Materi I - Productivity Concepts

Productivity
Concepts
Introduction
Why Productivity is Important?
• https://treasury.gov.au/speech/the-importance-of-productivity/
• Make groups of 2-3 peoutputle.
• Review that article (in 30 minute), and mention at least 5 reasons of
“Why Productivity is Important?”.
Analisis Produktivitas-Productivity Concepts Week 1-3 2

Discussion

References
• David Gruen. 2012. The Importance of Productivity.
https://static.treasury.gov.au/uploads/sites/1/2017/06/Gruen_The_Im
portance_of_Productivity.pdf . Diakses tanggal 11 Februari 2019.

Definition of
Productivity/Requirements
for Improving It

What is Productivity?
“the quantitative and qualitative results of the input of all resources. The
most widely used productivity measure is one-dimensional (one measure
of input and one measure of output) and defines productivity as output
per labor input (e.g., number of trees planted per employee hour, etc.). A
broader and more modern view involves value measures, e.g., labor
productivity equals value added per employee. Value added is defined as
the net contribution of business to the value of the input”
Industrial Engineering Terminology

(American National Standard Institute, 1983)

What is productivity?
• Productivity is commonly defined as a ratio of a volume measure of
output to a volume measure of input use.
(OECD, 2001)
• Productivity is the relationshinput between the quantity of output
(goods and services produced) and the quantity of input (i.e., resources
such as labor, materials, machinery, and energy) that are used in
production.
(Antonio D. Kalaw, Jr., Philinputpine, 2015)

Hence, Productvity…

Productivity and Efficiency
• Productivity is concerned with how efficiently goods and services are
produced and the value created by the production process.
• If a product is made at the lowest cost with high quality and can be sold
competitively in the market at a price higher than its cost of production,
then its productivity level is considered high.
• The objective of productivity is to maximize output and minimize
input

Productivity and Effectiveness
• Effectiveness relates to the attainment of the desired goals or
outcomes set by the producer of a product or service.
• If the customers are highly satisfied in using the product or service, this
could mean higher revenues and repeat orders for the product or
service.
• It could also mean higher return on investments for investors and even a
better image or reputation for the company or organization.

Productivity, Efficiency and Effectiveness

Production vs. Productivity
Data Which one is true?
Year Production
Material a) Production in 2015 is greater
Investment than 2014, thereby the
2014 20 15 productivity of 2015 is better
than 2014.
2015 30 25
2016 50 40
b) Production in 2016 and 2017
are same (50), so does with
2017 50 30 their productivity.
2018 25 25
c) Productivity of 2014 is better
than 2018.

Production and Productivity
• Production and productivity are totally different subjects.
• That is to say that productivity does not improve simply with increased
production and vice versa.
• Productivity is simply a ratio of input and output items.
• Unfortunately, management often mistakes productivity improvement
for increased production and their respective values.
• The productivity level is not dependent on the size of production
volume.
• Productivity improvement does not require output increases.

Impact of Productivity
• Productivity is an integrated concept, a combination of princinputles
from various discinputlines such as science, engineering,
economics, finance, and psychology.
• Productivity improvements or enhancements are generally achieved
through collaborative efforts that target specific issues affecting an
organization.
• In short, achieving improved productivity involves a managed and
systematic process; it does not happen by coincidence or accident.

Productivity Management Framework
• CHECK, assessing the organization’s
present condition or productivity level.
• ACTION. At this stage, the organization
looks for countermeasures to remedy
the problem or improve the present
condition.
• The next step is PLAN, wherein the
organization will determine what
productivity improvement program or
project it will implement.
• The final step is DO, when an
organization starts to implement the
planned productivity initiative or
intervention.

