Productivity and Profitability Hardcopy

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Productivity andProfitability.


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Introduction.

What is Productivity?

Productivity is a measureof output from a production process, per unit of input. Forexample, Labour Productivity is typically measured as a ratio of

output per labor-hour, an input. Productivity may be conceived ofas a metric of the technical or engineering efficiency ofproduction. As such, the emphasis is on quantitative metrics ofinput, and sometimes output. Productivity is distinct from metricsof allocative efficiency , which take into account both the monetaryvalue (price) of what is produced and the cost of inputs used, andalso distinct from metrics of profitability , which address the

difference between the revenues obtained from output and theexpense associated with consumption of inputs.
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What is Profitability?

Profitability is expressed in terms of several popularnumbers, that measure one of two generic types of performance:"how much they make with what they've got" and "how much theymake from what they take in It is basically an accountingconcept intended to measure the surplus of revenue overexpenses for a particular period of time. Reported on the

profit-and-loss financial statement, it is an indicator of the health of a company.

Profit is calculated by adding revenue, subtracting allcosts of sales and all expenses (including depreciation

and other non-cash expenses) to calculate the profitbefore tax. Subtract taxes from profit before tax to obtainnet after-tax profit, which is also called net income. Profitcalculations may vary by industry and tax jurisdiction.


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Productivity and Profitability

The pressure for ever-increasing profits is intense and unrelenting today. And accommodating Wall

Street, coping with local competitors and thriving in the global economy make bottom-line efficiency anabsolute day-to-day business essential.But most companies have been squeezing costs and doublingdown on productivity-enhancing tools, services, practices and processes for years now. So how can theywring any more excess out of their organizations even if theyre zealously efficient?

Thats a very good que stion and the right one to ask, at least from our perspective.

The answer is both simple and complex.

Simple because even though weve been continuously modernizing and streamlining to make things moreefficient, the average business is still using old t echniques and hasnt yet married its previous gains to allthe new opportunities currently available for profitable productivity.

Complex because generating constant productivity growth is hard, and finding the right technology to helpisnt always easy.

Our view is that we need to combine the old methods with a new digital model that includes real-timetracking of work. This would provide us with immediate knowledge of whos doing what on a team or in anorganization, and where each project actually stands. If we could simply understand the specific thingseach person is responsible for delivering and get the information on demand imagine how far aheadwed be and how many good and fast decisions we could make.

We dont need a lot of technology bell s and whistles or reams and screens of exotic information toadvance productivity further. Email chatter isnt necessary; nor is social dialogue or meeting minutes. Justthe state of the deliverables. Theres no better way to improve productivity than knowing where it livesand whos performing and where its lacking and whos slacking inside a company.

In the end, if we can successfully combine old and new efficiency approaches, well re -define productivityfor the 21st century. And from here on out, the new equation for bottom-line improvement should be:Productivity Growth Equals More Profit With Less Effort.

Throughout history especially modern industrial society weve seen inefficiency square off against an

intense need for more profits with less effort. In almost every case, a cutting-edge collaborative tool orsweeping community process helped boost efficiencies and spread knowledge, while increasing profitsand reducing risk.

Lets look at the shipping industry in late 17th century England to see how this worked. Back then, shipsand their cargo were insured using the combined expertise of individuals who would regularly congregateat coffee bars on Exchange Alley in London. The terms of each deal would revolve around the collectiveeffort of those in attendance; and they would base each insurance agreement on a variety of factors,


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including: the shipping routes, the weather, the captains, the commodities being transported, and theships themselves. Those that chose to become guarantors would sign under the stated terms andbecome the underwriters.

This loosely structured process was filled with inefficiencies and fraught with risk. And with no market

maker for insurance, the captain was apt to pay exorbitant rates.

Edward Lloyd, who ran one of these coffee houses in London, clearly grasped the problems with shippinginsurance. To remedy things, he began accumulating and publishing shipping data. The postedinformation started attracting the best and brightest minds in the shipping business. Soon, a group formedLloyds of London and became a brokerage that guaranteed the investments of their underwriters. Theircareful indexing of risk brought rates down and pushed profits up.

This marked the beginning of the end for the inefficiencies that plagued shipping insurance. It alsotriggered a massive expansion in shipping, because unfettered access to data enhanced visibility andtransparency, and this, in turn, reduced insurance risk.

