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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.
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.
1. We established that the organisation’s financial position was not stable in the long run and the profits realised are not sustainable in the long run. The overall change in profitability between the two periods under review was characterised by a massive price over recovery and huge productivity losses.
2. There was a slight decrease in revenue generated by the organisation, a decrease in costs and a slight increase in gross profit during the two periods under review. The profits realised by the organisation were as a result of price recovery which implies that the organisation leveraged on price movements.
3. The organisation was inefficient in resource usage as pointed out by productivity losses in all the major resource categories i.e. labour, capital, energy. The organisation’s services rendered between the two periods declined at a rate faster than that of resource volumes resulting in productivity losses.
4. Product prices increased at a rate faster than that of resource prices resulting in a price over recovery thereby short-changing the consumer and passing all the value to the shareholders.
5. Productivity measurement for the company’s labour was done using job grades (employment categories). We established that productivity losses were relatively significant for low level employees.
Download the full article below.
Improving Organisational Efficiencies using Total Factor Productivity Measurement
This article was written by one of the consultants at IPC
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