BASICS OF PRODUCTIVITY

MEASUREMENT

PPT Taken from Asian Productivity

Organization online program

Delivered by
Shahein Aruna
Lecturer/ Consultant
National Institute of Business Management
 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)

 a. The Basic Tools in Productivity Measurement

• 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)
 a. The Basic Tools in Productivity Measurement

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.
 a. The Basic Tools in Productivity Measurement

• 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.
 
 a. The Basic Tools in Productivity Measurement

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)
 a. The Basic Tools in Productivity Measurement

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
 a. The Basic Tools in Productivity Measurement

• 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.  
 a. The Basic Tools in Productivity Measurement

• 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.
 a. The Basic Tools in Productivity Measurement

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
 b. Measuring Partial Factor Productivity
and Total Factor Productivity
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.

 b. Measuring Partial Factor Productivity
and Total Factor Productivity

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
 b. Measuring Partial Factor Productivity
and Total Factor 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.
 b. Measuring Partial Factor Productivity
and Total Factor Productivity

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.
 b. Measuring Partial Factor Productivity
and Total Factor Productivity

Table 3. PQPM Using Cost as Measure of Inputs

Period 1 Period 2 Percentage Change

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
 b. Measuring Partial Factor Productivity
and Total Factor 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.
 b. Measuring Partial Factor Productivity
and Total Factor Productivity

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.
 b. Measuring Partial Factor Productivity
and Total Factor Productivity
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

* The machines in Capital are of the same kind/type.

 b. Measuring Partial Factor Productivity
and Total Factor Productivity

Table 5. PVPM Using Costs as Measure of Inputs

Period 1 Period 2 Percentage Change
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
 b. Measuring Partial Factor Productivity
and Total Factor Productivity

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.
 b. Measuring Partial Factor Productivity
and Total Factor Productivity

Table 6. PVPM Using Physical Quantity as Measure of Inputs

Period 1 Period 2 Percentage Change
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
 b. Measuring Partial Factor Productivity
and Total Factor Productivity

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.
 b. Measuring Partial Factor Productivity
and Total Factor Productivity
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.
 b. Measuring Partial Factor Productivity
and Total Factor Productivity
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

* The machines in Capital are of the same kind/type.

 b. Measuring Partial Factor Productivity
and Total Factor Productivity

Table 8. VAPM Using Physical Quantity as Measure of Inputs

Period 1 Period 2 Percentage Change

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
 b. Measuring Partial Factor Productivity
and Total Factor 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.
 b. Measuring Partial Factor Productivity
and Total Factor Productivity
Table 9. VAPM Using Costs as Measure of Inputs
Period 1 Period 2 Percentage Change
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
 b. Measuring Partial Factor Productivity
and Total Factor 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.
 c. What are some examples showing how each tool
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.
c. What are some examples showing how each tool
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.
 c. What are some examples showing how each tool
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.
 c. What are some examples showing how each tool
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.
 c. What are some examples showing how each tool
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.
 c. What are some examples showing how each tool
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.