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Understanding the concept of

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Stefan Tangen

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 Proceedings of the 7th Asia Pacific Industrial Engineering and Management Systems Conference (APIEMS2002), Taipei

Understanding the concept of productivity

Stefan Tangen
Dept. of Production Engineering
The Royal Institute of Technology
Stockholm, Sweden

emphasise the basic meaning of productivity. Hence, an

Abstract – Although the concept of productivity is a widely improper definition of productivity will often result in that
discussed subject by politicians, economists, managers and action is being misdirected [4].
media, it is often vaguely defined and poorly understood. In
practise, this lack of knowledge results in productivity The aim of this paper is to discuss and provide insight into
being ignored by those who influence production processes. the basic meaning of the concept of productivity as well as
The purpose of this paper is to discuss the basic meaning of the difficult question of how productivity is related to other
productivity as well as its relation to other similar terms. similar terms. The view of productivity within the Swedish
The findings are based on a review of the productivity industry is also investigated. A proposed terminology of
literature from the last decades and on two investigations terms frequently used synoumos to productivity is
undertaken in the Swedish industry. The paper explains the presented and evaluated, since it is believed that a common
ambiguous term productivity, how its defined in the grammar is important in order to be able take appropriate
Swedish industry and proposes a terminology on the actions to measure and improve productivity in today’s
subject. complex business environment.
The findings in the paper are based on a review of the
1. INTRODUCTION productivity literature from the past two decades and on
two investigations undertaken in the Swedish industry. In
The concept of productivity, generally defined as the the first study, 15 managers from five major manufacturing
relation between output and input, has been available for companies were interviewed about how their companies
over two centuries and applied in many different defined and measured productivity. The objective was to
circumstances on various levels of aggregation in the explore how the view of productivity differed between
economic system. It is argued that productivity is one of the different companies. The second study had the same
basic variables governing economic production activities, approach as the first one, but only concerned one company
perhaps the most important one [1]. However, at the same where 27 employees from top management to bottom line
time as productivity is seen as one of the most vital factors operators were interviewed. The objective was to see if the
affecting a manufacturing company’s competitiveness, view of productivity altered within the company.
researchers argue that productivity is often relegated to The paper is organised as follows. The second section
second rank, and neglected or ignored by those who
explains the term productivity and its differences to other
influence production processes [1,2,8,10]. A major reason similar concepts. The third section proposes a new
for this could be that many managers do not understand terminology. The forth section discusses how productivity
what the term productivity actually means. In fact,
is defined in the Swedish industry. The fifth section
productivity is frequently discussed by managers but rarely
concludes the paper.
defined, often misunderstood and confused with similar
terms, and seldom measured in an appropriate way, leading
to productivity being disregarded or even to that contra 2. PRODUCTIVITY – AN AMBIGUOS TERM
productive decisions are taken. According to Koss and Despite the confusion on the subject, several characteristic
Lewis, remarkably many managers who every day make features that represent the concept of productivity have
decisions about improving plant efficiency do not know been identified within this research. Generally speaking,
how to answer the simple question: “What do we really productivity is in industrial engineering defined as the
mean by productivity?”. It further appears to be a resistance relation of output (i.e. produced goods) to input (i.e.
to addressing this question [3]. Published research also consumed resources) in the manufacturing transformation
shows that productivity and similar terms are not used process. Productivity is therefore, on the one hand, closely
consistently [2]. connected to the use and availability of resources. This
Nevertheless, if we do not fully understand what means in short that productivity is reduced if a comapany’s
productivity is, how can we decide what productivity resources are not properly used or if there is a lack of them.
measures to use? How can we interpret them correctly? On the other hand, productivity is strongly linked to the
How can we know what action to take to improve creation of value. Thus, high productivity is achieved when
productivity? Evidently, the confusion surrounding the activities and resources in the manufacturing transformation
subject makes it necessary to further investigate and process add value to the produced products. Furthermore,
 Proceedings of the 7th Asia Pacific Industrial Engineering and Management Systems Conference (APIEMS2002), Taipei
the opposite of productivity is represented by waste, which change for reasons that have little to do with productivity,
must be eliminated in order to improve productivity. such as inflation and other external conditions that may
bear no relationship to the efficient use of resources. Miller
So far the term productivity may seem rather easy to argue that productivity is a more suitable measure to
understand, however, there are several implications which monitor manufacturing excellence in the long run rather
have caused much confussion. A common mistake is, for than profitability, since profits are influenced by many
instance, to use productivity synomous to measures of factors in a short-term perspective [6].
production, which refers to the amount of a product or
service produced. As a result of this confusion, people tend The term profitability clearly has a productivity component,
to believe that increased production, means increased but it is strongly influenced by the prices a company pays
productivity. This is not necessarily true. An important for its input and receives for its output. If a company can
point to keep in mind is that productivity is a relative recover more than the cost of its input from rising prices for
concept, which can not be said to increase or decrease its output, its profitability can be increased even in times
unless a comparison is made, either of variations from when its productivity is decreasing, see figure 1. That is
competitors or other standards at a certain point in time, or also a strong argument for productivity being expressed in
of changes over time. Basically, improvements in physical units (in quantities) instead of monetary units. In
productivity can be caused by five different relationships conclusion, productivity can be separated from profitability
[5]: by the price recovery [6].
? Output and input increases, but the increase in input is
proportionally less than the increase in output. Change in Change in Change in
? Output increases while input stays the same. product quantity revenue product price

