Question

You have been sent to a factory as a performance consultant. Factory leadership tells you that the productivity of the plant is poor. Because of this, they chose to focus on the following metrics:

- $ produced per employee
- Total production costs per unit (weighted or normalized to an agreed-to "standard" product)
- Units produced (normalized) per labor hour
Despite management intensely monitoring and responding to these elements for several months, NONE of these metrics show improvement, and production costs per unit have increased (which, of course, is bad since we want costs to go down).
How do you respond to their problem?

Answer 1

The factory's issue with non-improving productivity metrics despite intense monitoring may require a reassessment of metrics to include both average and marginal costs, and possibly a broader range of productivity measures beyond output per hour. An alternative approach could examine other factors influencing productivity such as total factor productivity, process flows, equipment efficiency, and employee motivation.

Step-by-step explanation:

To respond to their problem, we need to reassess the metrics being used to measure productivity and potentially introduce new performance indicators. Although the factory leadership has been focusing on metrics such as 'dollars produced per employee', 'total production costs per unit', and 'units produced per labor hour', the lack of improvement suggests that these metrics may not fully capture the factory's operational inefficiencies or that there may be issues in areas not directly tied to these measurements.

Regarding the consideration of costs per unit, the leadership should examine both average cost and marginal cost. Average cost (AC = TC/Q) helps understand the cost of producing a given quantity on average, while marginal cost (MC = ∆TC/∆Q) highlights the cost of producing each additional unit. If the marginal cost is increasing with each unit, it indicates inefficiencies in the production process. The policy they have towards productivity monitoring and labor utilization may require adjustment if we understand that productivity is not strictly about output per hour but also includes the value generated per hour, and is influenced by wage levels, as they reflect the value of the output produced.

An alternative approach could involve looking at other measures of productivity that factor in the value of output relative to inputs, including both labor and capital. Such measures could include total factor productivity or revenue per employee. Furthermore, an analysis of process flows, equipment efficiency, and employee skills and motivation could reveal underlying issues affecting productivity beyond those captured by the traditional metrics.