under $25 – Saved 8 seconds
per transaction
Change the size of the ice scoop – Saved
14 seconds per drink
New expresso machines – Saved 12
seconds per shot

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How to increase productivity
• Become efficient
• Output increase with little to no increase in input
• Expand
• Both input and output grow but output increases more rapidly
• Achieve Breakthroughs
• Output increases while input decreases
• Downsize
• Output remains same but input is reduced
• Retrench
• Both output and input decreases, with input decreasing at a
faster rate
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Improving Productivity at Starbucks

Operations improvements have helped Starbucks increase

yearly revenue per outlet by $250,000 to $1,000,000.

Productivity has improved by 27%, or about 4.5% per year.

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 Measure of process
improvement

PRODUCTIVITY
Represents output relative to
input
Units produced
Productivity =
Input used
Only through productivity
increases can our standard of
living improve
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 Productivity Calculations:

Labor Productivity
One resource input
Productivity =
Units produced  single-factor
Labor-hours used productivity
1,000
= = 4 units/labor-hour
250
Multi-Factor Productivity
Also known as total factor productivity

Output and inputs are often expressed in dollars

Multiple resource inputs  multi-factor productivity

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 Multi-Factor Productivity

𝑂𝑢𝑡𝑝𝑢𝑡
𝑀𝑢𝑙𝑡𝑖𝑓𝑎𝑐𝑡𝑜𝑟 =
𝐿𝑎𝑏𝑜𝑟 + 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 + 𝐸𝑛𝑒𝑟𝑔𝑦 + 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 + 𝑀𝑖𝑠𝑐𝑒𝑙𝑙𝑎𝑛𝑒𝑜𝑢𝑠

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Productivity Variables
Labor contributes about 10% of the annual increase

Capital contributes about 38% of the annual increase

Management contributes about 52% of the annual increase

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 Key Variables for Improved Labor
Productivity

BASIC EDUCATION DIET OF THE LABOR FORCE SOCIAL OVERHEAD THAT

APPROPRIATE FOR THE MAKES LABOR AVAILABLE
LABOR FORCE

Challenge is in maintaining and enhancing skills in the midst of

rapidly changing technology and knowledge
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 Service Productivity
Productivity improvement in services is difficult because

Frequently focused on
Typically, labor intensive
unique individual
(e.g., counseling,
attributes or desires (e.g.,
teaching).
investment advice).

Often an intellectual task

Often difficult to
performed by
mechanize (e.g., a
professionals (e.g.,
haircut).
medical diagnosis).

Often difficult to evaluate

for quality(e.g.,
performance of a law
firm).
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 Productivity at Taco Bell
Designed Shifted some
Revised the
meals for easy preparation to
menu
preparation suppliers

Efficient Training and New water

layout and employee and energy
automation empowerment saving grills

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 Productivity at Taco Bell

Management span of
Preparation time cut to In-store labor cut by 15
control increased from 5
8 seconds hours/day
to 30

Water- and energy-

savings grills conserve
Stores average 164
Floor space reduced by 300 million gallons of
seconds/customer from
more than 50% water and 200 million K
drive-up to pull-out
w H of electricity each
year

Green-inspired cooking
method saves 5,800
restaurants $17 million
per year
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Example 1 ( Single Factor Productivity)
Three employees process 600 insurance policies in a week. They work 8 hrs. per day,
5-days per week. Find labour productivity.

• Input • Out Put

No of Employees=3 600 policies /week
Working hour = 8 hrs/day
Week days =5 • Productivity = Output/Input
Total working hours per week = 600 Policies/week/120 hrs/week
3*8*5 =120 hrs/week =5 policies/hrs
Example -2. A team of workers make 400 units of a product, which is valued by its
standard cost of 10 MU each (before markups for other expenses and profit). The
accounting department reports that for this job the actual costs are:

400 MU for labour,

1 000 MU for materials and
300 MU for overhead.
*MU = Money Unit
Calculate Multi-factor productivity

Input Output Productivity

Labour = 400 MU ( money Unit) 400 Units
Output/Input =
Materials =1000 MU Standard cost =10 MU 400*10/400+1000+300
Overhead =300 MU =4000/1700 =2.35
1.1 Chuck Sox makes wooden boxes in which to ship motorcycles. Chuck and his three employees
invest a total of 40 hours per day making the 120 boxes.

a) What is their productivity?

b) Chuck and his employees have discussed redesigning the process to improve efficiency. If they can
increase the rate to 125 per day, what will be their new productivity?

c) What will be their unit increase in productivity per hour?

d) What will be their percentage change in productivity?

