Course Manual: (Finding Out Why Productivity Improvement Starts and Ends With Measurement)

Course Manual
BASICS OF PRODUCTIVITY
MEASUREMENT
(Finding out why Productivity Improvement Starts
and Ends with Measurement)
Module 4 - Basics of Productivity
Measurement
Introduction
• As productivity and quality experts say, “what is not measured cannot be
managed”. Hence, the cycle of productivity improvement starts with
measurement.
• This simply means that it is important to determine first the current level
of productivity of an organization to pinpoint opportunities for
improvement (OFIs) that can be addressed by applying appropriate
productivity tools/techniques.
• This module can help you appreciate the why and how of productivity
measurement which is really part of what is called the Plan-Do-Check-
Act Cycle or PDCA cited initially in Module 1.
Measurement
Introduction
• Productivity improvement is really a managed process hence
many organizations have adopted the Productivity Management
Framework which is based on the PDCA Cycle as a management
tool.
• In this Module you can also learn the basic tools and techniques
that you can apply in measuring productivity in an organization.
Measurement
Learning Objectives
At the end of the module, participants will be able to:
1. Define what productivity measurement is
2. Explain why productivity improvement starts and ends

with measurement (PDCA cycle)
3. Identify the tools and techniques applicable in

productivity measurement
4. Explain how to analyze and derive meaning from the

productivity measures
Measurement
Outline
• Concept of Productivity Measurement
‒ What is Productivity Measurement?
‒ What are the approaches to Productivity Measurement?
‒ Why do we need to measure productivity?
‒ How do we measure productivity?
• Basic Tools in Productivity Measurement

‒ What are the basic tools?
‒ Applying the tools in measuring Partial Factor and Total Factor
Productivity
‒ Some examples showing how each tool is applied
• Analyzing the measures and knowing what they mean or indicate

Concept of Productivity Measurement
CONCEPT OF
PRODUCTIVITY MEASUREMENT
a. What is Productivity Measurement?
As cited in Module 1 the basic definition of

productivity is “the ratio of the output of a good or
service, or collection of goods or services, to the input
of one or more factors producing it.”
OUTPUT
PRODUCTIVITY =
INPUT
It is about making the most effective use of all

resources and gaining the maximum value from them.
The INPUT factors may be land, labor, capital or materials, and
studies have also been made by economists on energy or fuel,
technology and others.
The OUTPUT may be a piece of product or a type of service that

passes a level of quality standard and are accepted by customers or
consumers. Therefore, when a good or service is not acceptable to
consumers (due to defects or low quality standards), it is not
considered part of the output.
Thus, a firm or organization with high rate of defects and rejects has
low productivity performance. On a farm it may be the total yield of a
crop in terms of quantity or weight; in a factory it may be the total
quantity or value of products produced; and for a hotel it may be the
room occupancy rate.
Productivity measurement is quantifying or putting values to inputs and
outputs in order to establish the productivity level or performance of an
organization or firm through time. It can be also used to compare
productivity performance between organizations or between firms and
sectors.

There are however many difficulties when one attempts to find out the
productivity ratio because of the heterogeneity of outputs and inputs. For
example, the labor force is not homogenous (i.e., there are skilled
workers, unskilled workers, professionals, operatives, etc.) and are very
much inter-related with capital because all humans use tools or machines
which are part of capital input.
A manufacturer for instance may produce many different lines from time
to time. Moreover, he may employ different machines at different times,
retiring obsolete ones and installing new ones every now and then.
b. Approaches to Productivity Measurement
• Economist Approach

The economists’ approach to productivity measurement not only
studies productivity levels and changes over time but also attempts to
identify the effects of each and every known factor on productivity.
While productivity levels and trends may be reflected through the

simple equation of Productivity equals Output/Input and the methods
devised to measure productivity accordingly, identifying the
contribution of each input factor requires analysis by means of a more
complex formula, basically through the production function and its
variations.
• Manager’s approach
To the average executive or manager, especially at the firm level, the
“economist’s approach”, particularly the production function formula, often
is not practical enough.
The average manager is interested in profitability. He is faced with a

changing product-mix in his operations and has to meet the challenge of
volatile market conditions. To him, productivity measurement must be an
integral part of the decision making tool.
Therefore, the Manager’s Approach in productivity measurement would be

simple and straight-forward, able to provide a relatively clear-cut results that
would help decision-making and improve profitability. The methodology
here should be mainly concerned with ratios between output and various
inputs, levels and trends, and comparison. The purpose is to detect problem
areas, devise remedial actions, and achieve optimization of all resources.
• Industrial Engineer’s Approach
In the “industrial engineer’s approach”, all outputs and inputs are

carefully measured to establish standard units, standard time, usable
life of each equipment, wages and salaries of each employee,
including direct and indirect labor, etc.
This approach is more thorough and once standards are established, a

measurement system can be built into the production operation,
including the production of services.
However, detailed methodology for each different line of business

would be different, and the introduction of new products, new
working methods and new equipment would require modifications
and adjustments accordingly.
Each of the three approaches has its own merit. In this

module however, we shall be focusing more on the
“Manager’s Approach” to productivity measurement.
There will be a sprinkling of “Industrial Engineer’s

