Module III – Productivity and decision making

Concept of productivity and its measurement; Competitiveness, Decision making

process; Models in decision making, Decision making under certainty and risk, Decision
making under uncertainty, Decision trees, Models of decision making.

PRODUCTIVITY

Productivity of a production system is analogous to the efficiency of a machine. Just as it is desired to

increase the efficiency of a machine, it is also aimed at to raise the productivity within the available
resources.

Productivity may be defined as the ratio between output and input. Output means the amount produced
or the number of items produced and inputs are the various resources employed, e.g., land and building,
equipment and machinery, materials, labour, etc.

In general sense, productivity is some relationship between inputs and output of an enterprise. It is
the quantitative relationship between what we produce and the resources used. The only way of
raising the living standard of the society is to increase productivity. Productivity can be increased by
increasing output from each unit of input.

Some of the definitions, given below explain the fundamental concept of productivity:

(i) Productivity is measure of how much input is required to produce a given output i.e. it is ratio
of output to input.

(ii) Productivity is the ratio between the amount produced and the amount of resources used in the
course of production. The resources may be any combination of materials, machines, men and space.

(iv) According to Peter Drucker, "Productivity means balance between all factors of production that
will give the maximum output with the smallest effort."

(v) I.L.O. generally takes productivity to mean, "The ratio between the volume of output as
measured by production indices and the corresponding volume of labour input as measured by
employment indices.

Productivity = Measure of Output / Measure of Input

Inputs in a business organization can be labour, capital etc. The measures can be expressed in terms of
money value or in terms of quantity. In most cases output will be goods and services produced, for
which input will be men, money, equipment, power, plant facilities and other items used in the process
of production.

High productivity suggests minimum use of resources for achieving a set of targets. Without a set result
there is no productivity. Improvement in productivity will result in accomplishment of set targets with
relatively lower sacrifice of input resources.

Higher the productivity ratio, better it is. High productivity increases production and reduces cost of
production per unit and, therefore, reduces selling price and increases profitable of the concern.
Productivity should not be confused with production because the latter refers directly to the output while
the former relates to the ratio of output in terms of input of materials, labour hours, machine hours,
capital employed or any other factor of production. Thus in a broad sense, productivity means goods
and services produced in relation to resources utilized in producing the same.

Factors affecting productivity

(a) Factors affecting National Productivity

1. Human Resources
2. Technology
3. Research and development
4. Trade unions
5. Government Regulation
6. Group Policy

(b) Factors affecting productivity in Manufacturing and Services

7. Product (or System) Design

8. Machinery
9. Skill upgradation
10. Materials
11. Working environment
12. Production Volume

1. Human Resources: Periodical training given to the employee on the recent developments ideal in
a given field; education and enlightenment of employees of newer production practices coupled
with motivation can trigger higher productivity. Employees need to be motivated to be productive.
Pay is not enough; they need to have good, safe, working conditions and to be recognized as the
most vital part of the enterprise.
2. Technology: A slate of the art technology absorbed as a result ever growing technological
advancement and endeavours of research and development are sure to aid the enterprises in
increasing its productivity significantly.
3. Research and development
 Constant research into work process in order to identify the redundant operations which
escalate cost.
 Identifying the source of supply which can supply the inputs of good quality at fair price.
 Encouraging innovation and creativity at stop floor level.
 Optimum utilisation of employees at work place.
 Reduction of cost and waste through process 'improvement.
 Cutting down turnaround time are some of the measures to enhance productivity.
4. Trade unions: Maintaining smooth industrial relations by providing a lot of employee well-being
measures, optimum workload. Comfortable and congenial work environment and periodical wage
revision etc. are sure ways to maintain smooth relations with unions, flus will avert strikes of
different types and loss of productive lime.
5. Government Regulation: An excessive amount of government regulation may have a detrimental
effect on productivity. Government can do much to eliminate unneeded regulations and to make
cost-benefit analysis to determine the necessary regulations such as those on health and safety.
6. Group Policy: Elimination of bureaucratic hurdles and cutting down red-tapism and simplifying
procedures may go a long way towards raising the productivity.
7. Product (or System) Design
If through better product design, a product can be simplified by eliminating some of its parts, it is
obvious that the material these pieces are made of will no longer be needed. Nor will the equipment,
tooling, and labour to make them be required. Value Analysis can bring out many product design
changes that improve productivity. R & D is a vital contributor to improved product design.
Standardization of the product and the use of group technology are other design factors that make
possible greater productivity in the factory.
8. Machinery: Installation of new machines and equipment, use of robots in the production spectrum
can help increase the productivity. For example computerisation of operations and increasing use
of machines in banks, insurance and other service sector help in no small measure in increasing
productivity.
9. Skill upgradation: Skill upgradation of employees in shop floor level by providing skill
development training helps in cutting down wastages and in enhancing productivity. The trained
and experienced worker can do the same job in a much shorter time and with far greater
effectiveness than a new one. However, even the well-trained employees must be motivated to be
productive.
10. Materials: Materials purchased by the organisation has a bearing on the productivity. Quality of
materials, timely supply and uninterrupted flow of production thanks to continuous feeding can lead
to higher productivity.
11. Working environment: Congenial work environment, job design, smooth relationship between
superior and subordinates, alternate work options given to employees to balance work and home
life etc. can tone up the morale of the employee and consequently heighten the productivity.
12. Production Volume
Assume that the volume of output is to be doubled. The number of direct workers would have to be
doubled and a few indirect workers might also be needed. But there would probably not be a need
for more engineers, research scientists, headquarters staff people or other support personnel. So if
the output is doubled, the productivity of these support people is in effect doubled.

