Total Factor Productivity: A Two Dimensional Matrix

Total Factor Productivity is an important concept in economics. It connotes the fact that factors other than capital and labour contribute to the output of an economic system. Total Factor Productivity (TFP) is the portion of output not explained by the amounts of inputs used in production. As such, its level is determined by the amount of inputs used in production, and by how efficiently and intensely the inputs are utilized in production. TFP growth is usually measured by the Solow Residual. An equation of Cobb-Douglas form is used to explain total output as a function of total factor productivity and the capital and labour productivity. While some economists believe that TFP is a key driver of economic growth, others believe that it is subject to annual variations and suffers from imperfect measurements.

The Conference Board in its Productivity Brief 2015 suggests that TFP growth is the result of a combination of improvements in efficiency (meaning, fewer inputs are needed for a given output) as well as technology and innovation (meaning, more output is achieved from a given input). It considers financial capital in terms of machinery, equipment and structures. It considers human capital in terms of skills and management competencies. Adding technology and innovation to this capital combination, it expects increase in output per worker hour. If jobs expand together with higher productivity there would be a growth in total output. The data presented by The Conference Board present a declining or flat growth situation in TFP, across the developed markets as well as emerging markets. It concludes that unless productivity growth picks up, key indicators of economic health would not pick up, affecting societal welfare.

Macro or micro?

National economic management is in the hands of policy makers in the Governments. They typically attempt to draw up policies at macro level that stimulate and attract national and international investments and support expansion of micro-level industrial, business and economic activity. Industries and businesses do require policy stimulation and support but probably there is a lot that can happen at micro level itself through higher productivity. The trickle-down effect of policy stimulation and bottom-up impact of productivity improvement would be synergistic. In fact, without the latter (of productivity improvement) inflow of capital arising from policy stimulation would cause further exacerbation in productivity scenario. Without productivity drivers in the economy flow of capital, even if stimulated by policy framework, could eventually ebb. The linkages between macro and micro are as important as discrete macro and micro improvements. This is particularly important for India given the legacy of socialist policies, inevitability of mixed economy and importance of domestic and foreign investments.

Industry gets organized in public sector (or Government owned sector), private sector (or citizens, individually or collectively, and in joint sector (Government and people ownership). There is also the concept of public-private partnership. Although all of these are organizational entities, they are considered to vary significantly in respect of productivity practices, which are in turn linked to management approaches. The common view is that public sector is sought to be influenced by the Governments while private sector seeks to influence the Governments. The former, it is felt in some quarters, is a convenient instrument for economic stimulation and job creation while, likewise in some quarters, the latter is arraigned as an opportunistic instrument for market capitalization and rent seeking. The joint sector and public-private partnerships are stuck in the middle, often gridlocked with ownership differences. The polemical perceptions should not be allowed to influence a genuine focus on total factor productivity which is essential for any organization (and economy), regardless of organizational nature or ownership (or economic policies).

Pan-organizational

Within the limits of what is humanly possible and within the perspectives of work-life balance, the greater the output that is achieved from certain inputs, productivity movement is supported. This, in turn, helps economic growth. This is applicable for all organizations. The totality with which a policy issue is considered and the speed with which the policy thought is converted into executive action defines productivity of national governance. The comprehensiveness with all inputs are aggregated and the competitiveness with which the aggregate is converted into a product or service for the customer defines the productivity of industrial management. The productivity of governance is impacted by certain democratic structures and processes, be it in US and Japan or India and China. The productivity of industry may be impacted by policy framework but is largely within organizational control.

Unfortunately, over the last several years, productivity as a concept is overshadowed by competitiveness. Individual and system productivities are considered to be of lower significance than businesses competitiveness; and competitiveness is defined in terms of either product differentiation or cost leadership. The emergence of concepts of competitiveness is welcome but the dilution of focus on productivity is not so helpful. Productivity has a strong connotation of intrinsic efficiency improvement in an absolute sense while competitiveness has a connotation of getting better of another in a relative manner. While the concept of competitiveness may be helpful at an overall business level, organizational management has to continue to be focused on productivity. There have, of course, been criticisms of productivity that it lacks a business perspective and could lead to sub-optimization of the total system even if the sub-systems are productive. One can safely premise, however, that without productivity there cannot be competitiveness.