Approach” without necessarily trying to establish
standards in units, time, wages, etc.. There will be
minimal use of the “Economist’s Approach”,
(production function method) if there is any.
c. Why do we need to measure productivity?
In academic institutions, students’ academic performance are

measured by the grades they get for each subject and upon
graduation, their GWA is computed as the basis for Latin
honors. A student seeking academic excellence to earn Latin
honors will be guided by the grades he gets from the subjects
given specially during midterm exams where he can focus his
attention to subjects where his grades are low in order to get
higher grades during the final exams.
Doctors subject their patients to medical tests/exams as the

basis to determine their state of health before conducting the
appropriate medical intervention to cure the patient’s sickness
or disease.
In firms or organizations, productivity is measured to help

analyze effectiveness and efficiency. Its measurement can
stimulate operational improvement.
The development, installation and operation of a

productivity management system can improve labor
productivity by as much as 5 to 10 percent, with no other
organizational change or investment (J. Prokopenko).
Productivity measurement indices help establish realistic targets and

checkpoints for diagnostic activities during the implementation of a
productivity improvement program/plan or during an organization
development process, pointing to bottlenecks and barriers to
productivity/performance improvement. This will enable the firm to
continuously improve their performance throughout the years.
Furthermore, there can be no improvement in industrial relations or

proper correspondence between productivity, wage levels and gains-
sharing policies without a sound measurement system. Productivity
indices are also useful in inter-firm and inter-sectoral comparisons
designed to detect factors accounting for success or failure.
That is the reason why productivity measurement and analysis should be

among the first priorities of a manager.
A Manager or Entrepreneur who seeks to improve the

firm’s profitability, competitiveness, or seeks business
excellence must have a concrete basis upon which his plan
of action will be guided.
Productivity measurement is a basic technique that the

manager or entrepreneur can use to improve and sustain
overall firm performance in the long run.
Basis of Productivity Improvement Plan/Programs
All firms or organizations operate by using the factors of production, namely: land,
labor, capital, energy, and materials. Note that these factors are the inputs in the
productivity ratio of output/input. Productivity improvement simply means
“getting the most (outputs) out of these individual inputs”.

Before a firm can start planning for productivity improvement it has to establish the
productivity level, by measuring each of the factor inputs as a starting point. The
firm has to measure the partial factor productivity of labor and capital (basic),
materials productivity for companies using a lot of materials (like the garments
industry); energy productivity for companies using a lot of energy like the plastics
industry, and land productivity for farms.
A firm can develop a family of measures for each factor that can be related the other
factors. To measure the firm’s overall productivity performance, total factor
productivity shall be measured. In the total factor productivity, all factor inputs are
combined to determine how relates it to output.
Basis of Productivity Improvement Plan/Programs
To be effective, measurement should be done regularly, that is, daily (ideal), weekly, or monthly
(not ideal). Once the productivity levels are established, trend analysis should be done to
determine what productivity improvement interventions shall be done for each factor input. The
Manager can now target how much, for example, labor productivity improvement to achieve in,
say, one quarter. The manager can also determine how much increase in labor productivity to
cover a raise workers’ wages by 10%.
Or the manager can determine how much increase in capital productivity to reduce prices of
their product without reducing the firm’s profitability. By regularly monitoring productivity by
measuring it, the firm, or any organization, can continuously improve its productivity
performance, its competitiveness in the market, its profitability, and achieve business excellence
that will heighten its success not only in business but in the society as a whole.
Before a firm or organization can improve its productivity, it must start by measuring it to
determine its level and monitor and analyze its trend. The firm can then target how much
productivity improvement to achieve in a specific period of time. Again, the firm has to
measure productivity after the given specific period of time to determine whether it was able to
hit the targeted productivity improvement and take corrective action if otherwise.
To Know the Effects of Productivity Improvement

1. Increase in labor productivity will “naturally” increase wages without
resulting to price increase (inflation) and no diminution to company
profits.
2. Increase in materials productivity results to reduction or elimination of

wastes thereby making the environment cleaner. (Green Productivity)
3. Increase in capital productivity will reduce the cost of capital and

increases the firm’s profitability.
4. Increase in total factor productivity increases the firm’s profits and

simultaneously, may also result to lower prices of their products
allowing consumers to buy more goods and services.
To Know the Effects of Productivity Improvement
5. Increase in productivity results to improvement in the quality of goods

and services as firms invest their previous productivity gains to
innovate their goods and services.
6. High productivity of a country will allow the government to collect

more corporate income tax because firms have higher revenues and
collect more personal income taxes because workers have higher
income. These taxes can be use to improve or build more public
infrastructures and deliver more and better social and health benefits.
7. High productivity performance results to higher standard of living and

better quality of life as now being experienced by developed countries.
d. How do we measure productivity?
The first step towards measuring productivity is to identify

the various Inputs and Outputs in the firm’s processes. In
the various stages of production, there are specific
processes with specific inputs used and outputs generated.
Aside from the production process which is covered by

operations/operations management, other major areas that
may be included in productivity measurement are finance,
marketing and administrative support services.
Once the inputs and outputs for the various processes are identified,
the next step is to collect the data on inputs and outputs. Physical
units of inputs and outputs can be collected at the shop floor.
Machine operators or the production workers can collect data as they

