Productivity simply refers to the measurement of how efficient a company’s production process is. This measurement takes into consideration the input and the output involved in the production process.
Managers use these productivity measurements so they can determine which departments, plants or workers are most efficient and how to maximize usage of the company’s resources to attain an optimum level of production and higher sales or revenue.
Although there is a basic formula for productivity, there are different ways to calculate productivity across different activities.
What is the Productivity Formula?
The basic formula for calculating productivity is a ratio of outputs produced to the inputs used in production. Productivity = Output / Input
There are so many different kinds of production processes and all these production processes have peculiar inputs which differ from one process to the other. For this reason, the productivity formula for various forms of production, though they conform to the basic formula, is not the same.
The most common inputs are labor hours, capital and materials whereas sales or the amount of goods produced are common output units. Some of the most common productivity measurements are total employee labor productivity, individual employee labor productivity and sales productivity.
How to apply the formula
Sometimes managers would want to measure a single employee’s productivity. The formula would stay very much the same except that you should know what constitutes the output and the input of the process.
For instance, if we want to calculate the productivity of one sales personnel, his labor hours will replace input in the formula whereas the amount of sales would be his output.
Example: Andy works 40 hours per week and made sales worth $4000 in his first week. John works 25 hours a week and makes $3000 worth of sales. Though Andy has a higher sales figure, John appears to have a better productivity level.
Andy: $4000/40hrs = $100/hour
John: $3000/25hrs =$120/hour
With this formula, a manager can determine which of his employees are less productive and also find out why they are being less productive. He can then take the appropriate course of action.
The illustration above can be described as partial factor productivity. Partial factor productivity simply refers to the use of a single unit of input in computing productivity. These are simple to compute, data is easy to come by, and they are the best for individual assessment. However, managing a company and calculating the overall productivity of production or service departments requires more than a partial factor productivity measurement.
Multifactor productivity computations are what mangers use for measuring the productivity of the various departments in a company. With this, productivity is measured by relating output to a subset of inputs in the production process. An example of such productivity formula is the ratio of units produced to materials, labor and capital.
Meanwhile, it takes more than a multifactor productivity formula to calculate the overall productivity of a company. This is because multifactor productivity formulas incorporate only a subset of the inputs used in production. Managers use total factor productivity formulas for computing the overall productivity of companies.
Unlike multifactor productivity which uses a subset of the inputs, Total Factor Productivity computations incorporate all inputs used in the production process. They are most appropriate for use when assessing the overall performance of a firm.