Productivity matrix

Productivity is all about efficiency and effectiveness. The concept itself needs to be deployed efficiently and effectively for the concept to deliver results in today’s scenario. True and authentic productivity analysis becomes possible when it is viewed as a matrix of value chain management and total factor deployment. A worker being productive on a manufacturing line in terms of components produced in a given unit of time would not help in the system productivity if the product is not packaged well or is not transported safely and delivered on time. Managing the value chain on an end to end basis would be of no avail if factors of productivity in each constituent are not taken into account to develop effective input-output metrics. Some firms view this need (if at all they recognize the concept) as more relevant for integrated companies which control all activities of the value chain. Firms also consider outsourced activities to be adequately measured in terms of productivity just through their cost competitiveness.

The fact, however, is that productivity matrix is relevant for all activities and for all firms. A highly research oriented innovation-dependent firm as well as an operations oriented manufacturing-driven firm would benefit by the concept of productivity matrix. In the former, at a gross level, more inputs may seem to lead to better output because the probability of an innovative discovery would improve with more work streams. However, in each work stream experimental productivity is vital. On the other hand, in repetitive work environment smooth flow, seamless coordination and freedom from defects support productivity. Productivity does not mean error-proof activities; rather it means discovering the cause of errors and enhancing output. Measurement systems for finished products ensure product quality but they would not assure zero defects. Understanding the output profile, in terms of quality and productivity, of the material supplier would, on the other hand, ensure productivity. Quality and productivity are interrelated. High quality leads to high productivity while just a rate of production without quality assurance would lead to poor final output.

Matrix measurement

Total factor productivity would work only if inputs and outputs at each stage of the value chain are fully understood and measured. There are more inputs than labour, capital and technology as commonly understand; nor are all the inputs linear and variable. Usually the three common inputs of labour, plant & machinery and technology are expressed in common financial terms and used as denominator. It is possible to granulate the inputs into sub-classifications such as direct labour, indirect labour, permanent employees, contract employees, energy, other utilities, land, building, equipment, direct materials, indirect materials, long term capital, short term capital, investments in R&D and so on. The granulation becomes relevant to compare and contrast productivity measurements across industries, firms and time. Adjustment for parity helps managements understand true operational productivity.

There are other process related variables as well, which impact productivity. In governance, the discussion and decision making structures (for example, ministerial versus bureaucratic or individual versus committee) impact productivity. On a shop floor, the feeder systems for materials and components (centralized versus decentralized versus delivered on spot or taken from store) determine the level of productivity. In a research laboratory, the access to global intellectual property databases and the availability of patent evaluation and patenting infrastructure determine the level of productivity. With respect to human capital the processes adopted and time invested for writing down operating procedures and training people in them determine the level of productivity. While all these are doubtless captured in financials, gross indexes convey little direction for improvement.

Organizing for TFP

Most productivity departments in firms are confined to shop floor as industrial engineering or productivity improvement departments. More recently operational excellence has come up as a more contemporary nomenclature. Yet, a preoccupation with manufacturing remains the unchanged focus. As discussed in this blog post, productivity is a much more comprehensive concept covering the total value chain with multiple factors in each stage of the matrix. A total factor productivity department needs larger organizational appreciation and leadership commitment. Economists are rightly intrigued to capture what is not covered in total factor productivity; it is time that industrialists, businessmen and administrators begin to get intrigued about and interested in what is yet to be covered for measurement of total productivity.

Posted by Dr CB Rao on June 27, 2015

Time and Motion Study in Modern Era: From Stopwatch to “Humatronics”

In the 1960s and 1970s, time and motion study was a rage. It was pioneered in the West by Frederick Taylor in the late 1800s and early 1900s. The International Labor Organization (ILO) which caters to the welfare and wellbeing of labor has published its landmark manual on time and motion study. The objective of time and motion study on which the early foundations of industrial engineering were built was initially seen to be productivity of labor. Over time, it was expanded to include productivity of machines and that of man-machine systems. The change of nomenclature of time and motion study to work study and addition of workmen friendly tools like ergonomics and system efficiency techniques like statistical work sampling could do little to enhance the image of the time and motion study. Yet, time and motion study was relied upon more to determine piece rates and based on that wage and incentive rates in union-management negotiations.