process inputs into outputs by filling up standard forms. Industrial
engineers from the Production, Planning and Control office can also
collect input/output data in the various processes.
Firms with Computer Aided Manufacturing (CAM) program can

integrate their data collection in their CAM for real-time data
collection and processing. Data on money values of inputs and
outputs can be taken from the accounting department of the firm.
The most important part is processing input and output data into
useful ratios or indicators that will identify areas for improvement or
measure the productivity of critical processes or measure the
productivity of expensive materials.
A productivity measurement system can be developed to include a

family of measurements/ratios that interrelate with each other for
effective decision making.
For example, labor productivity can be measured two ways; by using

physical units and by using monetary values. Physical labor
productivity may be increasing because units of output is increasing
faster than units of labor inputs but the company may still be losing
because the price per unit of output is increasing less than the
increase in the cost per unit of labor.
Basic Tools in Productivity Measurement
2. BASIC TOOLS IN PRODUCTIVITY

MEASUREMENT
a. The Basic Tools in Productivity Measurement
There are three basic tools that can be applied in

productivity measurement. These are:

1. Production Quantity Productivity Measurement
(PQPM)
2. Production Value Productivity Measurement

(PVPM)
3. Value Added Productivity Measurement (VAPM)

• Production Quantity Productivity Measurement (PQPM)

In the PQPM, the output is measured in terms of quantity or physical units while
the inputs are either measured in physical units also or in money cost of inputs.
The PQPM is ideal at the process level, that is, at sectional or departmental level
of production because production workers can relate to it and can easily
understand it.
If the firm is producing multi-products, care must be taken to segregate different

products. In a shoe factory for example, the quantity of ladies’ shoes produced
should be separate from that of men’s shoes and so are the inputs used to
produce them. Furthermore, the products can be categorized into styles since
different styles may mean different quality of materials, different labor input
requirements, or different machine and equipment to process it.

Productivity is measured as: Quantity of Outputs (units of measure)
Quantity of Inputs (units of measure)
The PQPM tool may be difficult to use in measuring company-wide productivity

performance or total factor productivity measurement especially for a multi-
product company if physical units of inputs are used in getting the ratio.
For a water bottling company, where they have only one product, that is bottled
water, the inputs to produce bottle water cannot be combined because they are of
different physical units. The factor inputs of labor, capital and materials have to be
converted into indices to be able to measure total factor productivity. The
alternative approach is to use money values for inputs so that they can easily be
aggregated.

Alternative productivity measurement:
Quantity of Outputs (units of measure)

Cost of Inputs
The above tool can also be used to measure partial factor productivity. For
example, it can be used to measure labor productivity per pair of shoes.
• Production Value Productivity Measurement (PVPM)

The market value of goods and services produced is used as
measure of output in PVPM. The measure of inputs may be the
cost of inputs or the physical units of inputs used in the
production process.

Production Value = Total Operating Revenue + Change in
Inventory of Finished Goods and
Work-In-Process.

The short-cut method in calculating production value is simply to

multiply the quantity of output with the market price of the product:
Production Value = Quantity of Output X Market Price. The PVPM is
useful in measuring corporate-wide factor productivity performance by
using the money values of both outputs and inputs.
There is no problem combining different kinds or types of outputs and
inputs for the simple reason that you are using their money values.
Outputs are quantified as production value while inputs are quantified as
total cost of inputs. Total factor inputs will equal to labor cost plus cost
of capital plus cost of materials. For high energy/fuel consumption firms,
cost of energy or fuel may be added to total factor inputs.

Productivity is measured as
Production Value (in monetary currency)
Cost of Input (in monetary value)
It is convenient to measure profits using the PVPM by deducting

total factor input cost from production value. Managers find this
tool very handy because it directly connects productivity to
profitability. Profits can be calculated as total operating revenue
less total factor input costs plus other operating costs.

By using physical inputs in the productivity ratio, the manager can
also determine the monetary value of productivity of a specific
factor input like labor. The alternative ratio is:

Production Value (in monetary currency)
Units of Physical Inputs
• Value Added Productivity Measurement (VAPM)

Value added is the “wealth” created by the products and/or
services generated by an organization.
The more productive an organization, the more value added is

created.
In other words, Value-Added is the value created (through a

process/processes) by the firm out of the goods and services
bought from the outside. In this tool, output is measured by the
value created by the firm. The inputs used to calculate the
productivity ratio are measured either by costs or physical quantity
of inputs.
• Value Added Productivity Measurement (VAPM)

There are two ways of calculating value-added: the subtraction
method and the addition method.

Subtraction Method: Value-Added = Total Operating Revenue –
(Raw Materials Cost + Paid Expenses + Depreciation Costs) +
(Opening Inventory – Ending Inventory)
Addition Method: Value Added = Personnel Expenses +

Financial Cost + Rent + Depreciation Cost + Taxes + Net Profit +
Other Non-Operating Expenses.
The subtraction method is easier to understand and more convenient

to use. Since the value-added approach deducts the cost of
intermediate goods and services from the market value of the firm’s
product, it is a more accurate measure of productivity compared to
the product value approach. The VAPM can be calculated by:

Using physical quantity as inputs

Value-Added
Quantity of Physical Inputs

Using cost of inputs

Value-Added
Cost of Inputs
b. Measuring Partial Factor Productivity
and Total Factor Productivity
1. Production Quantity Productivity Measurement

