Improving Organisational Efficiencies using Total Factor Productivity Measurement

The Challenge…

In this post, we present the results from a research study on using productivity measurement models to determine the sustainability of profits at a local company in Zimbabwe. Given the tough economic environment that Zimbabwean companies are operating in, this particular company felt that it was crucial for them to know if their financial position was sound and stable. The company’s revenue was going down and they wanted to cut down on the cost of resources in general. To be in a position to answer this question, a productivity measurement study was carried out using a profit linked productivity measurement model.

Productivity measures the amount of products and services that are produced per each unit of resources or input. Productivity is better measured as a change between two periods (i.e. improvement or deterioration), rather than as an absolute figure. Generally an improvement in the labour productivity of a company is simply the increase in the output (such as, number of products or amount of services provided) produced as a result of the efforts of the employees of a company. This may be due to employees working harder or the employees working smarter as a result of training, good working environment, better or attitudes, among other things.

The Objectives…

There were three main objectives that were set out at the beginning of this study. The main objective was to determine whether the company’s profits were sustainable in the long run or not. This meant that we had to look at the company’s performance in terms of its revenue and costs. This would help us identify the key drivers of profits within the company’s resources. We would be able to establish if profits being realised by the company were as a result of the organisational efficiencies or as result of leveraging on price fluctuations in both the products and resources consumed.

How we solved it…

There are two main types of productivity measurement, namely partial productivity measurement and total factor productivity measurement. Partial productivity models measure productivity for one input at a time, relative to organisational performance. For example, labour productivity, capital productivity etc. This approach may not be a true reflection of organisational performance since it isn’t only one input that contributed to the total revenue of the organisation. On the other hand, total factor productivity models measure productivity for all the given inputs, relative to organisational performance. Unlike partial productivity models, total factor productivity models reflect simultaneous changes in outputs and inputs thereby giving a clearer picture of the organisational efficiencies. The model we used in this study was a profit linked total factor productivity measurement model.

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