• Input A. Productivity = (120 boxes/day)/(40 hours/day) = 3

boxes/Hours
Labour = 3 employees
B. Productivity = (125 boxes/day)/(40 hrs/day) = 3.125
Total Working hours = 40 hours/Day boxes/Hours

• Output C. Increase in productivity = 3.125-3 = 0.125 boxes/hours

120 Boxes/ day D. Percentage change in productivity = (0.125/3)*100=

4.166%
1.2 Carbondale Casting produces cast bronze valves on a 10-person assembly line. On a recent day, 160
valves were produced during an 8-hour shift.

a) Calculate the labor productivity of the line.

b) John Goodale, the manager at Carbondale, changed the layout and was able to increase production
to 180 units per 8-hour shift. What is the new labor productivity per labor-hour?
c) What is the percentage of productivity increase?

Input A. Productivity = 160 valves/80 hours = 2 valves/hours

Labour = 10 employees B. Productivity = 180 valves/80 hours = 2.25

valves/hours
Shift Duration = 8 hrs
Increase in productivity = 2.25-2 = 0.25 valves/hours
Total working hours = 10*8 =80 Hrs
C. Percentage change in productivity = (0. 25/2)*100=
12.5%
Output

160 valves/ 8 hours shift

1.3 This year, Druehl, Inc., will produce 57,600 hot water heaters at its plant in Delaware, in order to
meet expected global demand. To accomplish this, each laborer at the plant will work 160 hours per
month. If the labor productivity at the plant is 0.15 hot water heaters per labor-hour, how many
laborers are employed at the plant?

• Input A. Productivity = Output/Input

Labour =L 0.15 = (57600 hot water heaters /year)/(L*160*12)

Each labour working hours =160 hrs/month L = 57600/(12*0.15*160)]

L = 200 labour

• Output

57600 Hot water heaters /Year

1.5 George Kyparisis makes bowling balls in his Miami plant. With recent increases in his costs, he has a
newfound interest in efficiency. George is interested in determining the productivity of his organization. He
would like to know if his organization is maintaining the manufacturing average of 3% increase in
productivity per year? He has the following data representing a month from last year and an equivalent
month
this year:

Show the productivity percentage change for each category and then determine the improvement for
labor-hours, the typical standard for comparison.
 1.5

Resource Last year This year Change Percentage Change

Labor 1000/300=3.33 1000/275=3.64 0.31 0.31/3.33= 9.3%

Resin 1000/50=20 1000/45=22.22 2.22 2.22/20=11.1%

Capital 1000/10000=0.1 1000/11000=0.09 -0.01 -0.01/0.1=-10%
Energy 1000/3000=0.33 1000/2850=0.35 0.02 0.02/0.33=6.1%
1.6 George Kyparisis (using data from Problem 1.5) determines his costs to be as follows:
◆ Labor: $10 per hour
◆ Resin: $5 per pound
◆ Capital expense: 1% per month of investment
◆ Energy: $0.50 per BTU
Show the percent change in productivity for one month last year versus one month this year, on a
multifactor basis with dollars as the common denominator.

Last Year This Year

Production 1,000 1,000

Labor hr. @ $10 $3,000 $2,750
Resin @ $5 250 225
Capital cost/month 100 110
Energy 1,500 1,425

$4,850 $4,510

[(1,000 / 4,510) − (1,000 / 4,850)] 0.222 − 0.206 0.016

= = = 7.8% improvement*
(1,000 / 4,850) 0.206 0.206
1.8 Lillian Fok is president of Lakefront Manufacturing,
a producer of bicycle tires. Fok makes 1,000 tires per day with the following resources:

Labor: 400 hours per day @ $12.50 per hour

Raw material: 20,000 pounds per day @ $1 per pound
Energy: $5,000 per day
Capital costs: $10,000 per day

a) What is the labor productivity per labor-hour for these tires at

Lakefront Manufacturing?

Input Output
Labor = 400 hours/day @ $12.50 per hour
Raw material : = 1000 tires/Day
20,000 pounds per day @ $1 per pound
Energy: 1000 𝑡𝑖𝑟𝑒𝑠/𝑑𝑎𝑦
$5000 per day a) 𝐿𝑃 = ℎ𝑜𝑢𝑟𝑠 =2.5 tires/hour
Capital Costs : 400 𝑑𝑎𝑦
$10000 per day
1.8 Lillian Fok is president of Lakefront Input
Labor = 400 hours/day @ $12.50 per hour
Manufacturing,
a producer of bicycle tires. Fok makes 1,000 tires per Raw material :
day with the following resources: 20,000 pounds per day @ $1 per pound

