Advisory Board: Productivity primer
Learn to gauge productivity and you can improve it. Here's how.
By Ron Giuntini, Executive Director, OEM Product-Services Institute -- Modern Materials Handling, 11/1/2008
Over the past 40 years, U.S.-based organizations have seen a dramatic percentage increase in output. Even better, there hasn't been a similar increase in the resources employed to create that output. This is called productivity improvement. It accounts for the overall increase in American prosperity.
A primary productivity driver has been the ability of organizations to replace labor resources by investing in capital goods. Think farming and combines. Think manufacturing and robots. Think materials handling and lift trucks.
Because labor is becoming a smaller percentage of the overall resources employed in many processes, the estimated $10 trillion investment in productivity-improving U.S. capital goods is seen as an investment in low-hanging fruit.
What's productivity?
It's the measure of process performance over time. A process performance metric has two elements: outputs-of-value and inputs-of-resources, and is calculated as [(outputs-of-value)/(inputs-of-resources)].
Outputs-of-value are either a throughput quantity (i.e. tons extracted, miles driven, pieces manufactured) or a quality of result (i.e. # of units shipped that were not defective, # of work orders that were completed as planned).
The productivity measurement that uses throughput quantity as the output is defined as efficiency, while the productivity measurement that uses quality-of-results as the output is defined as effectiveness. Both can use the same inputs-of-resources as the denominator. Inputs-of-resources include investments (i.e. capital goods, facilities, software and inventory), people (i.e. direct, indirect), materials (i.e. packaging, fuel, office supplies), services (i.e. transport, communications). All or a few can be combined, or only one may be used.
For most individuals, productivity is focused almost exclusively on the manufacturing process's throughput quantity of output and the input of direct labor hours [(1000 tons produced)/(100 man-hours employed)]. This may have been relevant 50 years ago, but it's a poor indicator of U.S. productivity improvement. I think the block-and-tackle concept of productivity improvement isn't seen as sexy enough for the intellectual elites of the business world. That's why we hear gurus ramble on about the next great thing that will make an organization world class, such as TQM, lean, Six Sigma and other flavors of the month.
Productivity can be improved by:
improving operator training,decreasing unused investment capacity,modifying capital good capabilities,refining an operation's scheduling, anddecreasing failure.
Take for example a lift truck used to move goods from the manufacturing line to a warehouse. The productivity of this process could be improved by:
Training the operator to move goods faster and safer [(+10% tonnage moved safely)/(+3% training costs)]Modifying the lift truck's fuel system so it's more environmentally friendly; [(+15% of time in which forklift generates less than .03 level of carbon emission)/(+2.5% depreciation of forklift modification price)]Increasing the uptime of the lift truck through a robust preventive maintenance program; [(+11% uptime)/(+6% in the price of contractor preventive maintenance work)] (In this case there may also be a decrease in the price paid for parts used in corrective maintenance.)
Keep improving your productivity. It's the foundation of any free-market economic system.
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