Now lets fast forward approximately 300 years, to the fledgling financial markets in America. Industry wasthriving, and investing in railroads, oil and manufacturing was a rich mans endeavor. Less than 5 percentof Americans were invested in company stocks, and to buy equities was a time-consuming and expensiveeffort.

Over the course of the 20th century, groups of brokers, analysts and experts formed firms and beganadvising investors based on their know-how and observations. The firms basically operated in staccatointeractions with their clients. There was no continuous data flow, and no real-time monitoring of themarkets.

The advent of mutual funds brought more ongoing research and more investors to the financial markets.But significant inefficiencies still remained.

The rise of electronic stock exchanges has begun erasing those inefficiencies. Interactive online tools areputting real-time data, analysis and control in the hands of an ever-broader swath of investors. And, at alltimes, investors can see the specific performance of every component of their stocks right down to theminute-by- minute moves of each share. This new technology, combined with Wall Streets advice,expertise and recommendations, empowers investors, puts them on equal footing with brokers, andallows them to make better portfolio decisions more expeditiously.

The result is greater market efficiencies, increased market participation and trading volume, cheapertrades, and a more profitable Wall Street.

Work efficiency will surge in companies around the world when real-time tracking of deliverables theequivalent of Edward Lloyds publication of aggregated shipping insurance data and the rise of electronicstock exchanges that provide investors with access to an abundance of on-demand financial data isfinally embraced.


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Example

Work systems usually have to be appraised in relation to set objectives. A primary objective is to increaseproductivity. Productivity increases help to ameliorate the attendant inflationary pressures that drive thevicious cycle of increasing costs. In this work, we examine the performance of two print media worksystems in an environment of structural reform in a developing economy. The first is privately owned,while a government agency owns the majority stake in the second. We review the productivity andprofitability trends and recommend a relaxation of the existing rigid pricing regimes imposed by theregulatory agency. Differences arising from the performance of both organisations are partly traceable tothe quality of the work force, level of capacity utilisation, pricing regimes, technology of productionemployed and skills development training schemes adopted.


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Case study

itle:

The effects of productivity on profitability: a case study at firm level usingan activity-based costing approach

Author: Rantanen, Hannu

Otherauthor: Lappeenranta University of Technology, Industrial Engineering, Logistics

Date: 1995-08-04


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Abstract: Productivity and profitability are important concepts and measuresdescribing the performance and success of a firm. We know that increase inproductivity decreases the costs per unit produced and leads to betterprofitability. This common knowledge is not, however, enough in themodern business environment. Productivity improvement is one means

among others for increasing the profitability of actions. There are manymeans to increase productivity. The use of these means presupposesoperative decisions and these decisions presuppose informationabout theeffects of these means. Productivity improvement actions are in generalmade at floor level with machines, cells, activities and human beings.Profitability is most meaningful at the level of the whole firm. It has beenvery difficult or even impossible to analyze closely enough the economicalaspects of thechanges at floor level with the traditional costing systems. Newideas in accounting have only recently brought in elements which make itpossible to considerthese phenomena where they actually happen. The aimof this study is to supportthe selection of objects to productivity

improvement, and to develop a method to analyze the effects of theproductivity change in an activity on the profitability of a firm. A framework for systemizing the economical management of productivity improvement isdeveloped in this study. This framework is a systematical way with twostages to analyze the effects of productivity improvement actions inanactivity on the profitability of a firm. At the first stage of the framework, asimple selection method which is based on the worth, possibility and thenecessity of the improvement actions in each activity is presented. Thismethod is called Urgency Analysis. In the second stage it is analyzed howmuch a certain change of productivity in an activity affects the profitabilityof a firm. A theoretical calculation model with which it is possible to

analyze the effects of a productivity improvement in monetary values ispresented. On the basis of this theoretical model a tool is made for theanalysis at the firm level. The usefulness of this framework was empiricallytested with the data of the profit center of one medium size Finnish firmwhich operates in metal industry. It is expressedthat the framework providesvaluable information about the economical effects of productivityimprovement for supporting the management in their decision making.


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]Economic growth and productivity

Components of economic growth (Saari 2006)

Production is a process of combining various material inputs (stuff) and immaterial inputs (plans, know-how) in

order to make something for consumption (the output). The methods of combining the inputs of production in

the process of making output are called technology. Technology can be depicted mathematically by the

production function which describes the relation between input and output. The production function can be

used as a measure of relative performance when comparing technologies.

