Free Trade-Offs Related To Inputs In Productivity Essay Example
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Trade-offs related to inputs in productivity
Productivity is basically the ratio between ‘outputs’ and ‘inputs of a company/firm’s production process. Inputs are converted into outputs during the process. This assignment looks at the trade-offs involving the inputs to productivity.
Input and output factors in productivity calculations
Irrespective of type of industry or scale of operations, input factors include: labor (labor-hours or full-time equivalents); capital goods (machines, equipment) and resources (employees, capital, raw materials and power). Output factors are specified in terms of physical volumes (number of units or tons produced). Inputs and outputs are quantifiable in manufacturing industries, while in service firms difficulties arise in the quantification.
Strategies adopted by firms to increase productivity
Among several strategies to increase productivity, firms commonly adopt: (i) Increase production using the same or less amount of resources; (ii) Reduce the amount of resources used, while keeping production at the same level or increasing it; (iii) Allow usage of more resources, as long as production grows at a faster rate; and (iv) Allow production to decrease, as long as the amount of resources used is reduced at a higher rate. The company producing more with a given set of inputs or using fewer inputs to produce the same output has an advantage over the company producing less (Bruce Chew, 1988).
Trade-offs involving inputs to productivity
Trade-offs are discussed with regard to major inputs to productivity
1. Labor-hours: By making employees to work harder and produce more units, for the same wages, productivity can be increased. But there is an upper limit to how much an employee can produce in a given time. At the same time, quality of products deteriorates and defective output is generated with higher production by same employee. Squeezing higher production through labor-hours, thus would be a trade-off between quantity and quality. Most of the firms focus on direct labor-hours, neglecting the non-labor component which is going up. With mechanization and automation, labor content in operations has become a minor cost element, while non-labor component involving employees working in data processing and administration are going up. Trade-off between labor and non-direct labor has to be considered while measuring productivity.
2. Machines and equipment: By increasing utilisation rate of machines and equipment, a firm can enhance production and thus achieve higher productivity. At the same time, higher utilisation results in faster wear and tear and increased maintenance cost of machines and equipment. This incremental maintenance (and replacement) cost has to be weighed against the excess units produced by higher rate of utilisation of machinery.
3. Resources- Employees: An employee having rich experience and relevant skills may demand higher salaries. If a firm hires such an employee offering higher salary, this additional expenditure has to be off-set by increased output or reduced production cost or reduced cycle times.
Capital: Firms borrow money to fund their operations. Cost of raising equity or borrowing (debt) has to be weighed against each other and whichever cost is lower, the firm has to choose that type of funding.
Raw materials: By purchasing raw materials in bulk, a firm may save money (through discounts). This may not result in increasing productivity, as the firm may incur higher inventory carrying cost. Just-in-time inventory strategy may result in coping with deterministic demand levels but not with uncertain demand. Thus, whether to purchase in bulk or just-in-time, should be weighed against the overall cost of raw materials going through the plant operations.
Power: Contemporary production systems are power-intensive. Power tariffs are on the rise frequently. A firm has to generate its own power to provide uninterrupted power supply to the plant. The additional investment in installing and operating a captive power plant has to be weighed against the higher rate of increased production.
Input factors cannot be taken in isolation while observing productivity changes in a plant or a firm. Labor productivity is affected by factors related to physical work environment (technology, machines, plant layout, job layout, job design, work place ambience) and employee ability (experience, training, aptitude, interest, education and personality). A business manager has to take into account the inter-relation between different input factors and arrive at the best strategy to increase productivity, while making changes in inputs.
Bruce Chew, W. (1988). No-Nonsense Guide to Measuring Productivity. Harvard Business
Review, Jan 1.
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