Note that the relative proportions of the inputs are held constant so that all productivity improvement can be attributed to the improvement of technical efficiency. The change is a significant improvement in labor productivity and provides evidence supporting the effectiveness of the new process. If the increase in the cost of scrap and waste outweighs the savings from the reduced labor, then overall productivity has decreased.
If the economic effect of the productivity changes is positive, then the trade-off is good; otherwise it must be considered bad. Appreciating the trade-off will allow us to assess the financial impact of the decision to change the collection process. Profit-Linkage Rule. For the current period, calculate the cost of the inputs that would have been used in the absence of a productivity change and compare these costs with the costs of the inputs that were actually used.
To illustrate the application of the earnings-related rule, let's return to the Nevada example with input trade-offs. The calculation of the profit-linked effect is summarized in Figure 15-5 on the next page. The summary in Figure 15-5 shows that the net effect of the process change was beneficial.
The increase in income would not be sufficient to recover the increase in the cost of inputs.
Limitations of Activity Productivity Analysis
The value of these productivity improvements is $602,000—with most of the value being created by an increase in labor acquisition productivity. Thus, changes in activity productivity can be estimated or predicted using the same methodology available for estimating manufacturing productivity. Thus, it seems reasonable to exercise caution in using the interpretation of activity productivity analysis for non-value-added activities.
One option is to limit non-value-added productivity analyzes to changes in the actual costs of activities, with declines considered favorable and increases considered unfavorable. A third option is to consider non-value-added productivity analyzes only in the context of changes in process productivity.
Process Productivity Analysis
Process Productivity M odel
An Illustrative Example
M aking Sales Calls
Handling Objections
However, of the two activities, only one contributed to increasing process efficiency by increasing the resource efficiency of the activity.
Service Productivity
Activity Output Efficiency
Total Process Productivity
Because the activities were in separate departments, the process also included a relocation activity: an activity that required transferring the output of each activity from one location to another. Essentially, the customer's credit application was transferred from department to department, with a transfer occurring only after a particular department ceased operations (e.g., the credit department transfers the application to the business practices department after it assesses creditworthiness). The output of the process can be defined as financing approval and can be measured by the number of quotes.
Before any process improvement efforts, it took about six days to prepare a quote. First, the time needed to process an application was reduced from six days to a few hours. The number of workers remained almost the same and yet the number of processed quotas increased 100 times.
This means, for example, that if the partial labor productivity ratio was 10 before the upgrade, it is now 1000.
Activities and Process Productivity M easurement
Quality and Productivity
The second process no longer has to wait for the production of 1,200 units plus transportation time before it can go into operation. The total production time of 1,200 units is now 6,000 minutes plus the waiting time for the first unit (five minutes). The moving and waiting activities are non-value-added inputs that are virtually eliminated, improving process productivity.
P RODUCTIVITY
R e quir e d
Profile analysis indicates that productive efficiency has increased for materials and labor and decreased for energy. The outcome is mixed and no statement can be made about the overall productivity improvement without appreciating the trade-off. The value of the increase in materials and labor efficiency more than offsets the increased energy consumption.
The $40,000 increase in revenue would not have offset the increase in the cost of inputs. From the solution to requirement 3, the cost of inputs without a productivity increase would have been $144,000 (column 2). Only because of the productivity increase did the firm show an increase in profitability.
L UTIO N
Measure of Financial Productivity 667 Measure of Operational Productivity 667 Measure of Part Productivity 665 Price Recovery Component 672 Process Productivity Analysis 673 .
Calculate the change in profit attributable to the change in productivity of the three inputs.
A CTIVITY P RODUCTIVITY
Given the following most recent year's input prices for the accounts payable activity, calculate the activity's profit-linked measure:.
MEMO
Because suppliers often sent partial orders, the software was modified to allow this option. Now, two years later, Megan wants to analyze the productivity gains or losses resulting from the process changes implemented. The result for the procurement process is defined as the number of units (of all types) purchased and paid for.
Required
P RODUCTIVITY AND Q UALITY , P ROSPECTIVE A NALYSIS
Is the production manager correct in thinking that material and labor productivity increases with the automated system.
P RODUCTIVITY M EASUREMENT , B ASICS
P RODUCTIVITY M EASUREMENT , T ECHNICAL
AND P RICE E FFICIENCY
P ROCESS P RODUCTIVITY M EASUREMENT : S ECOND
C OMPONENT (A CTIVITY O UTPUT E FFICIENCY )
P RODUCTIVITY M EASUREMENT , P RICE R ECOVERY
Calculate the change in a batch's profit from the beginning of the year to the end attributable to changes in the productivity of all three inputs.
C OLLABORATIVE L EARNING E XERCISE
C YBER R ESEARCH C ASE