Measures to Improve Productivity

(i) Better planning and training of employees, improved jobs and communication and effective
management through CPM/PERT methods.
(ii) Use of time and motion studies to study and improve work performance. It enables to assess
the quantum of work, which can be used for planning and control.
(iii) Better transportation and material handling system.
(iv) By providing work incentives and other benefits to workers.
(v) Workers involvement in decision making and working of organizations.
(vi) Improvement in technology of production process and nature of raw-material and its quality
(vii) Simplification, standardization and specialization technique.
(viii) Better and efficient utilization of resources at the disposal of the enterprises.
(ix) Use of linear programming and other quantitative techniques for better decision making.
(x) ABC analysis to identify more important items and then apply inventory control to reduce
capital investment
(xi) Value engineering to reduce material content by good design.
(xii) Tie wages more closely to output and use merit awards.
(xiii) Develop and utilize more standard times in service industries.
(xiv) Redesign the content of jobs to make them more interesting and challenging.
(xv) Improve communications to encourage everyone to work toward the same desired objectives.

INCREASING PRODUCTIVITY OF RESOURCES

It implies, getting more number of goods (output) from the same amount of resources (input), as
explained under:

(a) Material Industries in which the cost of raw material is a big percentage of the cost of finished
goods, higher productivity can be achieved through proper use of materials, Le., by reducing
scrap. Sometimes a little change in the design of the component or component layout may save
a lot of material. Productivity of materials can also be increased by using correct process,
properly trained workers, suitable material handling and storage facilities and proper
packaging. All these factors reduce scrap rate.
(b) Labour. A little change in the design of component parts so as to facilitate final assembly, can
increase the number of products assembled per day with the same amount of labour.
(c) Work methods if improved through work-study techniques, can substantially increase the rate
of production.
(d) Plant, Equipment and Machinery. Productivity can be increased through the use of improved
tools (e.g., cutting tools in a machine shop), simple attachments and other devices. Total
production times can be cut short considerably by improving machine setting up methods,
thereby reducing set-up times. Proper maintenance will (avoid sudden breakdown and) add to
the productivity.
(e) Land and Buildings. A suitable plant layout can accommodate more machinery in the same
space and thus raise productivity. Proper orientation, construction and inside conditions of a
building definitely affect productivity.

Benefits from Increased Productivity

Higher productivity results in higher volume of production and hence sales at lower cost and higher
profit. It is beneficial to all as stated below:

A. Benefit to Organisation:
1. More profit.
2. Higher productivity ensures stability of the concern.
3. Higher productivity and higher volume of sales provide opportunity for expansion of the concern
and wide spread market.
4. It provides overall prosperity and reputation of the concern.

B. Benefit to Workers:

1. Higher productivity permits more wages.

2. More wages per unit better standard of living of workers.
3. Thus more productivity means better working conditions for workers which also help in
maintaining belter health for workers.
4. Higher productivity yields improved moral and greater satisfaction for workers.

C. Benefit to Consumers
 1. More productivity ensures better quality of product.
2. It also enables reduction in prices.
3. It provides more satisfaction to consumers.