? Output increases while input is reduced.

? Output stays the same while input decreases.
? Output decreases while input decreases even more. Change in Change in Change in
productivity profit price recovery

It is also important to understand the ambiguous nature of

productivity, since there exist several types of productivity
as well as different hierarchical levels which productivity Change in
Change in Change in
resource
can be discussed within. Almost any transformation process quantity
cost resource cost
within a manufacturing company is fed with several types
of input (e.g. labour, capital, material and energy) and emits
Figure 1. Productivity’s relation to profitability
more than one output (e.g. product A, product B). In turn
we must be able to separate partial productivity (i.e. output
Performance
related to one type of input) from total productivity (i.e.
output related to multiple types of input). Moreover, Many people who claim to be discussing productivity are
considering all the different hiarchical levels that exist in a actually looking at the more general issue of performance.
company it is not difficult to comprehend that, for example, While productivity is a fairly specific concept related to the
the management’s strategical perspective of productivity ratio between output and input, performance is a term
will usually differ from the more operational view of which includes almost any objective of competition and
productivity among operators at an assembly line. manufacturing excellence such as cost, flexibility, speed,
dependability and quality. However, as illustrated in figure
The literature show that the concept of productivity should
2, various performance objectives can have a large effect on
be distinguished from four other similar terms: profitability,
the productivity in an operation [7]:
performance, efficiency and effectiveness, which will now
? High-quality operations do not waste time or effort
be explained [3-8].
having to re-do things, nor are their internal customers
inconvenienced by flawed service.
Profitability
? Fast operations reduce the level of in-process
Perhaps the reason why companies tend to ignore the inventory between micro operations, as well as
importance of productivity is that they often link reducing administrative overhead.
productivity and profitability as one issue. Profitability is ? Dependable operations can be relied on to deliver
the overriding goal for the success and growth of any exactly as planned. This eliminates wasteful disruption
business, and is generally defined as a ratio between and allows the other micro operations to operate
revenue and cost (i.e. profit/assets). However, profitability efficiently.
as a performance measure mainly addresses shareholders as ? Flexible operations adapt to changing circumstances
the interest group and many researchers therefore claim that quickly and without disrupting the rest of the
using monetary ratios as productivity measures will result operation. Flexible micro operations can also change
in several shortcomings, for instance, induce short-termism over between tasks quickly and without wasting time
and discurage the customer perspective. Profitability can and capacity.
 Proceedings of the 7th Asia Pacific Industrial Engineering and Management Systems Conference (APIEMS2002), Taipei
External effects of industry. However, it is the combination of high values of
the five performance objectives Low price,
high margin,
both efficiency and effectiveness in the transformation
or both process that leads to high productivity. Thus, is it possible
for an effective system to be inefficient; it is also possible
Short delivery
Cost
for an efficient system to be ineffective.
lead time Dependable
delivery
High total
productivity
Speed
Dependability 3. THE TRIPLE-P MODEL
Fast Reliable
throughput operation
Internal effects of
the five performance
Based on the earlier descriptions of the terminology
objectives sourrounding productivity, the Triple-P model (figure 4)
Error-free Ability to has been developed to give a schematic view of how the
processes change
different terms are suggested to be used [10]. The model
Quality
Flexibility includes five terms; productivity, profitability, performance,
On-specification
effectiveness and efficiency, and explains how they are
Frequent new products
product/services Wide product range related to each other. Through the Triple-P model, the main
Volume and delivery
adjustments differences between these terms can easily be captured.
Figure 2. Productivity’s relation to performance objectives [7]
Effectiveness

Some researchers and managers see performance

objectives, especially quality, as a part of the concept of Performance Quality, delivery,
productivity, while they instead should se them as factors speed, flexibility
Profitability
affecting productivity. It is believed in this research that the Price recovery

confusion surrounding productivity will be even more Productivity

Output
complicated with a too broad view of productivity. If
productivity measures should include all types of Input
performance objectives, they are in grave danger of
becoming so complex that their usefulness as meaningful
measures of improvement become questionable.