Periods of protracted negotiations caused by the piece rate disputes used to add to industrial strife. The industrial engineer who entered the shop floor with his stop watch became as unpopular as the discipline he represented. However, with a change in the approach of unions and managements in favor of enterprise level goals rather than piece rate goals in the post-liberalization phase, the need to time every activity and person became less relevant. With the advent of Japanese production management systems which took shop floor productivity and man-machine optimization to new levels through integrated design of factory systems, classic time and motion study has virtually gone into oblivion. The question that arises is whether the concepts of work study and personal productivity are any less relevant today. As an analysis below would show, productivity from an individual to enterprise level continues to be a matter of critical importance.

Digital productivity

Today’s shop floor environment is characterized by digitally controlled equipment which perfectly record quality and productivity of output. The logistics environment is characterized by a number of coding and tracking devices, including global positioning services to record the speed and timeliness of movement and delivery. The office environment is characterized by a host of productivity devices, from desk top computers to smart phones to enable executives and managers to multitask. At a gross level, the electronic brain and eye are taking over several of the production, logistics and managerial functions from the human being. One would, therefore, believe that the newer digital ecosystem provides the right replacement technology for personal productivity, relieving the stop watch and work study from such vintage responsibilities.

Digitization, however, represents part-solution and part-problem. The solution, clearly, is one of accurate recording, retrievable archiving and analytical potential. The problem, less clearly, is one of digitization being a programmed and rigid protocol as opposed to human review and intervention which can be contextual and expansive to cater to unforeseen eventualities. The problem is also one of system designers prescribing excessive data collection and analysis which could eventually confuse analysis. Even more dangerously, any error in automation could lead to highly damaging results. The occasional cataclysmal results that occur due to the deployment of computerized algorithmic trading on the bourses are proof of such risks. At a personal level, the multiplicity of devices and options as well as of 24X7 working while seemingly aiding productivity could be actually enhancing stress and reducing productivity levels. 

Redefining productivity

In the digital era, productivity needs redefinition at personal, team and enterprise level redefinitions. The classic dilemma at individual level has been between professional (or work) life and personal (or family) life. In the digital era, the dilemma has been expanded to cover digital (or Internet) life. The fact that individuals are now increasingly programmed to work in a boundary-less and timeless manner with an ever larger universe of people indicates that the overall system productivity does need re-optimization. The fact that individuals are now increasingly networked independent of either personal or professional life indicates that both personal and professional productivity could be affected. The fact that the formal and informal teams are overtaken by virtual teams which do not share the same interactive characteristics of formal and informal teams is a cause for worry. At the enterprise level, lack of convergence between operational productivity and business competitiveness also needs to be tackled.

Samuel Johnson, the eminent English literary leader, said in the 18^th century that books of the hour need to be distinguished from the books of a lifetime. For achieving personal productivity, work for the day needs to be distinguished from the work for the lifetime; and so must information of the minute be distinguished from information of the lifetime. Equally, Internet interactions need to be distinguished in terms of socialization as a pastime from socialization for real personal and/or social good. Individuals must keep track of three important parameters of personal productivity: (a) in the personal, familial and social areas, the value-adding and non-value adding activities performed by the individual each day, (b) the efficiency and effectiveness with which the individual decides and executes each day, and (c) the ability to start and end each day with the conviction and humility of learning and contributing each day.

While individuals need internal motivation, teams need shared motivation to be productive. Virtual teams have been a result of globalization and global delivery models. Productivity of such teams is supported by plurality of ideas and systematization of planning but is eroded by constraints of time and space and diffusion of execution responsibility and accountability. Productivity of virtual teams is a subject by itself as virtual teams are governed by metrics rather than processes, and by communication rather than feel. The ability to be productive and focused is usually impaired by the Exponential and Inverse Laws of Virtual Teams. The Exponential Law states that each addition to a virtual team doubles the information overload. The Inverse Law states that the larger the team and higher the information, the lower will be the discussion.  Each virtual team requires a productivity mentor to enable productive behavior and results from virtual teams.

