Transcript a practical interpretation of productivity

A PRACTICAL INTERPRETATION
OF PRODUCTIVITY*
Andrew S Downes PhD
Professor of Economics and Pro Vice Chancellor
(Planning and Development)
University of the West Indies
March 21, 2013
*Human Resource Professionals of Antigua and Barbuda Luncheon
STRUCTURE OF PRESENTATION





Defining Productivity
Relevance of Productivity Growth
to Antigua and Barbuda
Enhancing Productivity
Caribbean Evidence on the Effects
of Productivity Initiatives
Beyond Productivity
DEFININIG PRODUCTIVITY


Productivity is defined as the extent to
which an organization is able to produce
a range of goods and services of a
specific quality utilizing a range of
resources (i.e. raw materials, machinery
and equipment, energy, human power
and skill)
It involves measures/indicators of OUTPUT
and measures/indicators of INPUT. It is a
“real value” ratio concept.

Expressed as a ratio given as:
Output of Goods and Services of a specific
Quality divided by Input of Resources Used
We can have a partial measure of productivity ( eg
labour productivity, energy productivity) or a total




measure of productivity which combines all the inputs
using a weighted average. A family of partial
measures can also be used.
If the output of a manufacturing firm is valued at $
100, 000 and the labour used amounts to 15000
person-hours ( 125 persons) then the level of labour
productivity is given as $6.67 per person-hour ($800
per person).
Partial measures are more commonly used
than total measures


Productivity can also be defined as
the ability of an organization to achieve
its goal(s) given the minimum use of
resources.
In this case it is specified as the ratio of
effectiveness relative to efficiency



Effectiveness relates to the degree to which a
productive unit/individual can achieve a given goal or
objective. It focuses on the “output” or
accomplishment ( goal achievement) of the
organization ( e.g. sales growth for the month)
Efficiency is defined by the degree of success in
making the minimum use of available resources
associated with the production of goods/services or
the specified goal (input focus)
These form part of the Performance of an
Organization or Individual ( eg Key Performance
Indicators-KPIs)

In practice, several partial measures of
productivity (with implicit assumptions
relating to price changes) are used:






Revenue or sales/wages or labour cost
Value added/number of persons employed
Output/energy used
Sales/persons or wages
Output/machine hours
Total measures would focus on the total
costs of producing an output ( eg
Revenue/Total costs)
RELEVANCE OF PRODUCTIVITY
GROWTH TO ANTIGUA & BARBUDA



Enhancing productivity at all levels of the
economy (department, organisation, sector, industry,
nation) is vital to rapid economic growth, a
higher standard of living, international
competitiveness and foreign exchange
generation, inflation control, capital
investment and employment generation
For example, the profitability of a firm depend on
(1) price recovery and/or (2) productivity
increases.
In a highly competitive environment Price
Recovery can be a difficult strategy to adopt to
enhance profitability. Reliance must be placed on
increasing labour productivity and improving output
quality.


International Price Competitiveness,
that is, the ability of an enterprise to sell its
products at a lower price in the international
market than other producers is partly
determined by labour cost (i.e., REAL UNIT
LABOUR COSTS – RULC)
RULC is the ratio of Real Wages to Labour
Productivity

With increased productivity




Companies benefit through increased sales,
competitiveness and profit, less wastage, absenteeism,
overtime and turnover;
Employees in the enterprise/organisation also benefit via
better wages/salaries, bonus payments, working conditions,
career prospects and greater job security;
Customer/clients benefit via lower prices and improved
quality
Society benefits as government revenue is increased with
increased sales, employment and profit. The revenue is
used to build roads, parks, housing, etc