(PQPM)
In measuring productivity using PQPM, the firm must have

complete data on the quantity of outputs and inputs used in
the production process at the different stages of production.
The manager must be able to define the boundaries of each
process in order to measure the productivity in each
process or stages of production. Below is a sample table of
showing output and input of data for two periods in one
process
Table 1. Quantity of Outputs and Inputs and their respective
Prices and Costs
Period 1 Period 2
Qty. Price/Cost Total Qty. Price/Cost Total
Output 1000 units $110/unit $110,000 1200 units $110/unit $132,000
Labor 800 $50/hr $40,000P 840 $50/hr $42,000
man hrs man hrs
Capital* 160 $100/hr. $16,000 180 $120/hr $21,600

machine machine
hrs. hrs.
Materials 1200 lbs. $40/lb. $48,000 1,300 lbs. $55/lb. $71,500

$104,000 $137,100
* The machines in Capital are of the same kind/type.

Table 2. PQPM Using Physical Quantity as Measure of Inputs

Period 1 Period 2 Percentage Change
Partial Factor Quantity Output Quantity Output
Productivity Quantity Input Quantity Input
Labor Productivity 1000/800 man-hours = 1200/840man-hours 14.4 % increase in

1.25 units/man-hour = 1.43 units/man- labor productivity
hour
Capital 1000/160 machine- 1200/180 machine- 6.72 % increase in
Productivity hours = 6.25 units hours = 6.67 units/ capital productivity
/machine-hour machine-hour
Materials 1000/1200lbs. = 0.833 1200/1300lbs. = 10.8 % increase in
Productivity units/lb. 0.923 units/lb. materials
productivity
It can be seen in Table 2 that all the partial factor productivity of labor,
capital and material factor inputs are increasing. Production and
industrial engineers normally use physical quantity of outputs and inputs
to measure efficiency which we call productivity.
In the above example, the quantity of output increased at a higher rate

compared to all the quantity of factor inputs. The quantity of output
increased by 20%, while labor input increased by 5%, capital input by
12.5% and materials input by 8.33%.
Thus, engineers see this as improvement in efficiency or in our case,

improvement in technical productivity. This also very useful at the shop
floor level because production workers can easily understand and can
relate their performance to the changes in partial factor productivity of
labor.
What about managers? Do they stop at “technical

productivity”? Managers are not only concerned with technical
efficiency, they are also concerned with profitability which is
the lifeblood of a firm’s existence. They are seriously
concerned how much it cost to produce the output. In Table 3,
the cost of inputs are used to measure productivity.
Table 3. PQPM Using Cost as Measure of Inputs

Partial Factor Quantity Output Quantity Output
Productivity Cost of Input Cost of Input
Labor Productivity 1000 units/$40,000 = 1200 units/$42,000 = 14% increase in labor

0.025 units/$ cost of 0.0285 units/ $ cost of productivity
labor labor
Capital Productivity 1000 units/$16,000 = 1200 units/$21,000 = 8.6 % decrease in
0.0625 units /$ cost of 0.0571 units/ $ cost of capital productivity
capital capital
Materials Productivity 1000 units/$48000 = 1200 units/$71,500 = 19.2 % decrease in
0.0208 units/$ cost of 0.0168 units/$ cost of materials
material materials Productivity
Total Factor 1000 units/$104,000 = 1200 units/$137,100 = 8.33 % decrease in
Productivity 0.0096 units/$ cost of 0.0088 units /$ cost of total factor
total inputs total inputs productivity
By using costs to measure inputs, it is shown in Table 2 that

overall Total Factor Productivity fell by 8.33 percent because
total factor input costs increased by 31.8% which is higher than
the 20% increase in the quantity of outputs. Only the partial
factor productivity of labor increased to 8.6% due to the low
increase in labor cost at only 5%. Cost of capital input
increased 31.25 % while cost of materials input increased 49%
that resulted to the decrease in the partial factor productivity of
capital and material.
2. Production Value Productivity Measurement

(PVPM)
This tool uses production value to measure output. The production

value is derived from the financial statements of the firm.
The firm must have a good accounting system for the
valuation of goods produced that are in inventory and work-
in-process inventory.
Unlike the PQPM where you can disect the quantity of output and
quantity of input per process or per stage of production, it
would be difficult to impute the value of a product at a
certain stage of production.
Table 4. Production Value and Quantity of Inputs and their
respective Costs
Period 1 Period 2
Qty. Price/Cost Value /Cost Qty. Price/Cost Value /Cost
Production $10 (in $12.5 (in

Value millions) millions)
Labor 1,000 man $50/hr. $50,000 1,050 man $55/hr $57,750
hrs. hrs.
Capital* 2,000 $150/hr. $300,000 2200 $150/hr $330,000
machine machine hrs.
hrs.
Energy 1,200 kwh $100/kwh $120,000 1,300 kwh $125/kwh $162,500
Total Factor $470,000 $550,250

Cost

Table 5. PVPM Using Costs as Measure of Inputs

Partial Factor Production Value Production Value
Productivity Cost of Inputs Cost of Inputs
Labor Productivity $10M/$50,000 = $200/$ $12.5M/$57,750 = 8.12 % increase labor
of labor cost $216.25/$ of labor cost productivity
Capital Productivity $10M/$300,000 = $12.5M/$330,000 = 13.65 % increase in

