Process Measures — Productivity and Efficiency
Part of managing processes is to measure their performance. This article will discuss 2 basic process measures: Productivity and Efficiency.
Productivity
Simply, productivity is measured like this:
Productivity = Outputs / Inputs
For instance,
| Quantity | $/Unit | |
| Car X | 4000 | $8,000 |
| Car Y | 6000 | $9,500 |
| Labor Hours for X | 20,000 | $12/Hour |
| Labor Hours for Y | 30,000 | $14/Hour |
What is the labor productivity in Hours for each car type?
Car X: (4,000 cars / 20,000 Hours) = 0.2 Cars / Hour
Car Y: (6,000 cars / 30,000 Hours) = 0.2 Cars / Hour
How about in labor Productivity in Dollars?
Car X: [(4,000 * $8,000) / (20,000 * $12)] = $133.33 / Car
Car Y: [(6,000 * $9,500) / (30,000 * $14)] = $135.71 / Car
So, based on the data set above, it appears that Productivity by Hours, both Car X and Car Y are the same; but, Productivity by Dollars, Car X is cheaper to make given the labor hours and hourly rate.
How is this practical? Below is a direct citation from the Harbour Report, 1998:
Labor hours needed for stamping, power train, and assembly operations:
Harbour Report (100% Nissan 27.6 hours (168%) GM 46.5 hours (126%) Ford 34.7 hours If GM could operate at Nissan’s level of productivity, they’d save themselves about $4.4 Billion Per Year. Measured another way, GM has about 55,000 more workers than it needs.
Efficiency
Efficiency is measured with the following equation:
Efficiency = [100% * (actual output / standard output)]
Standard Output in the equation above is a number that is arrived at by looking at historical data for the job and by experience. One would hope that that number is not an arbitrary one, but a number that is derived by looking at a historical time series.
Here’s an example:
Shmula’s Bodywork does automotive collision work. An insurance agency, using actuarial data, has determined that the standard time to replace a fender is 2.5 hours (ie, “standard output” = 0.4 fenders per hour), and is willing to pay Shmula $50 per hour for labor (parts and supplies are billed separately). Shmula pays its workers $35 per hour.
Suppose Shmula’s workers take 4 hours to replace a fender. What is Shmula’s labor hour efficiency? Given Shmula’s labor costs, will Shmula make money on the job?
Using the equation and the data above, we get:
(1 fender / 4 hours) / (1 fender / 2.5 hours) = .625 * 100% = 62.5% efficiency
2.5 hours * $50 = $125 paid by insurance
4 hours * $35 = $140 costsShmula will lose $15 per fender.
Economic Profits are important to Shmula; Given the answer above, how efficient does Shmula need to be to break even?
[($125) / ($35/hour)] = 3.57 hours to Break Even
We know that, Efficiency = 100% * (actual output / standard output). So,
(1 fender / 3.57 hours) / (1 fender / 2.5 hours) = .7003 * 100% = 70.03% efficiency. Shmula will need to improve efficiency to 70% or better to make money.
Often times, I hear people use the phrases "productivity" and "efficiency" carelessly, not completely understanding what they mean. These terms have technical definitions and are very practical for business. Still, given the explanation above, one must excercise good judgement in detemining which processes ought to be measured by Productivity and Efficiency and balance these measures with other items that might be important to the individual, firm, and industry. Some measures might make sense for some activities, but not others.
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Comments
I agree on these having standard definitions that people try to recreate. Nothing like a gorup trying to reinvent the wheel.
Based on my experience however, I would say that productivity and efficiency are measures of an overall operation that comprises a set of processes.
Specific business processes, at strategic, core or supporting level are best measured around their time, cost, and quality drivers. Their “measure types” need to be around result measures (that show a completed cycle) or activity measures, which are linked to a specific activity within the process.
There are also extended process dimensions beyond time, cost, quality; which include data, compliance, risk, ownership, benefits. These might need to be measured as well.
Great blog btw.
anv – http://www.andresnaranjo.com
I think your post is quite wrong as productivity is just another name for efficiency: pls read some definitions or wikipedia for example.
the particular RATIO OF ACCOMPLISHMENT you mention (”actual output / standard output”) has nothing to do with efficiency. It is actually closer to EFFICACY: which is “accomplishment” ie WHAT IS ACHIEVED; vs efficiency : HOW it is achieved: how many resources are being used for the given result(ie productivity). Nevertheless besides of the name given to your ratios, your reasoning seems good
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What about quality?