Relevant Features of the Antigua & Barbuda economy:
 Declining trend in economic growth since 1977 ( see Fig)
 High Volatility in economic activity
 Recession in recent years 2009-2011 ( over 20 %
contraction)
 Decline in ratio of exports of goods and service to GDP since
1990 (1990-89%, 2000-58%, 2010-43%)
 High dependence on services sector production ( esp
tourism)
 IMF 36 month Stand-by Arrangement in place the need to
“focus on enhancing productivity” and to “improve
competitiveness”
Antigua & Barbuda Economic Growth 1977-2011
20
15
Real GDP and Per Capita (%)
19
77
19
80
19
83
19
86
19
89
19
92
19
95
19
98
20
01
20
04
20
07
20
10
10
5
0
-5
-10
GDP grow th (annual %) NY.GDP
GDP per capita grow th (annual %
NY.GDP.PCAP.KD.ZG
2 per. Mov. Avg. (GDP grow th (a
NY.GDP.MKTP.KD.ZG)
Linear (GDP grow th (annual %)
NY.GDP.MKTP.KD.ZG)
ENHANCING PRODUCTIVITY


Several tools and techniques exist for
enhancing productivity (and performance) in
organisations. These form part of the
Productivity Management Process
These tools and techniques fall into two (2)
basic groups:


Industrial engineering – economic techniques
Human or behavioral techniques

Selected Engineering – Economic
techniques




Just-in-time production and distribution
management
Business Process Re-engineering (BPR)
Computer-assisted Design and Engineering
(CAD/CAE)
Balanced Scorecard Management (financial,
customer, internal processes, learning and growth
activities/perspectives of a firm’s operations)



Activity-based Costing and Management
Benchmarking and Inter-firm Comparison
Six Sigma

Selected Human- Behavioural
Techniques






Total quality management
Human resource management (skills training,
teamwork, etc)
Gain-sharing Schemes (Scanlon, Rucker,
IMPROSHARE, goal-sharing, etc)
Organisational Development
Strategic planning
Customer relationship management

These tools and techniques emphasize the
following factors in improving productivity
and performance:



Continuous improvement of business
processes
Focus on the customer
Maintaining a high quality product





Streamlining production processes (work
flows and designs)—innovation and
technology use
Participative management and employee
involvement in decision-making
Communication and information flow
Incentives/productivity based pay
The implementation of these initiatives can
have an impact on such organisational
performance variables such as:







Profitability
Market share
Absenteeism
Turnover
Return on investment
Degree of rework, rejects and errors
In order to boost organisational performance,
productivity enhancing measures must be
specially tailored to the culture and needs
of the organisation
CARIBBEAN EVIDENCE


Push for increasing productivity started in the
1990s – Jamaica Productivity Centre,
Barbados National Productivity Council,
Productivity Committee in Trinidad and
Tobago
Various productivity schemes have been
introduced but little empirical analysis of their
impact

Barbadian studies:

Downes and Alleyne (1998): “Evaluation of
Gainsharing Schemes”




A survey of companies using gainsharing schemes
(Scanlon, Rucker, IMPROSHARE, Performance-based
schemes) in 1997
Focus on ‘medium’ and ‘large’-sized firms
Rucker and KPI schemes mainly used
Schemes had a positive impact on labour and overall
productivity, cost reduction, product quality,
competitiveness and labour management relations



Gainsharing schemes were complemented by HRM
innovations such as TQM, work teams and work reorganisation
Employees indicated that the schemes had a positive
impact on their motivation to work harder, individual
productivity and commitment to the organisation
Bannister (2004): Impact of Performance-based
Incentive Plans on Organisational Performance


Update of the previous study
Results indicate a significant impact on

Labour and overall productivity






Commitment to organisation
Teamwork/cooperation with others
Willingness to help management
Goal setting
Need to link pay to performance
Downes (2004): Barbados National Bank Study

Performance based payment scheme indicated a
‘significant’ impact on:






Quality of work
Performance of department/branch
Linking pay to performance
Willingness to help manager/supervisor
Goal setting
Cooperative team work