Enterprise productivity defies easy definition. The concept of business competitiveness as measured by market share, market capitalization or earnings per share embeds in it operational productivity as a foundation. Business competitiveness requires operational productivity but operational productivity by itself cannot guarantee business competitiveness. Operational productivity coupled with strategic productivity can provide business competitiveness. Strategic productivity is poorly appreciated even in the best of organizations. The inevitable gross and futuristic nature of strategy allows huge latitude in deployment of resources and definition of expectations. Enterprise leaders need to develop and execute relevant company level paradigms to ensure productivity in strategic planning and execution.

Humatronics

Electronics and digitization dominate our modern day lives; individuals are overwhelmed by access to data and information and networks and matrices of multiple cross-sections. Teams are rendered invisible by virtual configurations of multi-geographic teams and boundary-less work streams, with constraints of time and space. Enterprises are unable to combine operational productivity and strategic productivity into an integrated paradigm. The way to cope with this is to develop a digital paradigm of work study which combines human ingenuity and flexibility with electronic speed and accuracy. This paradigm, christened Humatronics, will be contrarian in terms of a focused and purposeful use of electronics and digitization instead of an unbridled and unlimited use of these platforms.

From the view of personal productivity, humatronics would, firstly, involve limiting the followers and followed of the social and internet media to the bare minimum and to the most profound so that the ratio of value creation to time deployed has the most favorable number. Secondly, it would involve time-bound sequential working rather than toggle-switching multi-tasking. Thirdly, it would require a daily balance of activity accounting and achievement accounting, capturing the Top 5 time-drawers and Top 5 achievement-rankers. The clarity and value which would accrue through this process on an individual’s productivity would be phenomenal.

In terms of team productivity, Humatronics would, firstly, involve creation of teams that are able to develop the right balance of “read-talk-see” faculties so that the team members are able to simulate each other’s presence and thought processes and minimize the time required for physical interface. Secondly, the meetings should be based on effective tele-presence systems that bring a real life feel to remote meetings. Thirdly, it would require localization of primary responsibility within the global system so that the benefits of local execution and global delivery are combined. The productivity that would accrue through the use of digital processes for global team effectiveness would be substantial.

Enterprise productivity can be enhanced through humatronics in a number of ways. Commonly, digitization of all activities which enables accuracy and archiving is considered as the primary contributor to productivity. Real productivity would, however, accrue from conversion of hazardous and time consuming manual jobs to robotic operations. Welding and stamping have been primary areas for robotics. Automated high level stacking and retrieval, automated guided vehicle transportation, driverless automobiles, pilotless aircraft, robot-assisted surgeries, robotic ultra-clean room operations, automated continuous process systems, and such other areas are prime targets for humatronics at the enterprise level.

Holistic and integrated design of robot-assisted digital man-machine systems on one hand and optimization of digital-assisted human brain power on the other are the new enablers for productivity.

Posted by Dr CB Rao on May 9, 2013               

Business Competitiveness and Industrial Engineering

Industrial Engineering (IE) discipline has played an admirable role in enhancing productivity and efficiency at shop floor level for the last several decades. With the rapid changes in market dynamics and enhancements in competitive pressures, emphasis has shifted to more comprehensive and sustainable models of continuous business improvement. If the 1970s constituted the decade of industrial engineering, 1980s the decade of corporate planning and 1990s the decade of globalization, 2000s started off as a decade of investment-led growth. However, the global meltdown that started in 2008 brought business competitiveness as an essential strategy to cope with recession. In this context, industrial engineering can re-discover its niche in a corporate perspective as a tool for total business improvement.

A contemporary business model

In today’s context, a company is an amalgam of several core and supportive functions. While product development, manufacturing and marketing remain the core functions in an organization, an increasing number of domains such as information technology, human resources, quality assurance, environment, safety & health and intellectual property management are playing an important role in enhancing the specifications and quality of a product or service.

Today’s business faces heightened competitive pressures which are peculiar to each industry and which are related to suppliers, markets, technologies and other factor inputs. Traditional industrial engineering techniques have focused on optimization of individual activities in functional domains while today’s challenge is more pervasive in terms of an overall corporate value chain.

