A global marketplace for products and services means more customers and more intense com- petition. In the broadest terms, we speak of competitiveness in reference to other countries rather than to other companies. That’s because how effectively a nation competes in the global marketplace, affects the economic success of the nation and the quality of life for its citizens.
The OECD (Organization for Economic Cooperation and Development) defines competitiveness as “the degree to which a nation can produce goods and services that meet the test of interna- tional markets while simultaneously maintaining or expanding the real incomes of its citizens.”
The most common measure of competitiveness is productivity. Increases in productivity allow wages to grow without producing inflation, thus raising the standard of living. Produc- tivity growth also represents how quickly an economy can expand its capacity to supply goods and services.
Productivityis calculated by dividing units of output by units of input.
Output can be expressed in units or dollars in a variety of scenarios, such as sales made, products produced, customers served, meals delivered, or calls answered. Single-factor productivity com- pares output to individual inputs, such as labor hours, investment in equipment, material usage, or square footage. Multifactor productivity relates output to a combination of inputs, such as (labor capital) or (labor capital energy materials). Capital can include the value of equipment, facilities, inventory, and land. Total factor productivity compares the total quantity of goods and services produced with all the inputs used to produce them. These productivity formulas are summarized in Table 1.2.
Productivity = Output
Input Competitiveness:
the degree to which a nation can produce goods and services that meet the test of international markets.
Productivity:
the ratio of output to input.
Single-Factor Productivity
Multifactor Productivity
Total Factor Productivity Goods and services produced All inputs used to produce them
Output
Labor + Energy + Capital Output
Labor + Materials + Overhead
Output Capital Output
Materials Output
Labor Table 1.2
Measures of
Productivity
Osborne Industries is compiling the monthly productivity report for its Board of Directors.
From the following data, calculate (a) labor productivity, (b) machine productivity, and (c) the multifactor productivity of dollars spent on labor, machine, materials, and energy. The aver- age labor rate is $15 an hour, and the average machine usage rate is $10 an hour.
Solution
(a) (b) (c)
The Excel solution to this problem is shown in Exhibit 1.1.
=
100,000
$250,000 = 0.4 units per dollar spent
=
100,000
(10,000 * $15) + (5,000 * $10) + $35,000 + $15,000
Multifactor productivity =
Output
Labor costs + Machine costs + Material costs + Energy costs Machine productivity =
Output Machine hours =
100,000
5,000 = 20 units/hour Labor productivity =
Output Labor hours =
100,000
10,000 = 10 units/hour
Example 1.1
Calculating Productivity
Units produced 100,000
Labor hours 10,000
Machine hours 5,000
Cost of materials $35,000
Cost of energy $15,000
• Animated Demo Problem
Exhibit 1.1
Osborne Industries
B5*B7 B6*B8
B4/B5 B4/B6 B4/B14
• Excel File
The most common input in productivity calculations is labor hours. Labor is an easily identi- fied input to virtually every production process. Productivity is a relative measure. Thus, produc- tivity statistics provided in government reports typically measure percent changes in productivity from month to month, quarter to quarter, year to year, or over a number of years.
Productivity statistics can be misleading. Examining the formula for productivity, output/input, it becomes apparent that productivity can be increased in different ways. For exam- ple, a country or firm may increase productivity by decreasing input faster than output. Thus, although the company may be retrenching, its productivity is increasing. Seldom is this avenue for increasing productivity sustainable.
Figure 1.9 shows the growth rate in productivity for select countries for 2008, a year of global recession. Only five countries exhibited positive growth rates, led by Korea and the United States with increases of 1.2%. Examining the outputs and inputs more closely in Figure 1.10, we find that Korea and the United States achieved those increases in very different ways. Korea saw small
Republic of Korea United States Norway Belgium United Kingdom
Germany Japan Taiwan France Spain Australia Netherlands Canada Italy Sweden Denmark Singapore
2 0
–2 –4
–6 –8
Figure 1.9 Productivity Growth, 2008 (output per labor hours)
Source: U.S. Bureau of Labor Statistics. International Comparisons of Manufacturing Productivity and Unit Labor Costs—
2008, Washington, DC: October 22, 2009, p. 3.
Republic of Korea
Input (in hours worked) Output (in units) United States
Norway
Belgium United Kingdom Germany
Japan Taiwan France Spain Australia Netherlands
Canada Italy
Sweden Denmark
Singapore
2 4
0 –2
–4 –6
Figure 1.10
Percent Change in Input and Output, 2008
Source: U.S. Bureau of Labor Statistics. International Comparisons of Manufacturing Productivity and Unit Labor Costs—
2008, Washington, DC: October 22, 2009, p. 3.
increases in both its output and the input required to produce that output. The recession in the United States caused a decrease in both output and input; however, the cut in input (i.e., labor hours) was more severe, thereby producing a slight increase in productivity.
Productivity statistics also assume that if more input were available, output would increase at the same rate. This may not be true, as there may be limits to output other than those on which the productivity calculations are based. Furthermore, productivity emphasizes output produced, not output sold. If products produced are not sold, inventories pile up and increases in output can actually accelerate a company’s decline.
As the business world becomes more competitive, firms must find their own path to sustain- able competitive advantage. Effectively managed operations are important to a firm’s competitive- ness. How a firm chooses to compete in the marketplace is the subject of the next section: Strategy and Operations.
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