$33.33/$ of capital cost $37.88/$ of capital cost capital productivity
Energy Productivity $10M/$120,000 = $12.5M/$162,500 = 7.69 % decrease in

$83.33/$ of energy cost $76.92/$ of energy cost energy productivity
Total Factor $10M/$470,000 = $12.5M/$550,250 = 6.76 % increase in total

Productivity $21.28/$ cost of total $22.72/$ cost of total factor productivity
inputs inputs
In Table 4 above, Partial Factor Productivity and Total Factor

Productivity are measured by using Production Value as output
measure and Factor Costs as measures of inputs.
The partial productivity of labor and capital increased 8.12% and

13.65% respectively because labor cost increased only by 15.5% and
capital cost increased only by 10% while production value increased
by 25%. Energy productivity fell because it increased at a higher rate
of 35.42% compared to the 25% increase production value.
Overall, total factor productivity increased by 6.67% because total

factor cost increased at a lower rate of 17.07% compared to the
increase in production value. This would indicate that the firm would
be earning profits.
Table 6. PVPM Using Physical Quantity as Measure of Inputs

Partial Factor Production Value Production Value
Productivity Quantity of Inputs Quantity of Inputs
Labor Productivity $10M/1,000 man – $12.5M/1,050 man 14.29 % increase in
hours = –hours = labor productivity
$10,000/man –hour $11,428.57/ man-
hour
Capital $10M/2,000 $12.5M/2,200 13.63 % increase in
Productivity machine-hours = machine-hours = capital productivity
$5,000/machine – $5,681.82/machine
hour –hour
Energy $10M/1,200 kwh = $12.5M/1,300 15.38 % increase in
Productivity $8,333.33/kwh kwh= $9,615.38/ energy productivity
kwh
By using the physical quantity of inputs, the manager can

quantify how much production is generated per factor input.
While output as measured by production value increased by
25%, all factor inputs increased at a lower rate. The quantity of
labor inputs increased only by 5%, machine inputs by 20% and
energy input by 8.33%.
As a result, all the partial factor productivities of the three

inputs increased as shown above in Table 6. Note that if you use
cost as measure of inputs, energy productivity fell because the
cost per kwh increased by 25% as shown in Table 5.
3. Value-Added Productivity Measurement (VAPM)

The VAPM uses value-added, or the value created by the firm, as the
measure of output. This tool has closer connection to
profitability compared to production value. The higher the value
the firm adds to the intermediate goods and services brought
from the outside, the higher profits it would earn. Aside from
productivity improvement, high value-added may be due to
high quality, design, innovation, or creativity.
Value-added data is derived from the financial statements of the firm.

The firm should have a good accounting & financial system.
The calculation of value-added was discussed above. Let us
now apply the VAPM tool physical quantity and costs as
measures of inputs.
Table 7. Value-Added and Quantity of Inputs and their respective
Costs
Period 1 Period 2
Qty. Price/Cost Value /Cost Qty. Price/Cost Value /Cost
Value –Added $20 (in P20 (in

millions) millions
Labor 2,000 man- $50/hr. $100,000 1,500 man- $60/hr $90,000
hours hours
Capital* 4,000 $200/hr. $800,000 3,700 $175/hr $647,500

machine- machine-
hours hours
Energy 3,000 kwh $250/kwh $750,000 3,000 kwh $250/kwh $750,000
Materials 5,000 kilos $175/kilo $875,000 4,950 kilos $200/kilo $990,000
Total Factor $2,525,000 $2,477,500

Cost

Table 8. VAPM Using Physical Quantity as Measure of Inputs

Partial Factor __Value-Added__ __Value-Added_

Productivity Quantity of Inputs Quantity of Inputs
Labor Productivity $20M/2,000 man- $20M/1,500/man- 33.33 % increase in

hours = $10,000/ man- hours = $13,333.33/ labor productivity
hour man-hour
Capital Productivity $20M/4,000 machine – $20M/3,700 machine- 8.11 % increase in
hours = $5000/ hours = $5,405.41/ capital productivity
machine-hour machine-hour
Energy Productivity $20M/3,000 kwh = $20M/3,000 kwh = No change in energy
$6,666.67/kwh $6,666,67/kwh productivity
Materials Productivity $20M/5,000 kilos = $20M/4,950 kilos = 1.0 % increase in

