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PROFESSIONAL PRACTICE Demystifying productivity and performance Stefan Tangen D

PROFESSIONAL PRACTICE Demystifying productivity and performance Stefan Tangen Department of Production Engineering, The Royal Institute of Technology, Stockholm, Sweden Abstract Purpose – Examines the ways in which the concepts of “productivity” and “performance” are dealt with in the literature, demonstrating that terms used within these ﬁelds are often vaguely deﬁned and poorly understood. Design/methodology/approach – Reviews related performance literature from the past 30 years (of both an academic and a practical nature). Findings – Clariﬁes the meaning of ﬁve terms (productivity, performance, proﬁtability, efﬁciency, effectiveness) and shows how they are inter-related. Research limitations/implications – The creation of a common grammar is not an easy task; one must therefore still accept the fact that people will continue to interpret the terms described in this paper in slightly various ways. Practical implications – Measurement and improvement regimes are often built without a clear understanding of what is being measured or improved. This can be regarded as simply a pragmatic approach to improvement, or a missed opportunity to fully understand and then optimise important factors relating to competitiveness and success. Originality/value – The paper creates a terminology that reduces the existing confusion within the ﬁeld. Certainly, within academia and industry, a shared vocabulary and grammar are helpful in ensuring rigorous and robust development of shared understanding. Keywords Productivity rate, Performance management, Proﬁt, Process efﬁciency, Performance appraisal, Semantics Paper type Literature review Introduction The terms productivity and performance are commonly used within academic and commercial circles; they are however rarely adequately deﬁned or explained. Indeed they are often confused and considered to be interchangeable, along with terms such as efﬁciency, effectiveness and proﬁtability (Sink and Tuttle, 1989; Chew, 1988; Sumanth, 1994; Koss and Lewis, 1993; Thomas and Baron, 1994; Jackson and Petersson, 1999). Measurement and improvement regimes are often built without a clear understanding of what is being measured or improved. This can be regarded as simply a pragmatic approach to improvement, or a missed opportunity to fully understand – and then optimise – important factors relating to competitiveness and success. Certainly, within academia, a shared vocabulary and grammar is helpful in ensuring rigorous and robust development of shared understanding. The Emerald Research Register for this journal is available at The current issue and full text archive of this journal is available at www.emeraldinsight.com/researchregister www.emeraldinsight.com/1741-0401.htm IJPPM 54,1 34 Received October 2003 Revised February 2004 Accepted August 2004 International Journal of Productivity and Performance Management Vol. 54 No. 1, 2005 pp. 34-46 q Emerald Group Publishing Limited 1741-0401 DOI 10.1108/17410400510571437 Productivity – a multidimensional term A very early appearance of the term productivity was as used by Quesnay (1766) in the Journal de l’Agriculture over two centuries ago. Since then it has been applied in many different circumstances at various levels of aggregation, particularly in relation to economic systems (Tangen, 2002a). It has been argued that productivity represents one of the most important basic variables governing economic production activities (Singh et al., 2000). Grossman (1993), for example, discusses productivity improvement as one of the key competitive advantages of an enterprise in the following way: Companies need to realize that gains in productivity are one of their major weapons to achieve cost and quality advantages over their competition. In spite of the fact that productivity is seen as one of the most vital factors affecting a manufacturing company’s competitiveness, many researchers argue that productivity is often relegated to second rank, and neglected or ignored by those who inﬂuence production processes (Singh et al., 2000; Sink and Tuttle, 1989; Broman, 2004). One possible reason for this is the lack of common agreement on what the term actually represents. Though the term is widely used, it is often misunderstood, leading to productivity being disregarded or even to contra productive decision making (Tangen, 2002b; Forrester, 1993). Chew (1988) suggests that even though the concept of productivity has existed for a long time, remarkably many people who make decisions every day about improving plant efﬁciency do not know how to answer the simple question of what productivity is. Bjo ¨rkman (1991) suggests that decisions on productivity improvement are often based on individual opinions instead of on a shared and commonly held view. A relatively simple review of the literature suggests that: . Those who use the term productivity rarely deﬁne it. . There is a lack of awareness of the multiple interpretations