Productivity and Competitiveness in Supply Chain

A global marketplace for products and services means more customers and more intense competition. In the broadest terms, we speak of competitiveness in other countries rather than in other companies. That’s because how effectively a nation competes in the global marketplace affects the economic success of the nation and the quality of life for its citizens.

The OECD (Organisation for Economic Co-operation and Development) defines competitiveness as “the degree to which a nation can produce goods and services that meet the test of international markets while simultaneously maintaining or expanding the real incomes of its citizens.” The most common measure of competitiveness is productivity.

An increase in productivity allows wages to grow without producing inflation, thus raising the standard of living. Productivity growth also represents how quickly an economy can expand its capacity to supply goods and services.

Productivity is calculated by dividing units of output by units of input.

Productivity = Output / Input

Output can be expressed in units or dollars in a variety of scenarios, such as sales made, products produced, customers served, meals delivered, or calls answered.

Single-factor productivity compares output to individual inputs, such as labor hours, investment in equipment, material usage, or square footage.

Multifactor productivity relates output to a combination of inputs, such as (labor + capital) or (labor + capital + energy + materials). Capital can include the value of equipment, facilities, inventory, and land.

Total factor productivity compares the total quantity of goods and services produced with all the inputs used to produce them. These productivity formulas are summarized. Note when several factors are included in a formula, they should be expressed in common terms, such as dollars.

The most common input in productivity calculations is labor hours. When a publication quotes productivity rates, it is referring to labor productivity when not otherwise stated. Labor is an easily identified input to virtually every production process. If labor is used as the basis for productivity calculations consistently over time, changes in other factors of production will be reflected in the changes in labor.

There are many ways in which productivity statistics can be misleading. Examining the formula for productivity, output/input, it becomes apparent that productivity can be increased in different ways. For example, a country or firm may increase productivity by decreasing input faster than output. Thus, although a country or firm may be retrenching, its productivity is increasing. Seldom is this avenue for increasing productivity sustainably.

Productivity statistics also assume that if more input were available, output would increase at the same rate. This may not necessarily be true, as there are limits to output in addition to those on which the productivity calculations are based.

Furthermore, productivity emphasizes output produced, not output sold. If products produced are not sold, inventories pile up and increases in output can accelerate a company’s decline. Finally, productivity is a relative measure, which is why statistics provided in government reports typically measure percent changes in productivity from month to month, quarter to quarter, year to year, or over several years.

Calculating Productivity

Osborne Industries is compiling the monthly productivity report for its board of directors. From the following data, calculate (a) labor productivity, (b) machine productivity, and (c) the multifactor productivity of output per dollar spent on labor, machine, materials, and energy. The average labor rate is $15 an hour, and the average machine usage rate is $10 an hour.