A PRACTICAL INTERPRETATION OF PRODUCTIVITY*

Andrew S Downes PhDProfessor of Economics and Pro Vice Chancellor

(Planning and Development)University of the West Indies

March 21, 2013

*Human Resource Professionals of Antigua and Barbuda Luncheon

STRUCTURE OF PRESENTATION

Defining Productivity Relevance of Productivity

Growth to Antigua and Barbuda Enhancing Productivity Caribbean Evidence on the

Effects of Productivity Initiatives Beyond Productivity

DEFININIG PRODUCTIVITY

Productivity is defined as the extent to which an organization is able to produce a range of goods and services of a specific quality utilizing a range of resources (i.e. raw materials, machinery and equipment, energy, human power and skill)

It involves measures/indicators of OUTPUT and measures/indicators of INPUT. It is a “real value” ratio concept.

Expressed as a ratio given as: Output of Goods and Services of a specific

Quality divided by Input of Resources Used We can have a partial measure of productivity ( eg

labour productivity, energy productivity) or a total measure of productivity which combines all the inputs using a weighted average. A family of partial measures can also be used.

If the output of a manufacturing firm is valued at $ 100, 000 and the labour used amounts to 15000 person-hours ( 125 persons) then the level of labour productivity is given as $6.67 per person-hour ($800 per person).

Partial measures are more commonly used than total measures

Productivity can also be defined as the ability of an organization to achieve its goal(s) given the minimum use of resources.

In this case it is specified as the ratio of effectiveness relative to efficiency

Effectiveness relates to the degree to which a productive unit/individual can achieve a given goal or objective. It focuses on the “output” or accomplishment ( goal achievement) of the organization ( e.g. sales growth for the month)

Efficiency is defined by the degree of success in making the minimum use of available resources associated with the production of goods/services or the specified goal (input focus)

These form part of the Performance of an Organization or Individual ( eg Key Performance Indicators-KPIs)

In practice, several partial measures of productivity (with implicit assumptions relating to price changes) are used: Revenue or sales/wages or labour cost Value added/number of persons employed Output/energy used Sales/persons or wages Output/machine hours

Total measures would focus on the total costs of producing an output ( eg Revenue/Total costs)

RELEVANCE OF PRODUCTIVITY GROWTH TO ANTIGUA & BARBUDA

Enhancing productivity at all levels of the economy (department, organisation, sector, industry, nation) is vital to rapid economic growth, a higher standard of living, international competitiveness and foreign exchange generation, inflation control, capital investment and employment generation

For example, the profitability of a firm depend on (1) price recovery and/or (2) productivity increases.

In a highly competitive environment Price Recovery can be a difficult strategy to adopt to enhance profitability. Reliance must be placed on increasing labour productivity and improving output quality.

International Price Competitiveness, that is, the ability of an enterprise to sell its products at a lower price in the international market than other producers is partly determined by labour cost (i.e., REAL UNIT

LABOUR COSTS – RULC) RULC is the ratio of Real Wages to

Labour Productivity

With increased productivity Companies benefit through increased sales,

competitiveness and profit, less wastage, absenteeism, overtime and turnover;

Employees in the enterprise/organisation also benefit via better wages/salaries, bonus payments, working conditions, career prospects and greater job security;

Customer/clients benefit via lower prices and improved quality

Society benefits as government revenue is increased with increased sales, employment and profit. The revenue is used to build roads, parks, housing, etc

Relevant Features of the Antigua & Barbuda economy:

Declining trend in economic growth since 1977 ( see Fig)

High Volatility in economic activity Recession in recent years 2009-2011 ( over 20 %

contraction) Decline in ratio of exports of goods and service to

GDP since 1990 (1990-89%, 2000-58%, 2010-43%)

High dependence on services sector production ( esp tourism)

IMF 36 month Stand-by Arrangement in place the need to “focus on enhancing productivity” and to “improve competitiveness”

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ENHANCING PRODUCTIVITY

Several tools and techniques exist for enhancing productivity (and performance) in organisations. These form part of the Productivity Management Process

These tools and techniques fall into two (2) basic groups: Industrial engineering – economic

techniques Human or behavioral techniques

Selected Engineering – Economic techniques Just-in-time production and distribution

management Business Process Re-engineering (BPR) Computer-assisted Design and Engineering

(CAD/CAE) Balanced Scorecard Management (financial,

customer, internal processes, learning and growth activities/perspectives of a firm’s operations)

Activity-based Costing and Management Benchmarking and Inter-firm Comparison Six Sigma

Selected Human- Behavioural Techniques Total quality management Human resource management (skills

training, teamwork, etc) Gain-sharing Schemes (Scanlon, Rucker,

IMPROSHARE, goal-sharing, etc) Organisational Development Strategic planning Customer relationship management

These tools and techniques emphasize the following factors in improving productivity and performance: Continuous improvement of business

processes Focus on the customer Maintaining a high quality product

Streamlining production processes (work flows and designs)—innovation and technology use

Participative management and employee involvement in decision-making

Communication and information flow Incentives/productivity based pay

The implementation of these initiatives can have an impact on such organisational performance variables such as:

Profitability Market share Absenteeism Turnover Return on investment Degree of rework, rejects and errors