Energy:
Labor: 400 hours per day @ $12.50 per hour $5000 per day
Raw material: 20,000 pounds per day @ $1 per pound
Energy: $5,000 per day Capital Costs :
$10000 per day
Capital costs: $10,000 per day

b) What is the multifactor productivity for these tires at

Lakefront Manufacturing? Out Put
= 1000 tires/Day

1000 tires/Day
𝑀𝑢𝑙𝑡𝑖𝑓𝑎𝑐𝑡𝑜𝑟 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 =
${(400 × 12.50) + 20000 ∗ 1 + 5000 + 10000}

1000 tires/Day
𝑀𝑢𝑙𝑡𝑖𝑓𝑎𝑐𝑡𝑜𝑟 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 =
$(5000) + 20000 + 5000 + 10000}

1000tires/Day
𝑀𝑢𝑙𝑡𝑖𝑓𝑎𝑐𝑡𝑜𝑟 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 = =0.025 tires/dollar
$ 40000
1.8 Lillian Fok is president of Lakefront Manufacturing, Input
Labor = 400 hours/day @ $12.50 per hour
a producer of bicycle tires. Fok makes 1,000 tires per day
with the following resources: Raw material :
20,000 pounds per day @ $1 per pound
Labor: 400 hours per day @ $12.50 per hour Energy:
Raw material: 20,000 pounds per day @ $1 per pound $5000 per day
Energy: $5,000 per day
Capital costs: $10,000 per day Capital Costs :
$10000 per day

c) What is the percent change in multifactor productivity if

Fok
can reduce the energy bill by $1,000 per day without cutting Output
production or changing any other inputs? = 1000 tires/Day

1000 tires/Day
𝑀𝑢𝑙𝑡𝑖𝑓𝑎𝑐𝑡𝑜𝑟 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 =
$(5000) + 20000 + 5000 + 10000}

c) $1000 reduce energy bill per day

1000 tires/Day
𝑀𝑢𝑙𝑡𝑖𝑓𝑎𝑐𝑡𝑜𝑟 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 =
$(5000) + 20000 + 4000 + 10000}

% changes in Productivity = 2.56% improvement

1.11 Lake Charles Seafood makes 500 wooden packing boxes for fresh seafood per day, working in
two 10-hour shifts. Due to increased demand, plant managers have decided to operate
three 8-hour shifts instead. The plant is now able to produce 650 boxes per day.

a) Calculate the company’s productivity before the change in

work rules and after the change.

b) What is the percentage increase in productivity?

c) If production is increased to 700 boxes per day, what is the

new productivity?

a. Before = 500 wooden packing boxes/ 20 hrs = 25 Boxes /hour Note: 10 hours shift, two shift
After = 650 boxes / 24 hour =27.08 Boxes/hour Note : 8 hours shift, three shift

b. Percentage Change in Productivity = 8.3% increase

c. New productivity = 700 box / 24 hour = 29.1667 Boxes/hour

1.12 Charles Lackey operates a bakery in Idaho Falls, Idaho. Because of its excellent product and excellent location,
demand has increased by 25% in the last year. On far too many occasions, customers have not been able to purchase the
bread of their choice. Because of the size of the store, no new ovens can be added. At a staff meeting, one employee
suggested ways to load the ovens differently so that more loaves of bread can be baked at one time. This new process
will require that the ovens be loaded by hand, requiring additional manpower. This is the only thing to be changed. If the
bakery makes 1,500 loaves per month with
a labor productivity of 2.344 loaves per labor-hour, how many workers will Lackey need to add ? ( Hint: Each worker
works 160 hours per month.)

Input Output

Labor 1500 loaves, 25% more = 1875 ( New Demand)

