Why it’s important to measure productivity

Productivity is a measure of how well your company manages resources. Understanding how to measure the productivity of people and processes in your company helps you determine what is working well and where changes in the workplace are needed. Some reasons businesses use productivity formulas and regularly assess productivity include:

Maximizing profits

If your business isn’t as productive as it could be, your overall profits could suffer. Bottlenecks and delays reduce how you deliver your products or services to customers, and improving productivity lets you serve more potential clients than you otherwise could.

Improving efficiency

When you’re spending money on equipment, supplies and employee salaries, you want everything to run as efficiently as possible. Productivity assessments help you identify where you can make improvements or change strategies to use your resources more wisely.

Better time management

Part of managing employees involves scheduling work hours and assigning tasks, so knowing exactly how long specific tasks take makes time management easier. Measuring productivity also lets you know which employees are best suited to which tasks, so you can assign duties and work hours based on individual efficiency, not just at random.

Regular feedback on overall performance

Employee efficiency and the effectiveness of particular production processes aren’t static things, and implementing a strategy of regular productivity assessments gives you an ongoing picture of how your business operations change over time. Productivity formulas provide feedback on what is or isn’t working within your organization so you know when to make changes or which new processes need further tweaking.

4 Ways to measure productivity

There are plenty of ways to measure productivity, but one thing to consider is which methods are appropriate for your business. The overall goal is to make your business run more efficiently, so if a particular method isn’t achieving that goal, then you may want to try a different method of calculating productivity. Some methods of measuring productivity include:

1. Productivity formulas

Productivity formulas let you input specific numerical values assigned to labor, capital or raw materials and use these to determine whether your company’s output shows an efficient use of these things.

2. Multifactor productivity

Multifactor productivity assesses output compared to the combined inputs of labor and capital instead of trying to compare output to only one of these factors.

3. Total factor productivity

Total factor productivity is an economy-wide measure of productivity, so it isn’t as useful for individual businesses except as a way to measure your overall industry. Total factor productivity compares the total output of businesses in the economy to the weighted averages of labor and capital inputs. It’s a measure of the growth rate of these inputs and outputs, not a measure of the exact dollar amount spent or made in the industry.

4. 360 degree feedback

360 degree feedback is a process in which managers and coworkers submit anonymous feedback to each employee to improve performance and boost accountability. The idea behind 360 degree feedback is that peers can assess productivity better than an outside review and that direct feedback can help employees gain self awareness about areas that require improvement. Employees who provide feedback in this type of setting may need training to ensure that feedback is unbiased and objective. In many cases, 360 degree feedback is used in conjunction with more objective productivity measures to help foster a cooperative work environment.

How to use productivity formulas

The most basic productivity formula is a simple calculation of units of output/units of input. Your company’s output includes the products you sell or services you provide. The inputs in the formula include the costs of your capital, labor and materials.

For example, if you produce $90,000 worth of goods or services in a given time period and your employees work 1,500 hours during that time period, the productivity formula would give you $60 of productivity per hour worked (90,000 divided by 1,500.) If you need to see how staffing affects productivity, you could use the number of employees instead of the work hours in the formula. For a company with 50 employees producing $90,000 worth of product, this formula would be $90,000/50=$1,800 per employee. You can make this same calculation for materials, capital and overhead costs to determine the productivity of different aspects of your business.

Productivity formulas are a starting point for figuring out where to allocate resources when you’re trying to improve your operations. You can use multifactor productivity formulas to get a comprehensive overview of efficiency within your organization and individual productivity formulas focused on labor, materials or other factors to find the primary sources of inefficiency.

One big issue with productivity formulas is that sometimes companies attach too much importance to one particular input. For example, while many companies traditionally focused on labor as the main factor in a productivity formula, this isn’t necessarily appropriate in the modern world. In many industries, labor costs have become less important than materials, equipment and overhead costs for operations. If your labor costs only make up 10 to 15% of your overhead, allocating 40 to 50% of your resources to improving employee performance isn’t the best path to improved efficiency. Instead, consider spending more of that money on a change in the way you source supplies or equipment that can speed up production independent of your employees’ efforts.

Measuring changes in productivity over time

While calculating productivity at a given point in time shows you what you need to work on within your organization, measuring productivity changes over time lets you see if your productivity-boosting methods are actually working. The easiest way to measure changes in productivity is to implement the productivity formula before alterations in business operations are made, and then measure it again a few weeks or months into the process. If your productivity per hour worked was $60 at the start and changes to $70 after you implement new processes, you have an improved productivity of $10 per hour.

To find the percentage of change, simply divide the improved productivity by the initial productivity and multiply the answer by 100. In this example, you would use 10/60 x 100=16.7% increase in productivity.

You can use these formulas to track how productivity increases over time once you have begun to implement specific changes. This can help you determine which new methods or processes work best and which don’t have an appreciable impact on productivity.

Pitfalls of productivity formulas

One big pitfall of using productivity formulas is that they don’t necessarily measure everything that could be affecting your business performance. Some aspects of business are difficult to measure, such as the roles of employees who aren’t directly involved in producing or selling your products or services. Companies that rely on research and development may find that productivity formulas indicate that engineers, designers and similar job roles are deemed unproductive because they don’t directly contribute to revenue. Eliminating these positions would cause the entire business to crash, though, since without them there would be no new products at all. Customer service representatives who respond to consumer complaints and reduce the rates of returns and refunds also often don’t easily fit into a productivity formula but may have a direct impact on overall profits.

The time involved in your production cycle is another area that isn’t typically included in productivity measurements. If your competitor is offering two-day shipping from the day of purchase and your products take two weeks to arrive at their destination, this delay can cost your company sales. Shortening production and shipping times may increase your competitiveness and overall profits more than small increases in employee productivity or reductions in supply costs.

How Businesses Can Improve Productivity

Once you know the areas in which your business could improve productivity, tackling those specific weaknesses is the next step. The type of plan you put into effect depends on what areas need attention.

Improving Employee Efficiency and Productivity

Some ways to boost the efficiency and productivity of your employees include:

• Setting clear, achievable goals for each individual employee
• Providing the right tools, including software, hardware, office equipment and space to work, for each employee’s success
• Implementing a system of regular feedback or employee evaluations
• Practicing positive reinforcement to encourage high performance

Improving Organizational Productivity

Improving productivity throughout your organization involves creating shared goals and making sure everyone is on board with your overall vision. Some things you can do to improve organizational productivity include:

• Creating a distinct mission statement for your business
• Delegating tasks within your company to those who can do them best
• Assessing the equipment needs of your entire office or production facility and choosing vendors that meet your organization’s needs
• Making your work environment comfortable
• Implementing incentive programs to motivate teams within your company
• Developing specific performance standards that are applied fairly across your organization
• Providing training for new processes and procedures and ongoing training to keep employees’ skills up to date

Measuring productivity is the first step toward improving your business’s efficiency, and acting on those measurements can improve processes, positively impact employee satisfaction and, ultimately, lead to increased profits.