$4000/kilo $4,040.40/kilo materials productivity
In Table 7, it can be seen that value-added is constant at $20million for the two periods.
Does it mean that productivity cannot be increased because output did not increase?
Calculations in Tables 8 & 9 will show the answer.
In Table 8 above, output as measured by value-added remained the same in both periods.
By using quantity as measure of inputs, it can be seen that partial productivity of labor,
capital, and material still increased which was achieved by decreasing the quantity of
inputs used.
Labor inputs decreased by 25%, capital inputs decreased by 7.5% while materials input
decreased by 1.0%. The quantity of energy inputs remained the same resulting to no
change in its partial factor productivity. This may be reflective of the firm’s improved
technical efficiency in the utilization of labor, capital, and material.
If the firm has an ongoing Productivity Improvement Program, the productivity ratios
shows that the firm has attain a level of success depending on their targets. While
improving technical productivity is good, managers look at profits as the bottom line. It is
therefore important to cost out all inputs as it would affect the profitability of the firm.
Table 9 shows the effect of the cost of inputs on productivity performance.
Table 9. VAPM Using Costs as Measure of Inputs
Partial Factor __Value-Added__ __Value-Added_
Productivity Cost of Inputs Cost of Inputs
Labor Productivity $20M/$100,000 = $20M/$90,000 = 11.11 % increase in
$200/$ cost of labor $222.22/$ cost of labor labor productivity
Capital Productivity $20M/$800,000 = $20M/$647,500 = 23.56 % increase in
$25/$ cost of capital $30.89/$ cost of capital capital productivity
Energy Productivity $20M/$750,000 = $20M/$750,000 = No change in energy
$26.67/$ cost of energy $26.67/$ cost of energy productivity
Materials Productivity $20M/$875,000 = $20M/$990000 = 11.64 % decrease in
$22.86/$ cost of $20.20/$ cost of material productivity
material material
Total Factor $20M/$2.525M = $20M/$2.477M = 1.89 % increase in
Productivity $7.92/$ of total input $8.07/$ of total input overall total
cost cost productivity
In Table 9, the measures of inputs are the costs of factors used in the production
process. This is very useful for managers because they can already see the effects of the
cost on productivity and profits. Partial factor productivity of both labor and capital
still increased just like in Table 8.
There is a noticeable difference in the rate of increase in the cost of inputs. In Table 9,
labor cost increased by 20% resulting to a 11.11% in labor productivity which is lower
compared to that in Table 8 where labor productivity, where inputs is measured in
quantity, increased by 33.33%.
On the other hand, the rate of capital productivity increase in Table 9 is higher at
23.56% compared to 8.11% in Table 8, because of the 12.5% decrease in the cost of
capital. Materials productivity, which showed an increase in Table 8 when quantity is
used as input measure, decreased by 11.64% because of 14.29% increase in its cost as
shown in Table 9.
Overall, the firm was able to increase its total factor productivity by 1.89% which
means that it increased its profits slightly, it not, maintaining it at the same level as
before. For future planning, the firm now has to focus in improving its energy and
materials productivity while ensuring that labor and capital productivity will not fall
but will continue to rise.
c. What are some examples showing how each tool
is applied?
The 3 tools in productivity measurement can be applied to practically all
types and kinds of organizations whether public, private or non-
governmental (non-profit) organizations producing goods or services.
1. Production Quality Productivity Measurement (PQPM)

Example
This tool is useful for government and non-profit organizations whose

main motivation is to provide public good or service.
Example A: Land Transportation Office
Capital (Machine) Productivity:

Number of driver’s license applicant picture taken
per camera / computer per hour.
is applied?
PQPM
Example B: Non-Governmental, Non-Profit Organization building

houses for the poor
Materials Productivity:
Number of houses built per ton of cement
Note: the houses have standard size and design
with estimated quantity of cement to be used per house.
Example C: Local Government Sanitation Services
Labor Productivity:
Area (square meter) swept/cleaned per street
cleaner per day.
is applied?
The PQPM can, of course, be used in private profit organizations not
only in manufacturing but also in services.
Example D: Barbershop
Labor Productivity:
Number of satisfied customers served (hair cut) per
barber per hour.
Example E: Internet Café
Capital Productivity:
Number of hours used/number of hours available per
computer.
Note: If the internet café is open 12 hours a day,
then each computer is available for 12 hours.
is applied?
2. Production Value Productivity Measurement (PVPM) is useful in
organizations that are profit motivated. While this is commonly used by
manufacturing firms, farms and service organizations can also use it.
Example A: Garments Factory
Labor Productivity: Production Value / Labor Cost

Note: Production value may be influenced by the
product mix of the factory if they have several types,
kinds, and sizes of garments.
Example B: Mango Farm
Labor Productivity: Production Value / hectare

Note: Production is computed by getting the market price
of mangoes harvested per hectare. Of course, this will
depend on the number of mango trees planted per hectare and
there is an optimum number of mango trees per
hectare.
is applied?
PVPM
Example C: Tourist Bus Company
Capital Productivity: Production Value per Bus per

Week
Note: Production value is computed by getting the
earnings of each bus per week. Since this is a tourist
bus the charging is not per passenger but the use of
the bus per hour per day. Thus, if a bus is used the
whole day every day of the week then its production
value is high and so is the capital productivity of the
bus.
is applied?
3. Value Added Productivity Measurement (VAPM) is very useful in
highly competitive industries like electronics, high fashion garments, or
furniture. Value added is the value created by the firm when they
produced goods and services. Value added may be influenced by
technological innovation, design, creativity, or preference of customers.
Example A: Laptops
Different brands and models of laptops have

different prices although the cost of intermediate
goods used to produce the laptop may be the same. But the
price of the laptop with more features because of
advanced technology may have a higher price.
is applied?
VAPM
Example B: Furniture Factory
A furniture factory in an APO-member country is well-

known designer of furniture and exports its products world-
wide. One of his customers is Hollywood actor Brad Pitt.
The cost of the factory’s intermediate goods (raw
materials) is the same as the other factories in the vicinity but
the value of their furniture is higher due to design and creativity.
Example C: Organic Farm
There are customers who prefer to higher price for

vegetables, fruits, or even meat that are grown in organic
farms. Farmers who operate organic farms produce high
value added products compared to ordinary farmers who use
pesticides and fertilizers in their soil and plants or inject
anti-biotic on their poultry and hogs.
Analyzing and Deriving Meaning from
Productivity Measurement
3. ANALYZING AND DERIVING MEANING

