Productivity is often cited as one of the prime factors in the decisions of multinational companies when it comes to deciding on which plants to strengthen, and which are to be signalled for closure. So how can we measure and compare productivity and efficiency between manufacturing plants? There are many different methods we can use. The choice of method depends upon:
- Simplicity, understandability.
- Availability of data?
- What is the Product complexity / mix of products?
- Do we want to measure a single plant over time or compare different plants?
Units produced/ employee
This is one of the most commonly used indexes, because it is simple, understandable, and difficult to manipulate. The “employees” figure should include all manufacturing employees (maintenance, engineering, HR etc), since these are part of the total manufacturing cost of the product.
Cost ($) / Units produced
Again, easily understandable and difficult to manipulate.
However both of these indexes have the difficulties where there are differences in specifications to the products, or where a variety of products are produced in the same plant. In this case the “Production” part of the equation must be translated into a common denominator, which is usually “Standard Value of Production”.
Standard Value of Production ratios
Value of production is frequently obtained by multiplying the units produced by a theoretical cost of producing each unit (known as Standard Cost). This has the positive effect of enabling us to compare “apples with oranges”, since we simply put a $ value on each. In this sense it is useful to compare the productivity of a single factory over time. However it is of little use to compare one factory with another, because different factories will almost certainly have different standard costing systems. Care must be taken with these ratios, since they will be affected not only by productivity, but also by outsourcing activities. For example if a facility decided to shut its press shop and purchase all pressed parts externally, then this ratio would improve, irrespective of whether the costs are greater of the in-house costs to produce the parts.
Standard Value of Production / Labour spend
This index measures pure labour productivity, but does not consider whether the company has an efficient overhead structure. This index is a good short term measure of daily or monthly labour productivity. However in the long term, it is dangerous to ignore other non-direct labour costs. For example, if a company invests heavily in automation, this ratio will be improved, but the ratio does not take into account that the high level of automation also has a cost in terms of higher indirect costs such as machine depreciation, or maintenance costs. For this reason in the medium/ long term companies should also use the following ratio:
Standard Value of Production / Manufacturing spend
This index measures productivity as a ratio of both direct and indirect manufacturing spend. Manufacturing Spend includes all factory spend incurred to produce that production, excluding raw materials. This ratio will be affected also by manufacturing volume, since the ratio includes fixed costs. By watching this ratio, managers will be pushed to take action when (for example) falling production volume causes fixed costs per unit to spiral upwards.
Sales Value of Production / Total Manufacturing Cost (through margin)
This method is less commonly used owing to the extra complexity in calculation. However this method gives us a true value of a factory’s capacity to add value. In this case, production is valued at market price (market price may be taken for simplicity from a single reference market or as an average across all markets). This will give us a neutral market valuation of production which is comparable from one factory to another.
This ratio provides us with a true valuation of a factory’s capacity to add market value and enables benchmarking across different products, even different industries. Furthermore this ratio will reward those factories capable of innovating to produce high value products.
Direct Benchmarking of Similar Products
If the factories concerned produce sufficiently similar products, then it is possible to directly benchmark the cost of those products. This method is recommended for “commodity” products such as chemicals, or electronic resistors where it should be relatively easy to find products with identical specifications to compare. However differences in specifications may make it more difficult to apply with more complex products. Is it reasonable to compare the cost to produce an Audi with a VW? The answer is “yes” but with caveats- the comparison may provide useful insights, but these insights must be analysed and treated with care, making allowance for difference in product specifications.
Cost of inputs
This solution ignores factors such as technology and productivity, based on the concept that technology and knowledge of best manufacturing practise is transferable and independent of geographical location.
We take unit costs of key inputs and apply a weighting to develop a Cost Of Input Factor weighting:
Unit labour cost $ / effective hour worked. Care must be taken to include all costs (health care, average absenteeism rates, paid holidays).
Building rental cost/ sq.M
Energy cost / kw/h
The weighting to be applied will depend upon the type of industry, typically based on past and current experience. This method is useful when contemplating the set up of a new manufacturing plant where there is no historical data to be analysed, and is also complementary to the other methods to provide insight to the key cost drivers for the manufacturing plants.