Manufacturing Productivity Guide

Manufacturing productivity refers to the rate at which goods are produced by a company. It’s a production management metric that helps manufacturers determine how much time it takes to produce a specific volume of goods.

Measuring manufacturing productivity can help you better plan and purchase for future production jobs.

By providing an accurate way of analysing your existing production capacity, you’ll be able to determine whether your current processes are sufficient to meet future demand – and make the correct, necessary investments and purchasing decisions for your company.

Manufacturing productivity vs manufacturing efficiency

The primary difference between manufacturing productivity and manufacturing efficiency is that productivity measures the quantity of goods able to be produced in a specific timeframe, whereas efficiency measures the effectiveness and quality of the manufacturing process itself.

Here’s a simple summary of productivity vs efficiency in manufacturing:

• Productivity = How long it takes to produce items in a given period.

• Efficiency = How effectively a manufacturing process can produce items without wasting time, materials, or energy.

The formula for calculating productivity in manufacturing is:

Output / Input = Manufacturing Productivity

Without context, however, this formula isn’t very helpful.

So let’s break it down.

Input vs output

First, we need to clarify two important terms: input and output.

Inputs are any resources – such as people, raw materials, energy, information, or finance – used in a system, such as an economy or manufacturing plant, to get a desired output. Resources are often financial, but things like time and expertise are also considered inputs.

Outputs are the goods, services, energy, or work produced by a machine, factory, company, or individual in a given period.

By dividing your company’s outputs by the inputs used in your production process, you can calculate a representative figure for your manufacturing productivity.

When calculating productivity at a global economy scale, economists often measure the ratio of gross domestic product (GDP) to labour hours. Similarly, measuring productivity in manufacturing requires tracking the number of units produced, or net sales, relative to employee labour hours.

It’s important to note that measuring labour hours as the sole input is only a partial measure of productivity. In practical terms, this is a useful benchmark. Labour is an input to almost all production.

However, it does not capture the full picture.

Other measures of manufacturing productivity include Capital Productivity, Multifactor Productivity and Total Productivity. We’ll look at these shortly.

Productivity is the effectiveness of productive effort.

When it comes to understanding manufacturing productivity, we can measure it by contrasting the rate of output per unit of input.

Productivity increases when the same quantity of inputs results in more outputs, or when you get the same output quantity using fewer inputs.

There are four main types of input that can be used to determine productivity:

• Physical capital: The equipment and structures workers use to create goods and services.

• Human capital: The knowledge and skills that workers gain through education, training, and experience — all the relevant know-how accumulated during their life.

• Natural resources: These are inputs derived from nature, including renewable resources (such as plantation forestry and solar power) and nonrenewable resources (such as oil and minerals).

• Technological knowledge: Technological progress within the economy. Technological knowledge can be public or proprietary. Public knowledge is openly available and used by all firms, while proprietary knowledge is secret and only known to the company that discovers it

Productivity and the wider economy

Productivity is a key source of economic growth and competitiveness. Economists use productivity to model what their country can produce, which contributes to forecasting business cycles and predicting future GDP growth. High productivity leads to:

• Lower unit costs: Consumers get these cost savings in the form of lower prices, which can encourage demand, more output and an increase in employment

• Improved competitiveness and trade performance: Businesses with high productivity and lower unit costs can be more competitive in global markets

• Higher profit: More productive companies typically generate higher margins and more profit. This can be reinvested in the company to support long-term growth

• Higher wages for staff: Businesses can afford higher wages — attracting better staff — when they use their resources more efficiently

• Economic growth: Greater productivity and national output trends go hand in hand

All of the benefits above apply equally to the business world, making high productivity a critical goal of business leaders, and manufacturers in particular.

Productivity is a key source of economic growth and competitiveness. Economists use productivity growth to model the productive capacity of economies. This helps build better forecasts for business cycles and predict future levels of GDP growth, and assess demand and inflationary pressures.

Businesses don’t lift productivity for the sake of it.