Purpose of Productivity Improvement
Higher standard of living Lower consumer prices
Job satisfaction Environmental issues
Domination of competition Effectiveness of capital investments

Different Approaches Lead to Different Results
Input reduction first
A practical approach to effectively influencing company performance,

such as profit, profitability, and productivity, is to start by reducing input
resources.
The reason is simple:

1. input resources are fully manageable resources
internally;
2. there are no requirements from outside of the company

Input reduction first
Input reduction can be controlled following a set plan or schedule, but

output increase cannot be controlled, and it takes 1 year or more to get
results.
Effective step
of productivity

effective step of productivity
• Phase one is decreasing IP
resources while maintaining the
current level of OP results.
• The reason is that the necessary
actions are not big issues and
the necessary terms to complete
this phase do not take a long
time. Reducing working hours, number of
workers/operators, and ineffective work.
• Resource control is a possible
control for any company.

• Phase two is utilizing redundant
resources for current OP
requirements.
• Productivity improvement never
advocates firing people; the
rationalization is to keep balance
between reduced OP and required
IP.
• Closing specific factories is an
example of this. To find new
business areas of growth, reconsider
buying decisions and reducing
product prices in order to get more
sales orders.

• Phase three is managing two How much productivity improvement in a year
parameters of productivity that is a target for companies and why?
depend on companies’
requirements.
• A higher level of balancing
between OP conditions and the
requirements of IP resources is
imperative.
At least 5% per year is the minimum lowest

target, but 1% per month (at least 10% per
year) is recommended

Three level of improvement
• Work simplification: normally
focused on eliminating unnecessary work
or minimizing any inefficiencies involved
in an operation based on subjective
discrimination that it is waste, such as
inefficient work contents
• Methods engineering (improvement): a
detailed analysis of current methods in
practices
• Innovation: study the basic functions of
the operation, to develop a completely
new method of performing them without
regard to the current method, and to The implementation of all those well-known techniques,
accomplish the basic function in a make company cannot compete with the other good-
minimum of time standing companies who must have gone ahead

This approach belong to work

simplification and method improvement

IMPACT (Integrated
Management of Productivity
Activities)

Introduction
• Productivity is critical for the
long-term competitiveness and
profitability of organizations.
• It can be effectively raised if it is
managed holistically and
systematically.

Introduction
A Critical Component of IMPACT

• Measurement plays an important
role in your management of
productivity:
 It helps to determine if your
Why measure?? organization is progressing well.
“Without productivity objectives, a  It provides information on how

business does not have direction. effectively and efficiently your
Without productivity measurement, a organization manages its
business does not have control.” resources
(Peter Drucker, Pioneer of Modern Management Theory)

How to measure?
• Productivity is the relationship between
the quantity of output and the quantity
of input used to generate that output.
• It is basically a measure of the
effectiveness and efficiency of your
organization in generating output with
the resources available.
• Productivity is defined as a ratio of
output to input:

measures of output
Physical Quantity Financial Value
• At the operational level, where • At the organization level, output

products or services are is seldom uniform.
homogeneous, output can be
measured in physical units (e.g. • It is usually measured in financial
number of customers served, value, such as the following:
number of books printed).  Sales
 Production value (i.e. sales
• Such measures reflect the minus change in inventory
physical effectiveness and level)
efficiency of a process, and are
not affected by price fluctuations.  Value added

measures of input
Labor Capital
• Capital refers to physical assets such as
• Labor refers to all categories of employees in an
machinery and equipment, land and
organization. It includes working directors,
buildings, and inventories that are used by
proprietors, partners, unpaid family workers
the organization in the production of goods
and part-time workers.
or provision of services.
• Labor can be measured in three ways:
 Number of hours worked • Capital can be measured in physical
 Number of hours engaged quantity (e.g. number of machine hours)
 Cost of labor or in financial value, net of depreciation to
account for the reduced efficiency of older
assets.

measures of input
Intermediate input
• Major categories of intermediate
input include materials, energy
and business services.
• Such input can be measured in
physical units (e.g. kilograms,
kilowatt per hour) or financial
units (e.g. cost of energy and
materials purchased)
Analisis Produktivitas-Productivity Concepts Week 1-3

32
productivity indicators
Labor Capital
Productivity Productivity
Labor productivity, defined as value added Capital productivity measures the effectiveness and
per worker, is the most common measure of efficiency of capital in the generation of output. It is
productivity. It reflects the effectiveness and defined as value added per dollar of capital. Capital
efficiency of labor in the production and sale of productivity results from improvements in the
the output. machinery and equipment used, as well as the skills
of the labor using the capital, processes, etc.
Value added
• It represents the wealth created
through the organization’s
production process or provision of
services.
• Value added measures the
difference between sales and the
cost of materials and services
incurred to generate the sales.
• The resulting wealth is generated by
the combined efforts of those who
work in the organization
(employees) and those who provide
the capital (employers and
investors).

