calculate labour productivity

4 – Operations Management (IGCSE Business Studies 0450)

4.1 Production Processes

4.1.1 Meaning of Production

• Production: the transformation of inputs (labour, materials, capital, information) into goods or services that satisfy customer needs.
• Productivity vs. Production: Production is *what* a business does; productivity measures *how efficiently* it does it (output ÷ input).

4.1.2 Benefits of Increasing Efficiency

When a firm raises its efficiency (produces the same output with fewer resources or more output with the same resources) it can:

• Lower the unit cost of each product.
• Increase profit margins.
• Gain a competitive advantage (price leadership, better quality, faster delivery).
• Re‑invest savings in research & development, marketing or new technology.
• Offer lower selling prices without sacrificing profit.

4.1.3 Inventories

Inventories are stocks of:

• Raw materials – to guard against supply interruptions and to allow continuous production.
• Work‑in‑progress (WIP) – to smooth the flow between stages of a production line.
• Finished goods – to meet fluctuating customer demand and to avoid stock‑outs.

Holding inventory incurs costs (storage, insurance, obsolescence) so businesses aim to keep them as low as possible while still protecting the production process.

4.1.4 Lean Production

Lean production is a philosophy that seeks to eliminate waste and improve flow.

• Just‑in‑time (JIT): materials arrive only when needed, reducing holding costs and excess stock.
• Kaizen: continuous, incremental improvement involving all staff.
• Other lean tools (not required for the syllabus but useful): 5S, value‑stream mapping, cellular layout.

4.1.5 Labour Productivity

Definition

Labour productivity measures how efficiently a business uses its workforce to produce output. It is expressed as the amount of output produced per unit of labour input.

Formula

Labour Productivity = Total Output ÷ Total Labour Input

Labour input can be measured in either of the following ways:

• Number of workers (units per worker)
• Total hours worked (units per hour)

Steps to Calculate Labour Productivity

1. Choose the period for measurement (e.g., a week, a month).
2. Determine the total output produced during that period (units, metres, loaves, etc.).
3. Determine the total labour input:
   • If using workers – calculate the average number of workers employed during the period.
   • If using hours – add all hours worked by all employees in the period (including overtime, but excluding non‑productive time unless the question states otherwise).
4. Insert the values into the formula and calculate.
5. Interpret the result – a higher figure indicates higher productivity; compare with previous periods or industry benchmarks.

Worked Example

ABC Widgets manufactures plastic toys. In June the factory produced 12 000 toys. The factory employed 30 workers, each working 160 hours during the month.

• Total output = 12 000 toys
• Total labour input (hours) = 30 × 160 = 4 800 hours

Labour productivity (per hour) = 12 000 ÷ 4 800 = 2.5 toys per hour

Labour productivity (per worker for the month) = 12 000 ÷ 30 = 400 toys per worker

Practice Questions

1. XYZ Textiles produced 8 500 metres of fabric in a week. The company employed 25 workers, each working 40 hours that week. Calculate:
   1. Labour productivity in metres per hour.
   2. Labour productivity in metres per worker for the week.
2. A bakery reports that its labour productivity increased from 15 loaves per hour to 18 loaves per hour after introducing a new oven. If the bakery still employs the same number of workers who each work 40 hours per week, what is the percentage increase in total weekly output?
3. Company Q wants to improve productivity by 10 %. If current productivity is 5 units per hour, how many additional units must be produced each hour to meet the target?

Common Mistakes to Avoid

• Mixing incompatible units – ensure output and labour input use the same time basis (e.g., per hour, per week).
• Failing to total all labour hours when shift lengths differ or when overtime is used.
• Including non‑productive time (breaks, training) unless the question explicitly asks for total hours worked.
• Dividing by the wrong denominator (workers instead of hours, or vice‑versa).

Suggested Diagram

4.1.6 Main Methods of Production

Justifying a method: Choose the method that best matches product variety, volume, required lead‑time, and the skill level of the workforce. For example, a company that makes a single model of smartphone in millions of units would adopt flow production, whereas a bespoke jewellery maker would use job production.

4.1.7 Impact of Technology on Production

Technological advances such as computer‑aided design (CAD), computer‑numerical‑control (CNC) machines, robotics and automated assembly lines can:

• Increase the speed of production, raising labour productivity (more units per hour).
• Reduce the need for highly skilled labour in routine tasks, allowing staff to focus on supervision, problem‑solving and value‑adding activities.
• Improve product consistency and quality, which in turn reduces waste, re‑work and scrap.
• Enable new production methods (e.g., flexible manufacturing systems) that combine the advantages of batch and flow production.

4.2 Costs, Scale of Production and Break‑Even Analysis (Link)

Higher labour productivity directly influences cost calculations and break‑even analysis:

• Variable cost per unit falls when more output is produced with the same labour input.
• Economies of scale are achieved when increased output spreads fixed costs over a larger number of units, moving the break‑even point to a lower sales level.
• On a break‑even chart, the slope of the total‑cost line is determined by the unit variable cost – a figure that improves as productivity rises.

4.3 Achieving Quality Production

Quality control (checking output) and quality assurance (designing processes) are closely linked to productivity:

• Poor quality leads to re‑work, scrap and downtime, all of which lower labour productivity.
• Implementing quality management systems (e.g., ISO 9001, Six Sigma) can raise productivity by reducing defects and streamlining processes.
• Continuous improvement (Kaizen) simultaneously targets quality and efficiency.

4.4 Location Decisions

Productivity data are a key input when choosing a plant location. Companies may locate near:

• Skilled labour pools – reducing training time and improving productivity.
• Technology clusters or key suppliers – facilitating rapid adoption of new equipment and reducing transport time for inputs.
• Transport hubs – lowering distribution costs, which can free resources for productivity‑enhancing investment.

Legal controls (zoning, health & safety regulations) and the quality of local infrastructure (roads, power supply, internet) also affect the decision because they influence the ability to maintain high productivity.

Key Take‑aways (All of 4.1–4.4)

• Labour productivity = Output ÷ Labour input (workers or hours).
• Increasing efficiency lowers unit costs, raises profit margins and creates a competitive advantage.
• Production methods (job, batch, flow) must match product characteristics, volume and market demand.
• Lean practices and modern technology raise productivity by reducing waste and speeding up processes.
• Higher productivity reduces variable cost per unit, helping firms achieve economies of scale and a lower break‑even point.
• Quality management and location choices both affect and are affected by productivity levels.
• Regular measurement and analysis of productivity enable managers to make informed decisions about staffing, training, equipment investment and strategic expansion.