The production function is a simple description of the mechanism of economic growth. Economic growth is

defined as any production increase of a business or nation (whatever you are measuring). It is usually

expressed as an annual growth percentage depicting growth of the company output (per entity) or the national

product (per nation). Real economic growth (as opposed to inflation) consists of two components. Thesecomponents are an increase in production input and an increase in productivity . [2]

The figure illustrates an economic growth process (exaggerated for clarity). The Value T2 (value at time 2)

represents the growth in output from Value T1 (value at time 1). Each time of measurement has its own graph

of the production function for that time (the straight lines). The output measured at time 2 is greater than the

output measured at time one for both of the components of growth: an increase of inputs and an increase of
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productivity. The portion of growth caused by the increase in inputs is shown on line 1 and does not change the

relation between inputs and outputs. The portion of growth caused by an increase in productivity is shown on

line 2 with a steeper slope. So increased productivity represents greater output per unit of input.

Accordingly, an increase in productivity is characterised by a shift of the production function (steepening slope)

and a consequent change to the output/input relation. The formula of total productivity is normally written as

follows:

Total productivity = Output quantity / Input quantity

According to this formula, changes in input and output have to be measured inclusive of both quantitative and

qualitative changes .[3] In practice, quantitative and qualitative changes take place when relative quantities and

relative prices of different input and output factors alter. In order to accentuate qualitative changes in output

and input, the formula of total productivity shall be written as follows:

Total productivity = Output quality and quantity / Input quality and quantity

[edit ]Main processes of a company

Main processes of a company (Saari 2006)

A company can be divided into sub-processes in different ways; yet, the following five are identified as main

processes, each with a logic, objectives, theory and key figures of its own. It is important to examine each of

them individually, yet, as a part of the whole, in order to be able to measure and understand them. The main

processes of a company are as follows

real process

income distribution process

production process
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monetary process

market value process

Productivity is created in the real process, productivity gains are distributed in the income distribution process

and these two processes constitute the production process. The production process and its sub-processes, the

real process and income distribution process occur simultaneously, and only the production process is

identifiable and measurable by the traditional accounting practices. The real process and income distribution

process can be identified and measured by extra calculation, and this is why they need to be analysed

separately in order to understand the logic of production performance.

Real process generates the production output from input, and it can be described by means of the production

function. It refers to a series of events in production in which production inputs of different quality and quantity

are combined into products of different quality and quantity. Products can be physical goods, immaterial

services and most often combinations of both. The characteristics created into the product by the manufacturer

imply surplus value to the consumer, and on the basis of the price this value is shared by the consumer and the

producer in the marketplace. This is the mechanism through which surplus value originates to the consumer

and the producer likewise. Surplus value to the producer is a result of the real process, and measured

proportionally it means productivity.

Income distribution process of the production refers to a series of events in which the unit prices of constant-

quality products and inputs alter causing a change in income distribution among those participating in the

exchange. The magnitude of the change in income distribution is directly proportionate to the change in prices

of the output and inputs and to their quantities. Productivity gains are distributed, for example, to customers as

lower product sales prices or to staff as higher income pay. Davis has deliberated [4] the phenomenon of

productivity, measurement of productivity, distribution of productivity gains, and how to measure such gains. He

refers to an articl e [5] suggesting that the measurement of productivity shall be developed so that it will indicate

increases or decreases in the productivity of the company and also the distribution of the fruits of production

among all parties at interest. According to Davi s, the price system is a mechanism through which productivity

gains are distributed, and besides the business enterprise, receiving parties may consist of its customers, staff

and the suppliers of production inputs. In this article, the concept of distribution of the fruits of production by

Davis is simply referred to as production income distribution or shorter still as distribution.

The production process consists of the real process and the income distribution process. A result and a

criterion of success of the production process is profitability. The profitability of production is the share of the

real process result the producer has been able to keep to himself in the income distribution process. Factors

describing the production process are the components of profitability, i.e., returns and costs. They differ from

the factors of the real process in that the components of profitability are given at nominal prices whereas in the

real process the factors are at periodically fixed prices.
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Monetary process refers to events related to financing the business. Market value process refers to a series of

events in which investors determine the market value of the company in the investment markets.

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