Understanding Productivity Improvement & Measurement

How Productivity affects you

Singapore’s economy has been steadily growing over the past number of years. We have all witnessed the ever changing skyline as more apartment blocks (both condos and flats) and office blocks go up; more and newer shopping malls and eateries open; the arrival of the integrated resorts and the new amenities of Marina Bay and Sentosa; improvements in transport such as new MRT lines and improved expressways; new terminals in Changi airport; etc. With this booming economy, there is an ever increasing demand for more workers which has benefited Singaporeans as more people are in jobs and salaries are going up. To fuel this boom, Singapore has had to take in foreign workers to do the jobs Singaporeans don’t want to do or wouldn’t do for the wages offered, as well as provide extra skills and expertise in areas such as finance, engineering, research & development, and manufacturing. These foreign workers also add to the demand for housing, for places to eat, for transport, and for all types of services. This in turn adds to the economic activity that is driving the boom and creates even more jobs for Singaporeans.

The government has highlighted that Singapore’s economic growth can only be sustained by improving national, company and individual productivity. While the economy has expanded by 8.2% between 2004 and 2007, productivity growth has slowed down to 0.8% per year from 1999 to 2009. Compared to other developed countries such as Japan and the USA, Singapore’s productivity levels are 50% to 60% lower for industry sectors such as manufacturing, services and construction.

Furthermore, labour costs such as salaries and wages in Singapore are higher than neighbouring countries. Foreign owned companies and MNCs contemplating setting up in the region may be attracted to those countries because of their lower wage costs instead of coming to Singapore. Indeed, companies already here could decide to move their operations or parts of their operations to these cheaper waged countries to reduce their costs. This would threaten the security of Singaporeans jobs. To counter such a possibility, Singapore must become more productive to remain competitive both regionally and globally.

In the recent economic downturn, which fortunately was short-lived for Singapore, some people lost their jobs as companies downsized or restructured to cut costs. Indeed, many of us saw family members, friends or even work colleagues retrenched. Job losses such as these are one effect of a lack of productivity improvement. Such job losses to ourselves, our family or friends can be avoided by increasing productivity. To ensure continued economic growth, Singapore’s companies and every individual in them has to work to improve productivity.

So what is Productivity?

Essentially, productivity is a measure of how well (or how efficiently) an organisation transforms its inputs into outputs (see Figure 1 below). All companies use inputs such as people, their skills, knowledge and various types of equipment to produce services as outputs. Many companies also use materials and energy as inputs because they produce goods as outputs. These inputs are transformed in the process of producing outputs and productivity is about how efficiently this happens.

Figure 1: The Transformation Model

Productivity is expressed as a ratio of inputs to outputs (outputs / inputs) and can be based on output volume (e.g. the numbers of customers served per employee) or output value (e.g. sales per employee). Output volume can also be measured as the number of goods produced as a ratio of the level of materials used as inputs, or as the cost of materials compared to the revenue received from the sale of the goods. Measures of productivity or efficiency can be based on a single factor of inputs (such as labour, or materials, or the capital employed, etc), or on all of the factors of inputs (cost of capital, materials, labour, energy, etc) for a total productivity measurement.

Productivity is frequently expressed in terms of the cost of the inputs as a ratio of the revenue from the sale of the goods and services. Thus, Materials Productivity = Value of Outputs / Cost of Materials. For example, a joiner uses wood, glue and screws (inputs) to make chairs (outputs). The wood costs $1,700, the glue $200 and the screws $100. The total materials cost is $2,000. The batch of chairs are sold for $3,000. Therefore Materials Productivity is 3,000 / 2,000 = 1.5

Labour Productivity = Value of Outputs / Hours Worked. Using the above example, if it took the joiner 25 hours to make the chairs, then Labour Productivity is 3,000 / 25 = 120.

All inputs may also be used to measure Total Productivity = Value of Outputs / cost of labour, capital, materials, energy, etc. To expand on the joiner example, say the joiner pays himself $400 for his labour; electricity for the period costs $20; the interest on the short-term loan he took out to buy the materials is $80; and the materials cost him $2,000. The total costs are $2,500. Total Productivity is 3,000 / 2,500 = 1.2.

Frequently productivity ratios are based on the concept of Value Added which is the difference between the sale price of goods or services (what the customer pays) and the cost of the inputs. As an example, a café has 3 workers. It buys in its materials (food, coffee, etc) at a cost of $5,000; labour (wages, CPF, etc) costs $2,000 for the period; rent costs $400; energy (electricity, gas, water) is $100; interest on the loan taken out to start the business is $200. The café’s total costs for the period are $7,700. The money it makes in sales for the period is $14,000. The Value Added is therefore $6,300 ($14,000 - $7,700).

In these terms, Labour/Employee Productivity measures the Value Added per worker and is expressed as Value Added / Number of Workers. The café in the above example’s Labour/Employee Productivity is $6,300 / 3 = $2,100.

Labour Cost Competitiveness measures a company’s operational efficiency in transforming inputs into outputs in terms of the cost of labour. As with most other measures, it can be used to benchmark against industry standards. It is expressed as Value Added / Total Labour Costs. Again using the café example, its Labour Cost Competitiveness ratio is 6,300 / 2,000 = 3.15.

In terms of labour/employee productivity, the government is keen to point out that increasing labour productivity is about working smarter not harder. It is not about cutting jobs, but rather about producing more goods and services with the current workforce. This increases wealth for the company, for the country, and ultimately for individuals as well.

It is possible to develop a large number of productivity or efficiency measures for different types of operations. The important point is that it is clear why something is being measured and ideally what is being measured should be related to the organisation’s goals.

The benefits of measuring productivity

Measuring various factors of a company’s operation from period to period lets the company know if performance is improving or not, and identifies areas that require attention. Improving such areas will increase the company’s performance, its Value Added, profitability and ability to pay increased salaries and bonuses. Measuring productivity also facilitates a company in benchmarking against industry standards.

Stay-tuned for future articles, which will talk about how productivity can be improved and the benefits of doing so.