Higher productivity leads to better financial performance and greater profit margins. In a Harvard Business Review article titled ‘Great Companies Obsess Over Productivity, Not Efficiency‘, the authors claim comprehensive research links companies with high productivity with “operating margins 30% – 50% higher than industry peers”.

Similarly, writers for Business Insider have linked global profit margins trends directly to labour productivity figures.

In short: increasing productivity is one of the most important challenges in business.

There are four main types of productivity measurable in manufacturing processes:

• Labour productivity

• Multifactor productivity

• Capital productivity

• Total factor productivity

Let’s check them out.

Labour productivity

Labour productivity is the most commonly used productivity measure. Labour productivity measures how efficiently a business uses human inputs to produce outputs. At a corporate level, labour productivity is calculated by measuring the number of units produced (or net sales) relative to employee labour hours.

How do you measure labour productivity?

The labour productivity ratio is simply output over input, where labour input is normally measured in hours worked or dollars, while the output is usually measured in units.

Labour productivity = Units of output / Units of input

• Learn more: How food manufacturing software improves productivity

Multifactor productivity

In the real world, labour is not the only factor that affects productivity. Multifactor productivity (MFP), also known as total factor productivity (TFP) or the Solow residual, compares the amount of output to the number of combined inputs used. Inputs can include capital, labour, energy, materials and services.

How do you measure multifactor productivity?

Multifactor productivity = Units of Output / (Units of Labor + Units of Capital + Units of Materials)

Most businesses use the MFP ratio to determine if productivity has changed from one period to another:

MFP index = (Output index / Combined input index) x 100

Using this method results in a more accurate ratio than using labour alone because changes in capital and materials used in production may also increase or decrease labour costs.

• 4 Ways to Lift Manufacturing Productivity: The MFP Approach 

Other types of productivity in manufacturing

In addition to labour and multifactor productivity, there are two more key types worth mentioning:

• Capital productivity: This measures how effectively cash flow is utilised to provide goods and services to your customers.

• Total factor productivity: A measurement of productive efficiency that tracks how much output can be produced by the total inputs used.

Difficulties in measuring productivity in manufacturing

There are a few challenges associated with measuring productivity:

It doesn’t include all industries

Not all government statistics departments will measure the entire economy. For example, New Zealand’s Stats NZ only measures 25 industries and excludes industries such as education and training, health care and social assistance.

Estimates vary with time periods

Due to the volatility of short-run estimates, productivity is usually measured over long periods of time that span multiple economic cycles.

It doesn’t measure all inputs and outputs

Some natural resources and intangible capital inputs are hard to measure or not measured at all. Things like by-products and work-in-progress inventory are hard to quantify.

While productivity and efficiency are closely related, in a manufacturing context the terms tend to be used differently.

Productivity in manufacturing

When measuring labour productivity, the number of output units over a set period of time is important. However their quality, or the amount of waste they generate is not. Thus a workforce that rushes out twice as many products in the same amount of time is considered more productive – even if those products are so poorly made they lead to more returns and customer complaints.

Efficiency in manufacturing

Efficiency is the ability to produce something without wasting materials, time or energy. It is often expressed as a percentage, with 100% being the ideal target of maximum efficiency. In the scenario above the workforce is considered less efficient because they wasted materials, time and energy producing low-quality products.

Similarly, it’s possible to run a much more efficient factory – say, where time was taken to pick up every dropped screw or component and return it to the production line – but at the expense of productivity.

Balancing productivity and efficiency

It’s important to strike a balance between productivity and efficiency. Imagine if a business focused solely on increasing the number of units they produce in an hour but neglected costs and quality. They might have achieved their aim but at the cost of wasted materials and lower quality items.

On the flip side, if a business focuses solely on trying to maximize efficiency, they might end up with the most cost-effective products that are of high quality but won’t have enough stock on hand to meet customer demands, which can end up hurting the bottom line.

Finding the right combination of productivity and efficiency allows you to optimise your output while minimising losses.