Viewed in a macro perspective, a company is no longer a stand-alone entity in the supply side or market side. A company has to view itself as part of a larger supply chain spanning the basic material to end product user stages. This has resulted in concepts of supply chain management (SCM) or customer relationship management (CRM) as two key drivers of competitive advantage. At an elevated level, one company’s SCM could be its vendor’s CRM. The inter-linkages between markets, manufacturers and vendors are as varied and complex as they are obvious.

Over the years, operationally as well, there has been a significant change of the context in which industrial engineering finds applications. A typical factory or office system has moved from being a predominantly man-dominated machine system in the 1960s or 1970s to a machine-dominated human system from the 1990s. The rate of technological change itself has moved from a stable, steady-state situation to a state of rapid change. Consequently, product life cycles which used to be predictable with extended spans of 10 years or more have become volatile, with compressed spans of 3 years or less. As a result, the competitive scenario has become intensely market-driven in addition to being supply driven, with heightened rivalry among firms.

Given the above changing dynamics, while individual and isolated efficiency improvements in discrete operations or functions continue to be important, it becomes necessary to bring a wider business perspective for industrial engineering to contribute effectively to corporate development.

An IE model for total business improvement

Given the fact that business development and corporate management have become extremely challenging with multi-domain, multi-entity and multi-location interactions, the need for overall system efficiency in an end-to-end connected value chain becomes obvious. In order to address this imperative industrial engineering needs to evolve itself into a new corporate level paradigm.

The proposed business driven model for industrial engineering views the entire spectrum of corporate actions as a total value chain where every entity and every domain has a specific role to play in improving a business in totality. Maximization of efficiency within and across each and every stage of the value chain becomes important as a potential strategy to optimize the overall system efficiency. At the same time, given the complexity of task, a conceptually elegant model is required to manage the complexity in an easily comprehensible fashion.

The proposed IE model for total business improvement has four essential components; two of which are internally focused and two externally oriented. Together, the four components can be synergised to deliver a powerful, positive impact on a company’s operations and overall business.

The proposed model is simple in that its rests on two fundamental concepts of ‘optimizing’ and ‘connecting’ which are applied on two relevant dimensions of ‘internal business processes’ on one hand and ‘external corporate transactions’ on the other. The business driven IE model is thus a 2x2 concept-application matrix which can be deployed in totality to the contemporary business configuration discussed earlier. This model will be relevant regardless of the number of internal or external domains or entities involved in a company’s value chain. The combinations are as follows:

Optimization of Internal processes : Value engineering
Optimization of External transactions : Supply chain management
Connectivity of Internal processes : Value chain management
Connectivity of External transactions: Collaborative networking

The model integrates four levers for industrial engineering to play a major role.

1. Value engineering

Value engineering has been by far the longest existing branch of industrial engineering that re-engineers products, services and operations to eliminate waste and enhance efficiency. Whether it is simplified components, optimized materials or minimalist manufacture, value engineering plays a vital role in re-engineering not only product, process and production systems but also any operational activity to enhance productivity and efficiency.

In today’s context, value engineering takes newer dimensions with application of computer aided design and manufacture which help designers and production engineers achieve unparalleled results in design and manufacturing simplification. Similarly, at operational level, information technology helps optimise man-machine interface through simulation of data and enhanced quantitative techniques in a manner that was not within the analytical reach of an industrial engineer in earlier years.

Modular design platforms and common internal components can help product designers achieve higher variety of end products with minimal proliferation of components and aggregates. Similarly flexible manufacturing systems and versatile dies, moulds and tool settings which can handle diverse component sizes and different production batch sizes can redefine manufacturing efficiencies. Value engineering has the capability to move from a focus of component and operational level improvement to a broader perspective of an overall engineering philosophy that simplifies design and manufacture at product family level. Value engineering then becomes a powerful tool for enhancing competitive advantage in the business as a whole.

2. Value chain management

If value engineering optimizes design, manufacture and operations, value chain management interconnects each functional domain of an organization to ensure overall delivery of a product or service in the most efficient manner. For any business to be competitive, it is not only essential to do each functional activity right but also integrate all the functional activities smartly with the right connectivities.

