Types and uses of Productivity Ratios

There are two basic types of productivity ratios. The, total productivity, relates the value of all output to the value of all input, using the ratio total output/total input. The second, partial productivity, relates the value of all output to the value of major categories of input, using the ratio total output/partial input.

The legal clinic is an example of a partial productivity ratio, called a labor productivity index or output per work hour ratio. Most productivity measures quoted by economists and business executives are, in fact, labor productivity indexes, since labor is one of the greatest ongoing costs for most organizations. Other partial productivity ratios measure the amount of scrap (wasted materials); the number of units that have to be reworked or fixed before they meet quality standards; cycle time, the length of time to perform an operation; and downtime, the unproductive time spent retooling a production line or waiting for customers. Any of these measures gives an indication of whether resources are being used to good advantage or wasted.

Uses of productivity ratios: Productivity ratios can be calculated for a specific time period, which measures the efficiency of operations at that time, or they can be compared with other ratios over time, as a measure of gains or losses in productivity. For example, between 1988 and 1992, Mexican manufacturing employees recorded an approximate 6.5 percent average annual productivity increase, compared to 3 percent average annual gain over the same period by US based manufacturing employees.

In recent years, US manufacturers have tried to boost productivity by closing plants, downsizing, laying off production workers, and selling off failing or unwanted businesses. Still, as an economic system, the United States lags behind Japan, South Korea, Great Britain, Norway, Sweden, France, and other countries in productivity growth. Many government officials and executives are searching for solutions to this problem.

Many experts say the problem is the emphasis on productivity itself. They charge that, in trying to improve “the numbers – quantitative measures of productivity – too many US managers have focused on capital investment in automation as a way to reduce labor costs. This short term focus has caused them to overlook the benefits of investing in the organization’s human capital employees and their skills and improving quality.

This emphasis is changing as managers at more organizations concentrate on finding the right mix of capital investment and human investment. One of the most important trends in operations management today is the focus on increasing workforce literacy, knowledge and skills that relate directly to job performance. Another is the trend toward participation management and the use of self managed work teams to improve productivity and quality simultaneously.

Corning Inc.’s experience at its Blacksburg, Virginia, plant illustrations both these trends. Rather than force workers to do repetitive, restricted job, plant managers decided to use a combination of automation and a multi-skilled, team based production force to challenge employees. Out of 8,000 people who applied for jobs, Corning selected the 150 who performed the best on tests of problem solving skills and showed willingness in work in a team setting. In the first year of production, 25 percent of work hours were devoted to extensive training in technical and interpersonal skills at a cost of $750,000.

The rewards were well worth the expense. A Blacksburg team can retool a line in just 10 minutes, six times faster than the norm in traditionally managed plants. As a result, the Blacksburg plant earned $2 million in profits during an 8 month start up period, although it had been projected to loss $2.3 million. As an additional bonus, morale is high. Productivity, product, product quality and Corning profits have all increased. Buoyed by this success, managers at Corning are planning to convert 27 other plants to a team managed approach using on the job training to improve worker skills.

Investment in human capital is increasingly important not only to manufacturing but to the service and knowledge oriented economy. As millions of people are displaced by technology, the downsizing of corporations, and competition from around the globe, issues of social responsibility of companies toward their employee become more crucial.