of the term, as well as the consequences, to which such discrepancy leads. . There are both verbal and mathematical deﬁnitions and approaches. This suggests that productivity is a multidimensional term, the meaning of which can vary, depending on the context within which it is used. However, there are common characteristics that tend to be embraced by the term. In industrial engineering, productivity is generally deﬁned as the relation of output (i.e. produced goods) to input (i.e. consumed resources) in the manufacturing transformation process (Sumanth, 1994). However, there are numerous variations on this basic ratio, which is often too “wide” a deﬁnition to be useful in practice. Table I shows a number of these variations, created from examining the term from different perspectives (Thomas and Baron, 1994). The verbal deﬁnitions aim to explain what the concept of productivity means. They are useful since they can create a “norm”, a shared view of what an organisation is striving to achieve. They can also be used when specifying and explaining an organisation’s strategic objectives (Bjo ¨rkman, 1991). Mathematical deﬁnitions, on the other hand, can be used as the basis of performance measures, where the major aim is to improve (not to explain) productivity. Since it can be difﬁcult to translate a verbal deﬁnition to a mathematical one, mathematical deﬁnitions do not always reﬂect all the characteristics that represent the concept of productivity. Compromises are often made when mathematical deﬁnitions are formulated, which in Demystifying productivity and performance 35 turn means that they usually only show a part of the “true” meaning of productivity. Broman (2004) suggests that it is necessary to have a clear distinction between a concept and a particular mathematical deﬁnition attached to the concept, in order to effectively evaluate the characteristics of the mathematical deﬁnition. (Bernolak (1997) provides a useful verbal explanation of productivity are related to manufacturing: Productivity means how much and how well we produce from the resources used. If we produce more or better goods from the same resources, we increase productivity. Or if we produce the same goods from lesser resources, we also increase productivity. By “resources”, Deﬁnition Reference Productivity ¼ faculty to produce (Littre ´, 1883) Productivity is what man can accomplish with material, capital and technology. Productivity is mainly an issue of personal manner. It is an attitude that we must continuously improve ourselves and the things around us (Japan Productivity Centre, 1958 (from Bjo ¨rkman, 1991)) Productivity ¼ units of output/units of input (Chew, 1988) Productivity ¼ actual output/expected resources used (Sink and Tuttle, 1989) Productivity ¼ total income/(cost þ goal proﬁt) (Fisher, 1990) Productivity ¼ value added/input of production factors (Aspe ´n et al., 1991) Productivity is deﬁned as the ratio of what is produced to what is required to produce it. Productivity measures the relationship between output such as goods and services produced, and inputs that include labour, capital, material and other resources (Hill, 1993) Productivity (output per hour of work) is the central long-run factor determining any population’s average of living (Thurow, 1993) Productivity ¼ the quality or state of bringing forth, of generating, of causing to exist, of yielding large result or yielding abundantly (Koss and Lewis, 1993) Productivity means how much and how well we produce from the resources used. If we produce more or better goods from the same resources, we increase productivity. Or if we produce the same goods from lesser resources, we also increase productivity. By “resources”, we mean all human and physical resources, i.e. the people who produce the goods or provide the services, and the assets with which the people can produce the goods or provide the services (Bernolak, 1997) Productivity is a comparison of the physical inputs to a factory with the physical outputs from the factory (Kaplan and Cooper, 1998) Productivity ¼ efﬁciency * effectiveness ¼ value adding time/total time (Jackson and Petersson, 1999) Productivity ¼ (output/input) * quality ¼ efﬁciency * utilisation * quality (Al-Darrab, 2000) Productivity is the ability to satisfy the market’s need for goods and services with a minimum of total resource consumption (Moseng and Rolstada ˚s, 2001) Table I. Examples of deﬁnitions of productivity IJPPM 54,1 36 we mean all human and physical resources, i.e. the people who produce the goods or provide the services, and the assets with which the people can produce the goods or provide the services. The resources that people use include the land and buildings, ﬁxed and moving machines and equipment, tools, raw materials, inventories and other current asset. This deﬁnition captures two important characteristic. First, productivity is closely related to the use and availability of resources. In short, this means that a company’s productivity is reduced if uploads/Management/ demystifying-productivity-and-performance.pdf