Return to Productivity


There are blizzards of performance measures available to managers, government ministers, academics and economists – but only a few are the most useful for addressing the biggest peacetime issue facing all nations:




  • The standard definition is:

    Productivity  =  Net output volume   =  Gross output – Output waste

                                      Gross input volumes          Net inputs + Inputs waste

  • This ratio is useful at process and task levels within any organisation as long as a single product is involved

  • But it becomes meaningless when several products – goods or services – are involved, as arises with most organisations and all nations, regions or sectors

  • Mixing or aggregation of volumes of different product outputs and/ or different inputs – labour numbers/ hours/ quality, material volumes/ quality and capital volumes –  is either impossible or can hide a multitude of sins and paint pictures far from reality

  • So one should ignore all productivity claims at such higher levels and seek other measures which reflect overall performance e.g. resource waste and  financial productivity measures such as RoCE (Return on Capital Employed), RoS (Return on Sales) and Sales/ Employee cost



  • The cost of any one product should be known not only to establish the unit’s selling price but also to provide a reference point that any future productivity improvement initiatives must beat

  • The unit cost formula is the inverse of the total productivity ratio, with the mix of all inputs used converted into actual costs so they can be added together viz:

               Unit costs  =   Total input costs     =    Gross (L + M + C) costs

                                              Total sold output               Net output volume

  • L = Labour        M = Materials        C = Capital



  • Efficiency and Effectiveness are words often confused

  • Efficiency measures how well present methods are being carried out – how close a team, whether at task, process or organisation level, is working to its capacity

            Efficiency   =         Actual output volume         =    80% say

                                             Maximum output volume

  • Efficiency thus measures existing capacity usage and possible operator training or capital investment needs

  • The more efficient a supplier is, the lower its unit costs will be – this increases profit margin headroom in the private sector and releases extra funds to deal with more customers in the public sector

  • However, efficiency can only be measured sensibly at process or task levels, often by just calculating the maximum output possible from their bottleneck on output volumes – clearly, this is not possible at any multi-product organisation (e.g. a hospital or supermarket) – even less so at national level

  • N.B.1 – In the private sector, a supplier can be very efficient but still go bust if customers don’t want what it offers them

  • N.B.2 – In the public sector, most service units are expected to improve their efficiency levels each year – the problem has been that targets set were for 1% or 2% improvements per annum which is well below what is needed or possible – and how do they measure their actual efficiency levels anyway?



  • Effectiveness measures how well a supplier meets its customers’ needs – in particular, what those customers think of what the supplier offers them

      Effectiveness  =  Customers’ ratings of actual outcomes  =  60% say

                                                 Customers’ requirement (= 100)

  • Customers’ views can be surprisingly different to what a supplier thinks they are

  • They can also be very different to the supplier’s own views on what it offers them

  • But, if customers don’t want what a supplier offers them, whether because of price, quality or service levels, something has to change, and fast

  • Otherwise, those same customers can soon become ex-customers



1 comment

    • Tamsin Stanley on 27 April 2017 at 4:25 PM
    • Reply

    Very interesting explanation. Thanks.

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