160 hours per month
Say X number labor required

Labor Productivity =2.344 = 1875 / X* 160 = X = 5

Current System , 2.344 = 1500/ X*160, X =4

Add one extra labor
1.13 Refer to Problem 1.12. The pay Input
Labor
will be $8 per hour for employees. 160 hours per month
Charles Lackey can also improve the Say X number labor required
yield by purchasing a new blender.
Output
The new blender will mean an 1500 loaves, 25% more = 1875 ( New Demand)
increase in his investment. This
added investment has a cost of $100
per month, but he will achieve the Each worker works 160 hours per month.)
same output (an increase to 1,875) 4 workers = 4*160 =640 Hours per month
5 workers =5*160=800 hours per month
as the change in labor-hours. Which
is the better decision? 1500
𝐿𝑃 = =0.293 loaves/$
640×8
a) Show the productivity change, in
loaves per dollar, with an increase in 𝐿𝑃 =
1875
= 0.293 loaves/$
labor cost (from 640 to 800 hours). 800×8
1.13 Refer to Problem 1.12. The pay Input
Labor
will be $8 per hour for employees. 160 hours per month
Charles Lackey can also improve the Say X number labor required
yield by purchasing a new blender.
Output
The new blender will mean an 1500 loaves, 25% more = 1875 ( New Demand)
increase in his investment. This
added investment has a cost of $100
Each worker works 160 hours per month.)
per month, but he will achieve the 4 workers = 4*160 =640 Hours per month
same output (an increase to 1,875) 5 workers =5*160=800 hours per month
as the change in labor-hours. Which
Investment Change
is the better decision?
1500
𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 = =0.293 loaves/$
640×8
b) Show the new productivity, in
loaves per dollar, with only an 1875
𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 = = 0.359 loaves/$
increase in investment ($100 per 160×4×8+100
month more).
1.13 Refer to Problem 1.12. The pay Input
Labor
will be $8 per hour for employees. 160 hours per month
Charles Lackey can also improve the Say X number labor required
yield by purchasing a new blender.
Output
The new blender will mean an 1500 loaves, 25% more = 1875 ( New Demand)
increase in his investment. This
added investment has a cost of $100
Each worker works 160 hours per month.)
per month, but he will achieve the 4 workers = 4*160 =640 Hours per month
same output (an increase to 1,875) 5 workers =5*160=800 hours per month
as the change in labor-hours. Which
(c) Change
is the better decision?
Percent change =0.293-0.293/0.293 =0 ( Labor)
c) Show the percent productivity
Percent change = 0.359-0.293/0.293 = 22.5% (Investment)
change for labor and investment.
The better option is to purchase a new blender because it
generates more loaves per dollar.
Compute the multifactor productivity measure for an eight-hour day in which the usable
output was 300 units, produced by three workers who used 600 pounds of materials.
Workers have an hourly wage of $20, and material cost is $1 per pound. Overhead is 1.5
times labor cost.
Compute the multifactor productivity measure for an eight-hour day in which the usable
output was 300 units, produced by three workers who used 600 pounds of materials.
Workers have an hourly wage of $20, and material cost is $1 per pound. Overhead is 1.5
times labor cost.
Input Out put
Labor =3 300 units
Working hours = 8
Hourly wage =$20
Labor costs =3*8*20 =$480

Material =600 pounds

Material cost =$1 per pound
Total Material Cost = 600 pounds*$1/Pounds =$600

Overhead cost = 1.5 times labor cost

=1.5*$480=$720
300 Uni𝑡𝑠
Multifactor productivity =
$(480+600+720)

= 0.167 𝑢𝑛𝑖𝑡𝑠 𝑜𝑓 𝑜𝑢𝑡𝑝𝑢𝑡 𝑝𝑒𝑟 𝑑𝑜𝑙𝑙𝑎𝑟 𝑜𝑓 𝑖𝑛𝑝𝑢𝑡

Osborne Industries is compiling the monthly productivity report for its Board of Directors. From
the following data, calculate
(a) labor productivity,
(b) machine productivity, and
(c) the multifactor productivity of dollars spent on labor, machine, materials, and energy. The
average labor rate is $15 an hour, and the average machine usage rate is $10 an hour.

Units produced 100,000

Labor hours 10,000
Machine hours 5,000
Cost of materials $35,000
Cost of energy $15,000

100,000 units
𝐿𝑎𝑏𝑜𝑟 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 = = 10 units/ hour
10,000 𝑙𝑎𝑏𝑜𝑢𝑟 ℎ𝑜𝑢𝑟𝑠
Osborne Industries is compiling the monthly productivity report for its Board of Directors. From
the following data, calculate
(a) labor productivity,
(b) machine productivity, and
(c) the multifactor productivity of dollars spent on labor, machine, materials, and energy. The
average labor rate is $15 an hour, and the average machine usage rate is $10 an hour.

Units produced 100,000

Labor hours 10,000
Machine hours 5,000
Cost of materials $35,000
Cost of energy $15,000

100,000 units
𝑀𝑎𝑐ℎ𝑖𝑛𝑒 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 = = 20 units/ hour
5000 𝑙𝑎𝑏𝑜𝑢𝑟 ℎ𝑜𝑢𝑟𝑠
Osborne Industries is compiling the monthly productivity report for its Board of Directors. From
the following data, calculate
(a) labor productivity,
(b) machine productivity, and
(c) the multifactor productivity of dollars spent on labor, machine, materials, and energy. The
average labor rate is $15 an hour, and the average machine usage rate is $10 an hour.

Units produced 100,000 Labor Cost = 10,000* 15 = 150,000

Labor hours 10,000 Machine cost = 5000*$10 =50,000
Machine hours 5,000 Materials Cost =$ 35000
Cost of materials $35,000 Energy cost= $15000
Cost of energy $15,000

100,000 units
𝑀𝑢𝑙𝑡𝑖𝑓𝑎𝑐𝑡𝑜𝑟 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 =
150,000+50,000+35000+15000
=0.4 units per dollar spent
Thank you

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