D. Benefit to Nation:

1. It provides greater national wealth.

2. It increases per capital income.
3. It helps expansion of international market with the help of standardised and good quality goods.
4. It improves standard of living.
5. It helps in better utilisation of resources of the nation.

DIFFICULTY IN MEASURING PRODUCTIVITY

1) Interdependence of Factorial Productivities

Productivity of one factor may be affected by the productivity of another. For example, labour
productivity may be affected by bad quality of materials, defective tools and machinery and poor
quality of management.

2) General Disagreement as to measuring output and input

When a concern is engaged in the production of a variety goods, it is difficult to measure

productivity of the w concern because of the differences in the volume of individual products.
Moreover, when the value of money does not remain stable due to fluctuations in price level, the
productivity measured in terms of monetary value may not reveal the correct position.

In such a case, relevant figures should be deflated with the help of index numbers for calculating
productivity. The difficulty of measurement of productivity, where variety of goods is produced,
can be overcome by expressing the output in terms of standard hours.

Productivity Measurement System

A productivity measurement system has the following basic components. These components are
phrased in a manner that enables them to be applied to any kind of organization i.e., manufacturing,
mining, service, government-profit seeking or non-profit seeking.

Components:

1. A statement of the objectives of the organisation.

2. A list of the units of output of the organisation.
3. Standard time, standard cost, raw material use, equipment use, tool use etc., for each kind of
output.
4. A method of building a zero base budget using forecasts of outputs, standard limes and forecasts
of the productivity.
5. A means of computing the productivity indexes al selected intervals.
6. A means of comparing output forecasts with actual output at selected intervals.
 7. A means of adding resource usage data and associated productivity indexes in a meaningful
fashion related to outputs to reduce the details in reports as data go to higher-and higher-level
managers

MEASUREMENT OF PRODUCTIVITY

Measurement of Overall Productivity means calculating productivity taking all input factors together
or the productivity of the business as a whole. As material, labour and overhead affect productivity of
the business as a whole, it is difficult to express these factors by a common denominator for measuring
overall productivity.

To overcome this difficulty, cost of different units of input is adopted as convenient measure of
productivity. Overall productivity can be measured by the following formula:

𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑜𝑢𝑡𝑝𝑢𝑡 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 + 𝑛𝑒𝑡 𝐴𝑑𝑑𝑒𝑑 𝑣𝑎𝑙𝑢𝑒 𝑁𝑒𝑡 𝐴𝑑𝑑𝑒𝑑 𝑉𝑎𝑙𝑢𝑒
= = 1+
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑖𝑛𝑝𝑢𝑡 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡

Overall Productivity is also measured by

𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑 = ∗ 100 = ∗ ∗ 100

Here, Profit = Profit before providing interest on long term borrowings and income tax

Capital Employed = Fixed Assets + Current Assets – Current Liabilities

Factorial Productivity means the productivity of individual factors which contribute to the overall
productivity and it may be of the following types:

a) Labour Productivity:

Where most of the work is done by hand labour, measurement of labour productivity is essential to
know the efficiency of labour. While calculating labour productivity all factory labour both direct and
indirect, should be included.

The resource inputs are aggregated in terms of labor hours. Hence this index is relatively free of changes
caused by wage rates and labour mix.

Some of the ways of measuring labour productivity are as follows:

Here, Added Value = Sales Value — Material Cost i.e., Total of Wages, Overheads and Profit.

Material Productivity:

Some of the ways of measuring material productivity are given as follows:

Machine Productivity:

Where most of the work is done by machinery, measure of machine productivity is essential know the
capacity utilisation and efficiency of machinery.

Machine productivity is measured by the following ways:

Total productivity (Craig and Harris model):
Direct labour cost productivity

- The resource inputs are aggregated in terms of direct labor costs. This index will reflect the
effect of both wage rates and changes in the labor mix.

Capital productivity

- Several formulations are possible. In one, the resource inputs may be the charges during the
period to depreciation; in another, the inputs may be the book value of capital investment.
Direct cost productivity

- In this formulation, all items of direct cost associated with resources used are aggregated on a
monetary value basis.

Energy productivity

- In this formulation the only resource considered is the amount of energy consumed.

Raw material productivity

In this formulation, the numerators arc usually weight of product; the denominators are the weight of
raw material consumed.

PROBLEMS – done in class