1. Competing with Productivity Leeds School of Business University of Colorado Boulder, CO 80309-0419 Professor Stephen Lawrence

2. The Value Equation

3. Productivity Defined  Inputs: labor, materials, capital, …  Outputs: goods, services

4. Factor Productivity Measures  Single Factor Productivity (SFP)  Total Factor Productivity (TFP)

5. Single Factor Productivity  Measures increase in productivity in relation to a single factor of production  Labor, materials, capital, …  Productivity = Output / Single Input  Example: Output Labor Period 1 1000 units 100 hrs Period 2 1100 105

6. SFP Limitations  Problem: too easy to substitute factors  Company purchases casting and machines them  Decides to purchase pre-machined parts  Lays of skilled, sells machines  Output remains constant, labor reduced  Labor productivity up 5% (!)  BUT: pre-machined parts cost 20% more  SO: material productivity declines by 20% (!!)

7. Total Factor Productivity  Measures increased in productivity from all relevant factors of production  Productivity (TFP) = all outputs / all factor inputs  Example: product sales + internal services TFP Index = ----------------------------------------------------------------------------- labor + material + services + depreciation + investment TFP Index 2002 2003 1.073 1.126

8. TFP Limitations  Issues affecting TFP measurement  Inflation, currency exchange gains (losses)  Depreciation, inventory valuation  Product mix changes, choice of base period, output measures...  Theoretically interesting  Difficult in practice…

9. Why Productivity is Important Percent of the labor force Year

10. Why Productivity is Important Relative Manufacturing Productivity -- Automobiles 1987 Dertouzos, Lester, Solow, Made in America: Regaining the Productive Edge, MIT Press, 1989. Best US auto plant worse than average Japanese plant Avg US auto plant worse than worst Japanese plant

11. Why Productivity is Important Gene Koretz, “Productivity: Trading Places,” Business Week, April 30, 2001

12. Factors Affecting Productivity Product Managers Labor Capatilities R & D Engineering Maintenance Investments Energy Capital Demand Materials Regulation Product Mix Product Quality Material Quality Technology Employed Equipment Utilization Operations Services Productive Capacity Resource Effectiveness Asset Utilization Operating Efficiency Production Operating Performance

13. How to Improve Productivity? ?

14. Specialization  Improvement in a worker’s dexterity  Ability to do a task, resulting from a worker’s concentration on one or a few tasks.  Saving in time typically lost in changing from one task (or group of tasks) to another.  When workers do not specialize, time is lost from physically relocating to the new task and from adapting, or orienting, oneself to the new task.  Concentration on or a few tasks  Increases the likelihood of discovering easier and better methods Adam Smith, Wealth of Nations, 1776

15. Better Work Practices  Work smarter, not harder  Scientific Management  Early 20th Century  Reaction to management problems of the industrial revolution  Organized approach to improving labor productivity  Standard methods, standard times  “Time and motion” studies  Championed by Fredrick Taylor, Frank and Lillian Gilbreth, others

16. Economies of Scale Quantity Produced Cost per Unit

17. Learning Quantity Produced Cost per Unit

18. Automation and Technology Labor Productivity Trends 1948 - 1996

19. Other Methods  Outsourcing – make vs. buy  Worker training  Improved quality  Focus – do fewer things better  More…

20. Productivity – The Economic Perspective

21. Labor Used per unit produced Capital Used (equipment) per unit produced Production Functions

22. Allocative vs. Technical Efficiency  Allocative Efficiency: obtaining the best allotment or mix of scarce resources among alternative activities and uses  purchasing what is not the best bundle of inputs, given the prices of various inputs and their marginal benefit in the production process  Technical Efficiency: minimizing the cost incurred to carry on each activity for any given mix of resources  obtaining less than the maximum output available from whatever bundle of inputs has been employed  Traditional economic analysis has focused on allocative efficiency, aka marginal analysis Caves and Barton, Efficiency in U.S. Manufacturing Industries, MIT 1990.

23. Allocative vs. Technical Efficiency Capital Used (equipment) per unit produced A Y B Labor Used per unit C Efficient Frontier Efficient Frontier Cost Line Optimal Mix of Capital Optimal Mix of Labor O

24. How Much Inefficiency Exists?  Tech efficiency based on gross output  Tech efficiency based on value-added Mean levels of technical inefficiency for 365 U.S. industries: Caves and Barton, Efficiency in U.S. Manufacturing Industries, MIT 1990.

25. Management Findings  Oligopoly is detrimental to technical efficiency  Import competition is favorable to technical efficiency  Enterprise diversification is hostile to an industry’s technical efficiency  Technical efficiency is negatively related to the presence of trade unions in industries that operate large plants  Capital vintage distributions have an important impact on technical efficiency -- importance of optimizing capital modernization and replacement decisions Caves and Barton, Efficiency in U.S. Manufacturing Industries, MIT 1990.

26. Evolving Economic Theory 1. Natural resources 2. Capital 3. Technology 4. Skills Sources of competitive advantage in international trade for the 21 st Century: Thurow, Head to Head, Wm Morrow, 1992.

27. A Cautionary Note US Productivity Growth 1995-2000, McKinsey Global Institute, Washington DC, 2001 “We’ve become fat and happy with our high profitability following the industry recovery in the 1990’s… as a result we’ve spent much less time focusing on operations and productivity.” Survey respondent