By: Barry Cobb
Every business owner strives to make a profit. As a business owner, one key to maximizing profit is the efficient use of labor and other resources such as materials and energy to produce your product or service. It seems simple, but how can you measure whether these resources are actually productive?
Productivity is the ratio of the product or service you provide (the output), compared to the materials and/or labor used to create the products or services (the input). In other words, output is the product or service provided — such as shirts produced by the Wise Guys screen printing shop, barrels of beer brewed by White River Brewing Company, or roller coaster rides at Silver Dollar City. Anything that adds to the cost of the product or service is an input. Inputs for the businesses mentioned above might include gallons of ink for the screen printer, pounds of barley for the brewery, and kilowatt hours of electricity for the theme park. Additionally, employee labor hours are an input for each of these businesses.
Let’s use a specific example to illustrate productivity more clearly. Suppose you operate a restaurant and two of the primary costs (inputs) in serving meals (output) are employee labor hours and electricity. Let’s say you served 4,700 meals last month and 5,000 meals this month. And let’s say you utilized 975 employee labor hours last month and 1,000 hours this month.
Based on labor alone, which month was more productive?
These are the questions business owners need to answer in order to be successful. In the first month, your labor productivity was 4,700 meals divided by 975 labor hours (or 4.82 customer meals per labor hour). In the second month, this same equation gives us 5,000 divided by 1,000, equating to 5 customer meals per labor hour. In the current month, you spent more for employee labor, but used that labor more efficiently, resulting in a 3.7 percent increase in productivity.
Measuring productivity in this way allows you to judge whether or not operational changes are working. If a restaurant makes changes to the layout of its dining room or kitchen to allow employees to work more efficiently, calculating productivity before and after the change is a way to evaluate this potential process improvement.
Productivity can be calculated for non-labor inputs as well. Continuing with the example above, suppose 9,900 kilowatt hours were used to produce the 4,700 meals last month, for energy productivity of 0.47 customer meals per kilowatt hour. If 10,000 kilowatt hours of electricity were used to produce the 5,000 meals this month, energy productivity for the month is 0.50 customer meals per kilowatt hour — a 5 percent increase in energy productivity. Measuring energy productivity can lead a restaurant to implement ideas for producing a meal using less electricity.
This example illustrates that simply monitoring the usage of resources like labor and energy doesn’t give a complete picture of efficiency. Although more inputs (costs) were used in both cases, the increase in the number of customer meals served was significant enough to improve productivity. Increased inputs (resources) resulted in increased outputs (services), which may lead to greater profit.
Profit is one measure of business performance. Implementing productivity measurements can help you determine whether the resources used to create your product or service are utilized efficiently. Monitoring productivity over time can help you recognize methods and processes that work most effectively for your business.
Barry Cobb is Interim Department Head in the Department of Management at Missouri State University. He holds a Ph.D. from the University of Kansas and conducts research and consulting in the areas of operations and supply chain management.
This article appeared in the January 8, 2016 edition of the News-Leader and can be accessed online here.