• Learn more: The Manufacturing Process: A Practical Guide for SMEs

What is productivity efficiency?

Productivity efficiency, or production efficiency, describes a level in which an economy or business can no longer produce more of one product without lowering the production level of another product. It refers to the level of maximum capacity where the business or economy makes full use of all their resources to generate the most cost-efficient product. 

Productive efficiency typically happens when production occurs along a production possibility frontier

To measure productive efficiency, divide output over a standard output rate and multiply by 100 to get a percentage. This is used to analyse the efficiency of a single employee, groups of employees, or sections of an economy.

Productive efficiency = (Output rate / Standard output rate) x 100

The standard output rate is a rate of maximum performance or maximum volume of work produced per unit of time using a standard method. Reaching 100% productive efficiency means you have achieved maximum production efficiency.

Maximum production efficiency can be difficult to achieve. Many businesses try to find a balance between using their resources, the rate of production and the quality of goods produced — without reaching full production capacity.

A closer look at the production possibility frontier

You’ll need to know about the production possibility frontier (PPF) to understand production efficiency. The PPF is a graph that shows all the different combinations of output of goods that can be simultaneously produced using all available resources.

• Points that lie on the PPF curve (A) illustrate combinations of output that are productively efficient
• Points that lie inside the curve (B) are productively inefficient
• Points outside the curve (C) are not attainable with the current resources

The law of diminishing returns and productivity efficiency

The law of diminishing returns is closely linked to productivity efficiency. Production managers take this into consideration when improving variable inputs for increased production and profit.

What is the law of diminishing returns?

The law of diminishing returns is a theory that suggests after you reach an optimal level of capacity, then all things remaining constant, adding an additional factor of production will actually result in smaller increases in output.

The law of diminishing returns is also known as the law of diminishing marginal returns, the principle of diminishing marginal productivity, or the law of variable proportion.

Why do manufacturing productivity levels change?

There are a wide number of reasons why productivity levels change but we’ve narrowed them down to seven main factors:

1. Technical factors

Imagine trying to sew 100,000 shirts without a sewing machine from your bedroom — it’s not the right environment to enable productivity. Technical factors can include having the proper location, layout and size of the plant and machinery, the design of machines and equipment, research and development, factory automation, and more.

2. Production factors

Production should be properly planned, coordinated and controlled. This involves getting the right balance of manufacturing inventory stock, using the right quality of raw materials or components, having a simplified and standardised process and more.

3. Organisational factors

Each individual should have their responsibilities clearly defined in order to avoid conflict and overlap between tasks. There should also be specialisation and a division of labour to make sure the production line moves smoothly and quickly.

4. Staff factors

Choose the right person for the job, and ensure they have proper training and development. Along with extrinsic motivators like wages, staff also need a positive working environment that boosts engagement.

5. Management factors

Many small businesses fail from poor management. Good managers make best use of the available resources to get maximum output at the lowest cost, use modern processes and techniques of production, and develop good relationships with employees. Efficient management is among the most significant factors in increasing productivity.

6. Financial factors

If the business’ finances are properly managed, productivity will increase. This involves control over fixed and working capital, undergoing financial planning, controlling expenditure and ensuring the business gets proper return on investment.

7. Location factors

Depending on where manufacturing happens, businesses need to take into account geopolitical issues, infrastructure facilities, how close they are to raw materials and their customers, and the availability of skilled labour.

A productivity gap is a sustained difference between a country’s productivity levels, measured in GDP per person employed, and that country’s main export competitors.

Many factors contribute to productivity gaps between countries:

• Access to technology
• The skill level of the labour force
• Quality of management
• Quality of national infrastructure
• The country’s training and education standards
• How much competition there is within markets
• Cultural factors such as attitudes and aspirations

Increased productivity is essential to scaling your manufacturing business.

However, to achieve increased productivity, you need a watertight strategy. That means ensuring you implement the right tools, maintain a healthy work environment, and allocate your time wisely.

To learn more about how to improve manufacturing productivity, read our guide to improving manufacturing productivity.

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