In today’s business environment wherein information is a widely accessible asset it is the execution that marks the difference between successful and not so successful firms. It is no longer sufficient to aspire for a product portfolio or market turnover. It is, on other hand, incumbent to plan out the entire value chain of activities starting from product conceptualization and ending with market launch, in terms of clear activities and resource deployment. Structured and end-to-end connected execution enables a company generate maximum value due to timely and precise deployment of resources across the organization for high quality results. Time tested project management techniques of PERT / CPM which are now further enhanced by the customized computer programmes should be deployed for various long term, multi-functional or multi-centric projects to ensure effective execution with the least resources or time slack. As an approach, concurrent design and manufacture, whereby all functions connected with product development, manufacture and market launch collaborate from the very beginning, is an ideal approach to institutionalize value chain management in a company.

3. Supply chain management

Business efficiency today verily rests on the manner in which a provider of a product or service manages its inventory not only within the company system but also covering the entire supply and distribution chain comprising multi-level vendors on the supply side to multi-tier distributors, retailers and customers on the market side. From an initial enthusiasm of minimal inventories within the company, the accent now is on optimizing inventories across the value chain. Various quantitative and simulation methodologies which the industrial engineers have in their tool kits are helpful in smoothening the inventories across the supply chain.

More fundamentally, the critical approaches of the industrial engineer in defining and streamlining work flows and eliminating redundancies as well as idle times are extremely relevant in developing a supply chain structure that supports efficiency. Disintermediation or elimination of superfluous layers leads to significant procurement and distribution economies. Modular packaging and foolproof, secure packaging could help movement of SKUs across the chain without the hassles of unpacking and repacking across the tiers.

Industrial engineers need to also integrate technology in a significant manner for optimal supply chain management. Contemporary telecommunication technologies and global positioning systems enable tracking of unit products or cartons anywhere in the world. Radio Frequency Identification (RFID) and related software solutions need to be deployed by industrial engineers to achieve technology-led efficiencies in supply chain management.

4. Collaborative networking

Even the best of supply chain management would perform below potential, if true partnership and collaboration are not integrated into the relationships. Quite apart from tools and techniques, industrial engineers would need to also focus on behavioral dynamics that result in adversarial or play-safe practices among various entities in a supply chain. For example, as long as the goals (at a strategic level) and the forecasting processes (at an operational level) of a manufacturer and its vendor are not truly aligned in a collaborative fashion, any degree of supply chain optimization, whether through quantitative analysis or technological development, would not be effective.

At the core of collaborative networking lies the premise that any two entities engaged in a relationship will derive greater value by having common objectives of business development. Toyota for example, is continuing to make strides over and above its famed Toyota Production System by adopting collaborative networking. Toyota’s CCC21 (Construction of Cost Competitiveness for the 21st century) initiative has helped Toyota double its annual consolidated cost savings from 100 billion yen (which itself is a formidable figure) to 200 billion yen. Collaboration helps Toyota and its suppliers find ingenious ways of feeding cost improvements back into products to raise their value.

Collaborative forecasting of demand and supply profiles has helped retail giants like Proctor & Gamble and Henkel achieve improved shelf presence of their products and enhanced customer satisfaction while ensuring dramatic reductions in inventory and other costs of retailing.

In order to succeed in collaborative networking, industrial engineers would need to develop a total business perspective of the industry structure, supply chain dynamics (both vendor side and customer side) and process linkages between entities. Key drivers of business optimization need to be identified and skills of collaborative networking and management mastered. More than anything else, industrial engineers would need to be members of cross-entity and cross-functional teams that facilitate collaborative management.

Conclusion

The business challenges that a firm faces in today’s recession environment are a complex combination of strategic and operational issues, with every industry becoming intensely volatile and competitive. As Indian industry globalizes, business opportunities as well as competitive pressures enhance.

Industrial engineers can make a useful contribution to India’s global business development by creating a new skill-set for total business improvement. The 2x2 model discussed in this paper of focuses on ‘optimizing’ and ‘connecting’ as the thematic tools to be deployed across ‘internal business processes’ and ‘external corporate relationships’. The proposed business improvement model provides to industrial engineering a relevant and highly productive play in a wider business canvas.

Posted by Dr CB Rao on April 12, 2009