Production, Productivity & Competitiveness Video

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  • 00:01 Production
  • 00:47 Productivity
  • 2:54 Multi-factor Productivity
  • 4:30 Critical Variables…
  • 5:51 Productivity & Competitiveness
  • 6:36 Lesson Summary
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Lesson Transcript
Instructor: Jennifer Lombardo
Do you know the difference between production and productivity? In this lesson, we will discuss production, productivity, and competitiveness, and the critical variables that enhance productivity.


Sarah is a 12-year-old genius. She has recently started her own zero-calorie cookie business out of her mom's home with much success. She has hired six of her friends to help her increase her cookie production, which is the actual making of goods or services. In Sarah's case, she needs to increase the production of her cookies because hundreds of orders are coming in daily.

In this lesson, we will explain the difference between production and productivity, and discuss the relationship between productivity and competitiveness. In addition, you will learn the definition of single, multiple, and total factor productivity, and how to compute each. Finally, we will identify the critical variables that enhance productivity for Sarah's cookie business.


Before we can further examine Sarah's cookie business productivity, we need to explain some terminology. Many business students are easily confused with the terms 'production' and 'productivity.' We already explained that production is the actual making of goods or services. Productivity is the ratio of outputs (goods and services) divided by one or more inputs (such as labor, management, or capital).

When Sarah informs her staff that cookie production has been high, she is only saying that more people are working to make cookies. For instance, this week, Sarah's cookie production was very high because all six of her workers worked full-time. Sarah is NOT saying that she has high productivity. In order for Sarah to make that claim she needs to calculate and measure actual productivity. For her cookie business, the easiest way to accomplish this is by measuring labor hours. This can be accomplished in the following way:

Productivity Measurement
Productivity = Units produced / Input used

For example, if units (or cookies) produced = 15,000, and labor hours used are 250, then productivity = units produced / labor hours used, or 15,000 / 250 = 60 units (or cookies) per labor hour.

Sarah's measure of productivity for this week is higher than last week. Her new workers are acclimating to the cookie-baking process. Last week, her productivity was 12,000 cookies and 250 labor hours, which equaled only 48 cookies per labor-hour. The example above can be referred to as single factor productivity, as the ratio of only one resource (labor hours) to the goods and services produced (cookies) was calculated. Sometimes, it is important to calculate how productivity is affected by more than one resource.

Multi-Factor Productivity

Sarah also has a college business student named Tim who helps her analyze her business numbers. Tim showed Sarah different ways to analyze her cookie business by examining multi-factor productivity, which includes all inputs such as labor, materials, capital, and energy. Multi-factor productivity is also known as total factor productivity and is calculated by combining the input units as shown here:

Productivity = Output / (Labor + Materials + Energy + Capital + Miscellaneous)

To make this calculation easier to compute, the individual inputs can be shown in dollars. Tim showed Sarah how to calculate with her individual inputs. Cookie production = 15,000 / ($250 in labor + $100 in material + $30 of energy) = 15,000 / $380 = 39.47 cookies per dollar.

The multi-factor approach gives a more realistic view of cost, productivity, and how each input can affect overall output. Sarah can try to cut costs on materials, buy cheaper ingredients, or pay her workers less to improve her cookies-per-dollar output.

Other variables, such as external factors or quality of ingredient issues, can be hard to quantify and measure. For example, when a hurricane hit and Sarah lost power for two days, it drastically affected her cookie business.

Critical Variables Enhancing Productivity

Sarah has a good understanding of her production and productivity numbers for her cookie business. In order for Sarah to remain competitive in the marketplace, she needs to streamline her business to stay profitable. One way is for her to further analyze the critical variables that can enhance productivity.

These variables that are necessary to productivity are improvement-labor, capital, and knowledge. Sarah can utilize the variable of improvement-labor by increasing the output of her workers. This can be accomplished by educating, supporting, and motivating her employees by keeping them happy and healthy. Sarah has paid for her workers to take free baking classes to improve their understanding of the process. She has also given her workers half-day Fridays to improve morale. She is already seeing the improvement in productivity.

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