I would like to start this module on productivity by sharing a little quote
with you. I will read the quote, and you'll have to
guess the person who said this. Here we go.
The conservation of all national resources is only preliminary to the larger question
of national efficiency. I'll give you a hint.
It was a US President. Obama, George W., Ronald Reagan.
Turns out the person who said this was Theodore Roosevelt.
More than a 100 years ago Frederick Winslow Taylor wrote a wonderful book
known as The Principles of Scientific Management.
This was the opening line of the book. Productivity was a major theme a 100 years
ago and it's still a very current topic today.
We will start out our module on productivity with this first session in
which I will introduce some more academic definitions of productivity.
What I love about Taylor's work though, it's very much driven by observing people
in action. And so, the rest of the module, I will
promise you, will be much more hands on. As mentioned previously, we can define
productivity as a ratio between the units of output produced and the input that is
used. For example, we can define labor
productivity as four units per labor hour. Units might be insurance claims, it might
be vehicles or it might be patients. And so that, you can think about the
output produced. The vehicles, the insurance claims or the
patients per labor hour as a productivity measure.
Notice that those are exactly the processing time that we discussed
previously. The beauty of this example is that the
only input is labor time. If you think about affirmative, very
high-level perspective, there are many other input factors, including capital,
labor, materials, services at the front users and energy.
People refer to the multifactor productivity as the output divided by the
dollar values of all of these input factors.
Now, stick with the example for labor productivity a little longer, what keeps
us from having a perfect productivity. Think about the output in the productivity
definition as productive time or value add time, and the input as the total time.
Productivity is then simply the percentage of labor time that is spent productively.
Now, clearly, you cannot have the productivity, in this case, of higher than
a 100%. You can never get more than 60 productive
minutes out of a worker per hour. Similarly, if you think about the energy
efficiency of your house, you might measure the output as the temperature
gains that you have in your living room. And the input as the amount of oil or gas
that you burn in the basement in the heater.
Again, you will never generate more heat in the living room than you have consumed
in terms of primary energy in the basement.
The interesting question both of these example are really what reduces a
productivity. This gets us to the idea of waste and
inefficiency. Wastes are those things that are driving
down productivity, and are really at the heart of understanding the productivity in
an operation. With the concept of inefficiency in mind,
let's revisit the example from the introduction.
This was a group of call centers that were benchmarked along the dimensions of
responsiveness and productivity. For a call center, it is easier to achieve
a high productivity. Just staff so that your utilization is
really, really high. Now, the problem with that, of course, is
that your responsiveness will be very poor if you have a high level of utilization.
On the other hand, you can increase your responsiveness if you keep your
utilization very, very low. Good for your responsiveness, bad however
for you productivity. Thus, there exist attention between those
two forces, responsiveness and productivity.
Now, consider call centers A, B, and C. All of these call centers are on a line
that we previously defined as the efficient frontier in the industry.
This means that there is no player, no company, no call center that dominates
competitor A, B or C. And when I say, dominates, I mean, firms
that are both faster than we are and at the same time, also cheaper.
Now, you notice that competitor D is not on the frontier.
For competitor D, we have a distance to the frontier.
And that is what an inefficiency looks like at this very high level perspective.
Let's bring the concept of the efficient frontier to life by looking at some data
from the US airline industry. What I'm showing here is on the x-axis,
I'm plotting the efficiency of the major US carriers.
Here, efficiency is measured by how much it costs an airline to produce a number of
seat miles. On the y-axis, I'm showing what the
airline is able to command in terms of its prices for these miles.
Observe the frontier. Observe how these airlines are lining up
on a line that looks like this. On the one extreme, you have Hawaiian,
which is not able to get high prices but because of its very focused route
structures, able to provide an amazing efficiency.
On the other extreme, you have US Airways. The company is clearly able to command
high prices but has a horrible efficiency. You'll notice here how Southwest has been
able to break that frontier and shift it upwards to a new level.
Southwest entered this market at many routes.
But providing its superior operations, allowing it to charge almost the same
prices as these legacy carriers. Yet, operating at an amazing level of
productivity. Now, the data that I just showed you was
data for the year 1996. Let's take a look what has happened in the
airline industry since then. This is updated data from 2011.
Christian TerwieschAndrew M. Heller Professor at the Wharton School, Senior Fellow Leonard Davis Institute for Health Economics Co-Director, Mack Institute of Innovation Management
