Page 21 - DMGT501_OPERATIONS_MANAGEMENT

Unit 1: Introduction to Operations Management

outputs can be measured either in money terms or the number of units produced, provided the Notes
units can be measured in the same units.

Multiple Factor Productivity = Output (units or value of units)/[Labor + Capital + Materials +
Energy + Other]
When more than one input is used for each factor, it is called 'partial'. For example, the Partial
Productivity Index of labour is measured by dividing the market value of goods and services
produced during the year in the economy as a whole or a particular industry or a firm and
dividing it by the number of man-hours taken to produce the goods and services.
Outputs are sometimes difficult to define and measure.

Example: The productivity of a fast-food restaurant could be measured in terms of
customers served per hour or by the number of items sold. Both the measures can be misleading
because customers may order more than one item and restaurants sell various items (such as
drinks, sandwiches, and ice cream) that have different values.
Another issue is that even within the firm, customers of many processes are internal customers,
making it difficult to assign a rupee value to the value of process output.

Total Factor Productivity

Total Factor productivity is the year-by-year change in the output where a number of factors are
taken into consideration. It is the attempt to construct a productivity measure for an aggregation
of factors. Such an aggregation requires additional hypothesis to make it meaningful. These
other factors consist not only of investment for education, training, research and development,
but also of non quantifiable factors such as the labour relations, climate and worker and
management attitudes towards productive efficiency and competitiveness.

Total factor productivity is a more accurate indicator of the economic efficiency of a firm,
industry or nation than labour productivity. There are some other limitations to the definition
of "Total factor productivity".

Example: It might be the investment made in human beings to raise the quality of
labour, or that made to improve productive knowledge through research and development or
by the introduction of organizational, managerial and social innovations.
Economic productivity will depend also on pricing and demand. If consumers require fewer
products than can be produced, plants will not work at full productive capacity. Thus, economic
productivity can well fall with decreasing demand and prices.
Another limitation of this definition is that 'productivity' defined in this manner does not
identify whether the change is due to new machinery or more skilled labour force. Both
technological and market elements interact to determine economic productivity.

1.7.2 Enhancing Productivity to Gain Competitiveness

Although labour and multifactor productivity measures can be informative, they also can be
deceptive when applied to a firm at process levels.

Example: If a firm decides to transfer some of its work to outside suppliers and lay off
some of its own workforce, the labour productivity will increase. This is because the value of the
firm's total sales (the numerator) remains unchanged while the number of employees (the
denominator) drops.

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