Efficiency and effectiveness

Efficiency
The two terms effectiveness and efficiency render the
terminology even more complicated. There is no single Figure 4. The Triple P-model [10]
accepted view about these terms; however, effectiveness is
usually described as ‘doing the right things’, while Productivity is the central part of the Triple P-model and
efficiency means ‘doing things right’ [8]. Most researchers has a rather straightforward operational definition of
agree that efficiency is strongly linked to the utilisation of productivity as a ratio of output quantity (i.e. number of
resources and mainly influence the input of the productivity correctly produced products which fulfils their
ratio. This means that efficiency in manufacturing can be specifications) divided by input quantity (i.e. all type of the
seen as the minimum resource level that is theoretically resources that are consumed in the transformation process).
required to run the desired operations in a given system, Profitability is also seen as the relation between output and
compared to how much resources are actually used (see input, but includes influences from price-factors (i.e. price
figure 3). The efficiency ratio is rather simple to measure, recovery). Performance is the umbrella term of
whether it is based on time, money or other. manufacturing excellence and includes profitability as well
as non-cost factors such as quality, speed, delivery and
flexibility. Effectiveness is a term to be used when the
Efficiency =
Resources Expected to be Consumed /
Effectiveness = output of the manufacturing transformation process is
Actual Output / Expected Output
Resources Actually Consumed
focused, while efficiency represents how well the input of
the transformation process (i.e. resources) is utilised.
Upstream Transformation Downstream
Input Output
system process system

4. RESULT OF INVESTIGATIONS
Figure 3. Efficiency and effectiveness [8]
As expected, the result of the two empirical investigations
Effectiveness, on the other hand, is a more diffuse term and
confirmed previous research and showed that there was no
in most cases very difficult to quantify. It is often linked to
consensus of the view of productivity, neither between the
the creation of value for the customer and affects the output
the managers at the five companies nor among the
of the productivity ratio. In conclusion, a single focus on
employees at the particularly studied company. However,
efficiency does not seem to be a fruitful way to increase
productivity [9]. Unfortunately, this is often the case in
 Proceedings of the 7th Asia Pacific Industrial Engineering and Management Systems Conference (APIEMS2002), Taipei
the investigations did also reveal a number of other Unfortunately, it seems to be practically impossible to
interesting issues. create an exact definition of productivity that is applicable
and accepted within all areas of manufacturing.
In both studies, the interviewed people agreed in that is was Nevertheless, it vital that the basic features that
very important to establish a clear definition of productivity characterize the term are understood in industry as well as
within a company as well as within the industry in general. in the academia. Otherwise, the existing misinterpretations
A common opinion was that a definition would simplify on the subject will continue to cause problems and declines
comminucation and help employees to understand company in productivity.
goals, but a definition would also help both managers and
employees to take appropriate decisions to improve
6. REFERENCES
productivity. Nevertheless, a clear definition of productivity
had not been advocated in none of the studied companies. [1] H. Singh, J. Motwani, A. Kumar, “A review and
analysis of the state of the art research on productivity
In the first investigation, the managers presented various
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views on the meaning of productivity and numerous of
Systems, vol. 100, pp 234-41, 2000.
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that the manager’s opinions on the meaning of productivity [2] A. Kinnander and P. Gröndahl, “Productivity
were strongly influenced by the performance measures used development in manufacturing systems – a project
at each company. Many of the managers believed that they proposal within PROPER” Internal report, Stockholm:
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time they had difficulties in explaining the differences
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profitability that was mostly seen as the same thing as measuring what we really want” National Productivity
productivity. Review, vol. 12, pp 273-95, 1993.
At the particularly studied company in the second [4] J.W. Forrester, “Low productivity: it is a problem or
investigation, the lack of productivity definition had merely a symptom?” Handbook for productivity
unfortunately resulted in that the employees did not fully measurement and improvement, Cambridge:
understand the management’s goals for improvement, even Productivity Press, 1993.
though the goals had been specified in numbers. Many
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not defining the term was the difficulties in actually
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5. CONCLUSIONS
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