How is manufacturing productivity measured

Labor is an easily-identified input to virtually every production process. In the U. Output per hour in the nonfarm business sector is the productivity statistic most often cited by the press. Unit labor costs are calculated by dividing total labor compensation by real output or—equivalently—by dividing hourly compensation by productivity.

If both series move equally, unit labor costs will be unchanged. Within the U. Since firms can differ in their productivity, domestic outsourcing can affect business sector productivity if the contracting firm differs in its productivity from the original firm.

Similarly, outsourcing from U. Any effect of outsourcing or offshoring on business sector productivity change is expected to be modest.

Outsourcing and offshoring have the potential for greater effect on labor productivity measures for the manufacturing sector. BLS measures output for the manufacturing sector using the sectoral output concept: gross output less sales between establishments within the manufacturing sector. Unlike the value-added measure for the business sector, this output measure includes the value of intermediate inputs purchased from outside the manufacturing sector, whether purchased from domestic or foreign suppliers.

As manufacturing firms outsource or offshore production of intermediate inputs the value of manufacturing output is unchanged, but the shift to U. It is estimated that the growth in imported intermediate inputs contributed 23 percent 0.

Why can't I find a productivity measure for the total economy? The broadest measure of productivity published by the Bureau of Labor Statistics is that for the U. Business sector output covered about 75 percent of the value of gross domestic product GDP in The business sector excludes many activities where it is difficult to draw inferences on productivity from GDP.

These excluded activities are: General government, nonprofit institutions, paid employees of private households, and the rental value of owner-occupied dwellings.

In the GDP, the output of general government, nonprofit institutions, and paid employees of private households are based largely on the incomes of input factors.

In other words, the measure is constructed by making an implicit assumption of negligible productivity change. BLS also excludes the value of owner-occupied dwellings because this sector lacks a measure of the hours homeowners spend maintaining their home.

The primary source of hours and employment data is the BLS Current Employment Statistics CES program, which provides data on total employment and average weekly hours of production and nonsupervisory workers in nonagricultural establishments.

For the quarterly productivity measures , information from the National Compensation Survey NCS is used to convert the CES hours to hours at work by excluding all forms of paid leave. Because CES data include only nonagricultural wage and salary workers, data from the CPS are used for farm employment as well as for nonfarm proprietors and unpaid family workers. Government enterprise hours are developed from the National Income and Product Account estimates of employment combined with CPS data on average weekly hours.

For the industry productivity measures , average weekly hours for nonproduction and supervisory workers are estimated using data from the CPS and the CES.

The industry labor input measures also include estimates of the hours of proprietors and unpaid family workers from the CPS. Compensation is a measure of the cost to the employer of securing the services of labor. It includes wages and salaries, supplements like shift differentials, all kinds of paid leave, bonus and incentive payments, and employee discounts , and employer contributions to employee-benefit plans like medical and life insurance, workmen's compensation, and unemployment insurance.

The measures of compensation published with the major sector productivity measures and most of the nonmanufacturing industry labor productivity measures include an imputation of the earnings of the self-employed. This is because the output of proprietorships is included in the output measures for these sectors and industries. Different products are aggregated into one output measure by weighting multiplying the relative change in the output of each product by its share in the total value of output.

Thus, the products that require more resources to produce are given higher weight. The business sector comprises about 75 percent of GDP since it must exclude those portions of the economy for which productivity measures cannot be constructed. General government, the output of the employees of nonprofit institutions and private households, and the rental value of owner-occupied real estate are excluded.

An index series is simply a way of expressing, in percentage terms, the change in some variable from a given point in time to another point in time.

For example, let's say that output increased by 10 percent from an initial year to a subsequent year The index for our arbitrarily chosen base year of would be Conversely, if output had declined in by 10 percent, the index value would be BLS productivity measures are based on aggregate national measures of outputs and inputs.

These data sources do not provide the information BLS would need to construct occupational measures. There are also conceptual obstacles to disaggregating these national measures. When calculating productivity at a whole economy scale, economists often measure the ratio of gross domestic product GDP to labour hours.

Similarly, productivity in manufacturing measures the number of units produced or net sales, relative to employee labour hours. In practical terms, this is a useful benchmark, as labour is an input to almost all production. However it does not capture the full productivity picture, and other measures including Capital Productivity, Multifactor Productivity and Total Productivity are also used see below.

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

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.

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. Mary owns a burger bar that specialises in grilled burgers. She employs two staff members to help her. They work eight hours each, a total of 16 hours, and produce 80 burgers. In a given day, they make 80 burgers using 16 hours of labour. Labour productivity for the burger bar that day is therefore 5 burgers per hour:.

Learn more: How food manufacturing software improves 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. Most businesses use the MFP ratio to determine if productivity has changed from one period to another:. 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. Mary needs ingredients like burger buns, meat, cheese and lettuce. She also needs equipment like a grill, as well as kitchen staff and an accountant to manage her finances.

These resources are her inputs. With this, she will serve up some tasty burgers. To keep up with demand, she buys more ingredients, upgrades her machines and hires more staff.

Suppose that year one is the base year when an output index and a combined input index for the burger bar are both set to equal Not all government statistics departments will measure the entire economy. Due to the volatility of short-run estimates, productivity is usually measured over long periods of time that span multiple economic cycles. Some natural resources and intangible capital inputs are hard to measure or not measured at all. Things like by-products and work-in-progress are hard to quantify.

While productivity and efficiency are closely related, in a manufacturing context the terms tend to be used differently. 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 is the ability to produce something without wasting materials, time or energy. In the scenario above the workforce is considered less efficient because they wasted materials, time and energy producing low-quality products. 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. Finding the right combination of productivity and efficiency allows you to optimise your output while minimising losses. 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. Productive 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.

M2M Server with provision to analyse data and automate. Are you measuring your manufacturing productivity right? History of Manufacturing Productivity calculation Earlier manufacturing productivity is the ratio of a measure of total outputs to a measure of inputs used in the production of goods and services. A few to highlight were: Multi Factor productivity MFP , which measures the growth in value added output real gross output less intermediate inputs per unit of labour and capital input used; and Labor productivity LP , which measures the growth in value added output per unit of labor used.

The problem in Old metrics The accuracy of the raw data and in the methodologies applied generate measurement errors. What is OEE? Measuring OEE OEE measures three elements of metrics: Availability represents the percentage of scheduled time that the operation is available to operate actual running time vs running time.

Performance represents the speed at which the machines run as a percentage of its designed speed actual speed vs standard speed. Goods actually produced to the planned numbers is the performance Quality represents the good units produced as a percentage of the total units started good production vs total production.

OEE is the measure of function of Availability, performance and quality. Planned Down time and Breakdown losses are concerned with availability Minor stoppages and Speed loss are concerned with performance Production rejects and Start-up rejects are concerned with Quality. This helps businesses identify the exact issue and work on it. Why should you adopt OEE today? Download Learn More. Request Quote Learn More. We use cookies to ensure that we give you the best experience on our website.

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