FROM PRODUCTIVITY MEASUREMENT
In order to analyze the ratios in productivity measurement, it is necessary

that you monitor the ratios at regular intervals depending on the ease in
collecting the data and how fast the company can respond to improve its
productivity performance.
The more frequent, like daily measurement, the better. The longer the
intervals, like monthly measurement, the more ineffective the firm is in
improvement its productivity performance.
Productivity improvement is a dynamic process just like the Kaizen where

productivity improvement is a continual process. In the P-D-C-A cycle,
productivity measurement is used in C – checking the status of the
company’s productivity performance and is also used in P – planning the
target for productivity improvement, how much increase in productivity the
firm wants.
Analyzing Trends and Patterns
Productivity measurement does not mean anything if you do not look at the
trends and patterns over a period of time. The level of detail also helps in the
analysis. For example, instead of using total number of workers in the firm
as labor inputs in labor productivity measurement, the firm can go down to
the level of department or section which may be a specific process. Such as
output per worker in section A.
Total Factor Productivity Measurement
A declining trend in total factor productivity means that the overall

productivity of the company is falling and its not using its resources
efficiently. But it does not show which resource is not being used efficiently
and the level extent of its inefficiency.
It is therefore necessary to analyze and study the partial factor productivity.
By doing so, the company can determine which factor should be given
priority attention to improve their productivity.
Labor Productivity Measurement:
A declining labor productivity trend may be caused by many factors like

lack of skills and training, low morale, poor working environment, tardiness
and others. It is important that the management is able to identify the
reasons behind low or declining labor productivity.
5S or good housekeeping, Suggestion Scheme, or Quality Circles are

various tools and techniques that may be implemented in the firm to
improve its labor productivity. Labor productivity measurements should be
made after these tools and techniques are implemented in the company to
find out if it improved labor productivity.
Labor Productivity Measurement:
If labor productivity does not improve, it means that the technique was not
properly implemented or it is the inappropriate technique used.
Capital Productivity Measurement:
There are several factors that may cause capital productivity to fall. Some of these
are: constant machine breakdown, machine downtime, operating the machine
below capacity, level of skill of machine operators, etc. The production manager
should be able to identify the root cause of the problem to respond appropriately.
If the problem is constant machine breakdown, the firm can implement the Total
Productive Management technique to reduce or eliminate machine breakdowns.
Machine downtime may be caused by poor planning or constant power
interruption. If the problem is constant power interruption, then the firm may be
opt to buy their own power generators. Good planning can also reduce downtime
especially if it takes time for the machine to start up.
Conclusion:
Just like labor and capital, the productivity of other factors like materials or
energy can also be measured and improved.
Productivity measurement is necessary to improve productivity continually.

It shows the firm how much the increase in productivity for a period of time.
It allows the firm to identify which factor should be given attention to
significantly improve total productivity in a shorter period.
Without productivity measurement. The firm will have no direction in

improving its productivity that may result to losing its competitiveness
leading ultimately to its bankruptcy.
End of Module 4
Congratulations for finishing your lessons on

Module 4!
You are now ready to take the quiz to see how far
you have
absorbed the content of this module.
There are 10 questions.

Please tick/encircle the letter of
the correct answer.
End of Module 4
But wait…
You are encouraged to email to
industry@apo-tokyo.org
if you have questions and/or points for clarification on
any of the lessons
taken up in this Module.
If none, you may now close
Module 4 Course Manual and
proceed to the Module Quiz.
Module 4 - Quiz
Multiple Choice: Choose the letter that you think corresponds to the correct answer.
1. Which of the following ratios is a measure of productivity?
a. Cost of Capital c. Quantity of Labor e. None of the above

Cost of Materials Production Quantity
b. Cost of Goods d. Production Value

Value Added Cost of Labor
2. When should productivity measurement be conducted?
a. Before starting a productivity improvement program.

b. After the implementation of a productivity improvement program.
c. Before and after the implementation of a productivity program.
d. Continuously because productivity improvement is a continuing
process.
e. All of the above
Module 4 - Quiz
3. A firm can increase its productivity by:
a. Increasing its outputs and decreasing its inputs at the same time.
b. Decreasing its outputs and increasing its inputs at the same time.
c. Increasing its outputs and inputs at the same rate at the same
time.
d. Decreasing its outputs and inputs at the same rate at the same
time.
e. All of the above
4. Value-Added is the:
a. Quantity of goods produced by the firm.

b. Wealth created by the firm.
c. Value of inputs added to the firm.
d. Total revenue earned by the firm
e. None of the above
Module 4 - Quiz
5. Which tool in productivity measurement that is closely tied to profitability?
a. Production Quantity Productivity Measurement.