Value added shows the net wealth created
why use value by the organization.
added?
It measures the real
output of an organization sales purchases
Net
Wealth

why use value
added? Have different price,
size, process, etc.
It is practical
Value added is measured in financial units,

which allows the aggregation of different
output.

why use value
added?
It is easy to calculate
Value added can be easily derived from

an organization’s profit and loss
statement.
There is no need to set up a separate
data collection system.

why use value
added?
It is an effective
communication and
motivation tool
Provides a common bond between

employers and employees to achieve
the goal of increasing the economic pie
shared by both parties

why use value
added?
It is applicable to both
manufacturing and
service industries.
Value added is calculated in the same

way for both the manufacturing and
service industries.

how to calculate value added?
Subtraction Method
It measures the difference between sales and the cost of goods and services purchased to generate the sales.
Value added = Sales – Cost of purchased goods and services

how to calculate value added?
Addition Method
Emphasize the distribution of value

added to those who have contributed
to the creation of value added.
Value added = Labor cost to

employees + Interest to lenders of
money + Depreciation for
reinvestment in machinery and
equipment + Profits retained by the
organization + Other distributed
costs (e.g. tax)

An integrated approach to productivity
measurement
In an integrated approach to productivity measurement, the various dimensions of an organization’s
operations are linked to show how each of them affects overall performance.
an example of a
family of
interlinked
measures used
by a retailer

relate to the
organization’s goals
usually physical ratios

that address the
operational aspects that
need to be monitored
provide a snapshot of costs, activity and controlled.
levels and resource utilization
rates, which are particularly useful
for middle and higher
management.

why adopt an integrated approach?
 Provides a comprehensive picture of the organization’s performance
 Highlights the relationships among different ratios and units, and allows
the organization to analyze the factors contributing to its productivity
performance
 Helps diagnose problem areas and suggests appropriate corrective
actions
 Enables the organization to monitor its performance over time and
against the performance of other organizations

example: analysis labor productivity
Which one of these sentences are true
based on that analysis:
1. Labor productivity will decrease if the
total no. of staff are smaller than
before.
2. The number of sales don’t have a
significance influence at labor
productivity.
3. The increasing of number of sales will
increase the value added-to-sales
ratio.

example: analysis labor productivity
A decline in labor
productivity could
be due to a lower
sales per employee
ratio as a result of a
new competitor, or
a lower value
added-to-sales
ratio as a result of an
increase in product
costs.

how to develop an
integrated
productivity
measurement
system
The structure of the measurement
system varies, depending on the
needs and operations of the
organization.

Step 1. form a
measurement task force
• led by a member of senior
management or a productivity
manager
• representatives from different

departments and levels
• have good knowledge of the

organization’s operations and
processes.

• Define the objectives of measurement.
 At the management level, the objectives are based on

the organization’s overall productivity goals and key
productivity levers.
 Objectives at the organizational and management
Step 2. determine what to levels are cascaded down to the objectives of specific
measure functions and individuals.