In order to boost organisational performance, productivity enhancing measures must be specially tailored to the culture and needs of the organisation

CARIBBEAN EVIDENCE

Push for increasing productivity started in the 1990s – Jamaica Productivity Centre, Barbados National Productivity Council, Productivity Committee in Trinidad and Tobago

Various productivity schemes have been introduced but little empirical analysis of their impact

Barbadian studies: Downes and Alleyne (1998): “Evaluation of

Gainsharing Schemes” A survey of companies using gainsharing schemes

(Scanlon, Rucker, IMPROSHARE, Performance-based schemes) in 1997

Focus on ‘medium’ and ‘large’-sized firms Rucker and KPI schemes mainly used Schemes had a positive impact on labour and

overall productivity, cost reduction, product quality, competitiveness and labour management relations

Gainsharing schemes were complemented by HRM innovations such as TQM, work teams and work re-organisation

Employees indicated that the schemes had a positive impact on their motivation to work harder, individual productivity and commitment to the organisation

Bannister (2004): Impact of Performance-based Incentive Plans on Organisational Performance

Update of the previous study Results indicate a significant impact on

Labour and overall productivity

Commitment to organisation Teamwork/cooperation with others Willingness to help management Goal setting Need to link pay to performance

Downes (2004): Barbados National Bank Study Performance based payment scheme indicated a

‘significant’ impact on: Quality of work Performance of department/branch Linking pay to performance Willingness to help manager/supervisor Goal setting Cooperative team work

Sobers (1998): Bondhus Barbados Ltd study: The incentive-based scheme had the following effects:

Low staff turnover High market penetration Increased profitability and sales Reduced wastage/spoilage

Super Centre Supermarket (2008) The performance-based payment scheme resulted in

Reduced absenteeism and wastage Greater communication between management

and staff Greater employee awareness of the impact of

their productivity on company performance

Increased savings on pensions, medical insurance and national insurance

Better base for negotiations with union

Alleyne-Doherty-Howard (2005) – HRM and Performance in the Hotel Industry

Qualitative study of HRM on performance as perceived by managers

HRM practices (organisational commitment, job satisfaction, flexibility of staff, ability to move staff) seem to have some positive impact on organizational performance (innovation, financial performance, quality of service, market share and labour productivity)

KPMG (2009) provided an assessment of a range of performance management systems (general management and HRM systems – including Gain-sharing schemes) in 52 companies Main general management systems

introduced:- MIS, environmental disaster management,

customer relations management, knowledge management

These systems had a positive impact on overall and labour productivity, employee motivation, teamwork/cooperation, customer service

Main HRM systems used:- Occupational health and safety, training and

development, employee communication/information system, HRIS and job evaluation

These had a positive impact on labour productivity, employee morale, teamwork/cooperation, employee motivation

Main Gain-sharing systems used:- profit sharing, KPI/Family Measures, Team-

based incentives These had a positive impact on labour productivity,

employee motivation, teamwork/cooperation, profitability

Jamaican Studies Main study on Jamaica has been undertaken

by Noel Cowell: The Use of Workplace Innovations in a Developing Economy: The Case of Jamaica (PhD thesis, 2000)

Focus on Work Systems Innovations (TQM, Quality Circles, Job Design and Teams) and HRM Practices (flexible employment, high commitment and flexible compensation) on Business Performance (marketing, sales, profitability, market share, quality of output and customer satisfaction)

TQM was adopted by several firms and had a significant impact on performance

Linking performance appraisal with pay, the use of grievance procedures and the use of non-monetary awards for performance together have some positive impact on organisational performance as perceived by managers

Several key factors have affected productivity in Jamaica at the national and organisational levels: Shift to services and growth in informal

sector with low productivity levels Poor worker-management relations/distrust

by workers (Carter’s Why Workers Won’t Work, 1997)

Deficiencies in the education and training system (low level of certification and skill level)

Outdated plant/machinery Plant layout Inadequate raw materials Absence of a clear link between effort and

reward Weak social infrastructure (leading to lateness,

absenteeism, lethargy) Absence of quality standards/measures High incidence of poverty, crime and violence Dependence on remittances and overseas work

BEYOND PRODUCTIVITY

Recent study by the Institute for Corporate Productivity identified five(5) key factors which have the potential to raise productivity within organisations: Effective leadership Establishment of a high

productivity/performance corporate culture

Employee engagement practices – whereby workers mentally and emotionally invest in their work and contribute to the organisation’s success

Training and development

Compensation and benefits program which include employee health/wellness programs. These show care on the part of employers and boost the physical and well-being of workers

Organisations are now focusing on performance measures which relate to the achievement of several dimensions of its operations ( productivity, quality, efficiency, profitability, customer satisfaction, etc)

The Balanced Scorecard and Performance-based Pay are two such examples.

In a high competitive dynamic business/economic environment, organisations are seeking to reduce costs or seek competitive advantage by

Enhancing product quality Being close to the customer ( customer intimacy) Achieving Operational excellence

These require attention to all aspects of the organisation’s activities ( public and private)

Organisations have or will therefore focus on Performance Management rather than Productivity Management –esp in a services oriented economy like Antigua & Barbuda

Human Resource Professionals will therefore have a critical role to play in the process becoming strategic partners in the implementation of the new focus.

Thank you very muchThank you very much