b. Value-Added Productivity Measurement.
c. Production Value Productivity Measurement.
d. None of the above
e. All of the above
6. Alpha Metal Works produces cast bronze valve on a 10 person assembly

line. On a recent day, 160 valves were produced during an 8-hour shift.
Calculate the labor productivity of the line.
a. 2 valves/hr
b. 4 valves/hr
c. 6 valves/hr
d. 8 valves/hr
e. None of the above
Module 4 - Quiz
7. Malinis Carpet cleaned 65 carpets this month, consuming the following resources:
Labor: 520 hours at $13 per hour

Solvent: 100 gallons at $5 per gallon
Machine Rental: 20 days at $50 per day
a. What is the labor productivity per dollar?

b. What is the total factor productivity?
8. Taal Seafood makes 500 wooded packing boxes for fresh seafood per day, working in two
10-hour shifts. Due to increase demand, plant managers have decided to operate three 8-hour
shifts instead. The plant is now able to produce 650 per day. Calculate the company’s
productivity before the change in work rules and after the change. What is the percentage
change in productivity?
a. Before: 52 boxes/hr c. Before: 35 boxes/hr e. None of the above

After: 72.05 boxes/hr After: 37 boxes/hr
Change in productivity: 3.8 % Change in productivity: 10%
b. Before: 27.05 boxes/hr d. Before: 25 boxes/hr

After: 25 boxes/hr After: 27.08 boxes/hr
Change in productivity: 7.4 % Change in productivity: 8.3%
Module 4 - Quiz
9. In July, Makati Bikes produced 6,600 mountain bikes at its plant in Makati. The labor
productivity at this plant is known to have been 0.10 bike per labor-hour during that month.
If 300 were employed at the plant that month, how many hours did the average worker
worked that month?
a. 220 hours/laborer c. 205 hours/laborer e. None of the above

b. 200 hours/laborer d. 225 hours/laborer
10. John Delman is President of Savon Manufacturing, a producer of bath soap. Savon makes
32,000 standard size bath soaps per day, sold at $1.50 each, with the following resources:
Labor: 400 hours per day at $12.50/hour

Raw materials: 20,000 pounds per day at $1/lb.
Energy: $500/day
Capital: $10,000/day
i. Using the production value productivity measurement tool, what is the labor
productivity?
ii. Calculate total factor productivity using the PVPM.
iii. What is the percent change in total factor productivity if energy cost is reduced by
$1,000 a day?
End of Module 4
After taking the quiz,

you are encouraged to What are my Top 3
reflect and answer Takeaways or my
the question on this slide.
Write your answer on your Most Significant
productivity journal. Learnings from this
module?

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1. Define what productivity measurement is

2. Explain why productivity improvement starts and ends

3. Identify the tools and techniques applicable in

4. Explain how to analyze and derive meaning from the

• Basic Tools in Productivity Measurement

• Analyzing the measures and knowing what they mean or indicate

As cited in Module 1 the basic definition of

It is about making the most effective use of all

The OUTPUT may be a piece of product or a type of service that

While productivity levels and trends may be reflected through the

The average manager is interested in profitability. He is faced with a

Therefore, the Manager’s Approach in productivity measurement would be

• Industrial Engineer’s Approach

In the “industrial engineer’s approach”, all outputs and inputs are

This approach is more thorough and once standards are established, a

However, detailed methodology for each different line of business

Each of the three approaches has its own merit. In this

There will be a sprinkling of “Industrial Engineer’s

In academic institutions, students’ academic performance are

Doctors subject their patients to medical tests/exams as the

In firms or organizations, productivity is measured to help

The development, installation and operation of a

Productivity measurement indices help establish realistic targets and

Furthermore, there can be no improvement in industrial relations or

That is the reason why productivity measurement and analysis should be

A Manager or Entrepreneur who seeks to improve the

Productivity measurement is a basic technique that the

Basis of Productivity Improvement Plan/Programs

To Know the Effects of Productivity Improvement

2. Increase in materials productivity results to reduction or elimination of

3. Increase in capital productivity will reduce the cost of capital and

4. Increase in total factor productivity increases the firm’s profits and

To Know the Effects of Productivity Improvement

5. Increase in productivity results to improvement in the quality of goods

6. High productivity of a country will allow the government to collect

7. High productivity performance results to higher standard of living and

The first step towards measuring productivity is to identify

Aside from the production process which is covered by

Machine operators or the production workers can collect data as they

Firms with Computer Aided Manufacturing (CAM) program can

A productivity measurement system can be developed to include a

For example, labor productivity can be measured two ways; by using

2. BASIC TOOLS IN PRODUCTIVITY

There are three basic tools that can be applied in

2. Production Value Productivity Measurement

3. Value Added Productivity Measurement (VAPM)

• Production Quantity Productivity Measurement (PQPM)

If the firm is producing multi-products, care must be taken to segregate different

The PQPM tool may be difficult to use in measuring company-wide productivity

Quantity of Outputs (units of measure)

• Production Value Productivity Measurement (PVPM)

The short-cut method in calculating production value is simply to

It is convenient to measure profits using the PVPM by deducting

• Value Added Productivity Measurement (VAPM)

The more productive an organization, the more value added is

In other words, Value-Added is the value created (through a

• Value Added Productivity Measurement (VAPM)

Addition Method: Value Added = Personnel Expenses +

The subtraction method is easier to understand and more convenient

1. Production Quantity Productivity Measurement

In measuring productivity using PQPM, the firm must have

Partial Factor Value-Added __Value-Added_