Step 3. develop indicators
Indicators should measure Indicators used by the industry

something significant or benchmarked organisations
Indicators should be meaningful

and action-oriented Reliability of data
Component parts of the indicators

should be reasonably related Practicality

Step 3. develop indicators
The productivity
indicators listed are not
restricted to the usual
output per unit of input
ratios. They include
other performance
indicators that measure
the efficiency and
effectiveness of the
opera.ions

Step 4. design and implement
• After selecting the appropriate • Establish a system, using appropriate

indicators, the productivity technology, to collect, analyze and report the
measurement task force should: performance of the indicators.
 Establish accountabilities and • System should be an integral part of your

organization’s daily operations and
responsibilities for the provision and management information system
use of data
• Staff training
 Link the indicators and determine
how the performance of various
departments affects the
organization’s overall performance
 Decide how the indicators may be
used in productivity improvement
plans.
Step 5. monitor and
review
Productivity measurement is not a
one-off project. The productivity
measurement task force should
review the effectiveness of the
measurement system periodically
and solicit feedback from users to
further enhance the system and
ensure its relevance.

What do you do with productivity measures?
• Productivity measures allow you
to monitor the performance of
your organization and compare it
Productivity
against some standard to identify Level and
Comparison of
areas for improvement and Performance
Growth
actions to be taken.
Use of
• They also serve as a useful Productivity
communication tool to motivate Measures to
employees and reinforce Guide and
Change
performance. Behavior

productivity level and growth
• Productivity levels reflect how
efficiently and effectively an
organization’s resources are
used.
• Organizations must track their
productivity growth, which is an
indicator of the change in
productivity level over time.
• Productivity growth indicates
dynamism and the potential for
achieving higher productivity
levels in the future.

comparison of performance
Inter-Firm Comparison Benchmarking
• Inter-Firm Comparison (IFC) studies

involve comparisons of a common
set of key productivity indicators
identified for organizations in the
same line of business.
• Data provided by the organizations
are aggregated and presented in
terms of percentage changes, indices
and ratios.

use of productivity measures to guide and change
behavior
Productivity Measures as a Productivity Measures to Motivate
Communication Tool and Reinforce Performance
• Used by management as a • Productivity measures quantify
communication tool to direct and facilitate an objective
employees’ efforts towards the assessment of employees’
common goal of improving performance  Employee need
productivity. for training
• The measures provide information
on current performance, goals, and
• Productivity measures may be
what it takes for the employees to used to recognize and reward
reach them. performance  Award for
individual or team

Thank you

References:
• A Guide to Productivity Measurement. SPRING Singapore. 2011.
• Shigeyasu Sakamoto. 2010. Chapter 4: Definition of Productivity/
Requirements for Improving It. Beyond World-Class Productivity:
Industrial Engineering Practice and Theory. Springer. London
• Editor: Antonio D. Kalaw, Jr.. 2015. Handbook on Productivity. Asian
Productivity Organization. Tokyo.

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Productivity

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Industrial Engineering Terminology

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Higher standard of living Lower consumer prices

Job satisfaction Environmental issues

Domination of competition Effectiveness of capital investments

Analisis Produktivitas-Productivity Concepts Week 1-3 16

Input reduction first

A practical approach to effectively influencing company performance,

The reason is simple:

Analisis Produktivitas-Productivity Concepts Week 1-3 17

Input reduction first

Input reduction can be controlled following a set plan or schedule, but

Analisis Produktivitas-Productivity Concepts Week 1-3 18

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At least 5% per year is the minimum lowest

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This approach belong to work

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A Critical Component of IMPACT

“Without productivity objectives, a  It provides information on how

Analisis Produktivitas-Productivity Concepts Week 1-3 27

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• At the operational level, where • At the organization level, output

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why use value by the organization.

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Value added is measured in financial units,

Analisis Produktivitas-Productivity Concepts Week 1-3 36

Value added can be easily derived from

Analisis Produktivitas-Productivity Concepts Week 1-3 37

Provides a common bond between

Analisis Produktivitas-Productivity Concepts Week 1-3 38

Value added is calculated in the same

Analisis Produktivitas-Productivity Concepts Week 1-3 39

Value added = Sales – Cost of purchased goods and services

Analisis Produktivitas-Productivity Concepts Week 1-3 40

Emphasize the distribution of value

Value added = Labor cost to

Analisis Produktivitas-Productivity Concepts Week 1-3 41

Analisis Produktivitas-Productivity Concepts Week 1-3 42

usually physical ratios

Analisis Produktivitas-Productivity Concepts Week 1-3 43