Sobers (1998): Bondhus Barbados Ltd study:
 The incentive-based scheme had the following
effects:
 Low staff turnover
 High market penetration
 Increased profitability and sales
 Reduced wastage/spoilage
Super Centre Supermarket (2008)
 The performance-based payment scheme resulted
in
 Reduced absenteeism and wastage
 Greater communication between management
and staff
 Greater employee awareness of the impact of
their productivity on company performance



Increased savings on pensions, medical insurance
and national insurance
Better base for negotiations with union
Alleyne-Doherty-Howard (2005) – HRM and
Performance in the Hotel Industry


Qualitative study of HRM on performance as perceived
by managers
HRM practices (organisational commitment, job
satisfaction, flexibility of staff, ability to move staff) seem
to have some positive impact on organizational
performance (innovation, financial performance, quality
of service, market share and labour productivity)

KPMG (2009) provided an assessment of a
range of performance management systems
(general management and HRM systems – including
Gain-sharing schemes) in 52 companies

Main general management systems
introduced:

MIS, environmental disaster management,
customer relations management, knowledge
management
These systems had a positive impact on overall
and labour productivity, employee motivation,
teamwork/cooperation, customer service

Main HRM systems used:
Occupational health and safety, training and
development, employee communication/information
system, HRIS and job evaluation
These had a positive impact on labour productivity,
employee morale, teamwork/cooperation, employee
motivation
Main Gain-sharing systems used:



profit sharing, KPI/Family Measures, Team-based
incentives
These had a positive impact on labour productivity,
employee motivation, teamwork/cooperation, profitability

Jamaican Studies

Main study on Jamaica has been undertaken by
Noel Cowell: The Use of Workplace Innovations in
a Developing Economy: The Case of Jamaica (PhD
thesis, 2000)

Focus on Work Systems Innovations (TQM, Quality
Circles, Job Design and Teams) and HRM Practices
(flexible employment, high commitment and flexible
compensation) on Business Performance (marketing,
sales, profitability, market share, quality of output and
customer satisfaction)


TQM was adopted by several firms and had a significant
impact on performance
Linking performance appraisal with pay, the use of
grievance procedures and the use of non-monetary
awards for performance together have some positive
impact on organisational performance as perceived by
managers

Several key factors have affected productivity
in Jamaica at the national and
organisational levels:



Shift to services and growth in informal sector
with low productivity levels
Poor worker-management relations/distrust by
workers (Carter’s Why Workers Won’t Work,
1997)
Deficiencies in the education and training system
(low level of certification and skill level)








Outdated plant/machinery
Plant layout
Inadequate raw materials
Absence of a clear link between effort and reward
Weak social infrastructure (leading to lateness,
absenteeism, lethargy)
Absence of quality standards/measures
High incidence of poverty, crime and violence
Dependence on remittances and overseas work
BEYOND PRODUCTIVITY

Recent study by the Institute for Corporate
Productivity identified five(5) key factors
which have the potential to raise
productivity within organisations:




Effective leadership
Establishment of a high
productivity/performance corporate culture
Employee engagement practices – whereby
workers mentally and emotionally invest in
their work and contribute to the
organisation’s success
Training and development



Compensation and benefits program which include
employee health/wellness programs. These show
care on the part of employers and boost the physical
and well-being of workers
Organisations are now focusing on performance
measures which relate to the achievement of
several dimensions of its operations ( productivity,
quality, efficiency, profitability, customer satisfaction,
etc)
The Balanced Scorecard and Performancebased Pay are two such examples.

In a high competitive dynamic business/economic environment,
organisations are seeking to reduce costs or seek competitive
advantage by
Enhancing product quality

Being close to the customer
( customer intimacy)

Achieving Operational excellence




These require attention to all aspects of the organisation’s
activities ( public and private)
Organisations have or will therefore focus on Performance
Management rather than Productivity Management –esp
in a services oriented economy like Antigua & Barbuda
Human Resource Professionals will therefore have a
critical role to play in the process becoming strategic
partners in the implementation of the new focus.
Thank you very much