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Dickeson--Use the Right Efficiency Formula

January 1999
"Productivity is simply the ratio of chargeable hours to available man hours." Thus spoke NAPL consultant Bill Herrott at the 1997 Web Offset Conference.

So, when the national economists report that "productivity" of the United States is up or down for a recent quarter, are they saying that the national ratio of chargeable hours to available hours rose or fell?

In a word: No.

When economists say productivity is up, they mean that the value of the gross national product, factored by the resources applied, has risen. Nobody mentions "chargeability."

So if Herrott didn't mean the same thing that national economists mean, what did he mean? Has Herrott taken a page from Lewis Carroll's Alice in Wonderland, where one character likes to say, "It means what I say it means when I say it"?

Herrott and the NAPL are saying, more accurately, that the "chargeability" ratio is a statistical measure of some sort: hours identified with specific jobs divided by total hours employed. They're not speaking about "productivity" as it is commonly understood by economists. They're using their own definition.

The problem is that "chargeability" (or non-chargeability) is a term peculiar to rate-making for cost accounting. It's based on a forecast (from budget assumptions) of the number of hours the company expects to employ people during a coming period related to the number of those hours that are expected to be identified with specific jobs performed for customers.

The more hours you can trace to jobs, the higher your productivity. In fact, the more inefficient you become the greater your NAPL productivity ratio may be!

In the end, checking a chargeability ratio is really nothing more or less than monitoring the validity of rate-making forecasts.

At this point, you may be tempted to decide that the entire issue is meaningless, akin to the medieval quibble concerning the number of angels that can dance on the head of a pin. Resist that temptation.

It is vitally important to the survival of your enterprise to understand productivity. Productivity is the act of "adding value" to materials by performing services. If value is not added to goods by services, productivity is negative.

"Value" is an external perception by the customer, isn't it? The buyer's perception, limited by the competition, places a dollar value on the productivity. That's the "effective productivity"—an external measure.

How efficiently the printer uses resources to produce added-value measures "internal productivity."

Productivity can be indexed and measured by a combination of market effectiveness and internal efficiency. If a business is producing buggy whips with optimal resource use, it's "efficient." But since the value perceived by the market is essentially nil for buggy whips today, the business has negative effectiveness. It cancels out any efficiency and results in zero productivity for the effort.

So what are the basic resources that must be productive for the printer? They are:

  • capital,

  • materials,

  • knowledge, and

  • time.


All four must be achieving full productivity in order for the company to thrive. But, let your inventories and receivables pile up and there goes the capital. Likewise, as material waste rises, productivity of materials declines. Cut short training for new people or hire too many employees, you've bought time that's wasted.

How, then, shall we measure the productivity of a printing company? Don't suggest dividing chargeable hours by hours available!

Until someone suggests something better, my crude number is sales, less materials (value-added), divided by the number of people on the payroll—annualized.

Productivity needs some ideal number for an index or benchmark for monitoring change. You pick it for your company. Can't do it? Just take value-added per head for last year as a default. That's your base point. Say it's $80K per head. If the next quarter comes in at $60K per head, your productivity has fallen 25 points! If it comes in at $85K, productivity's up 6.25 percent.

Take your sales, materials and average head count for three or more prior periods (quarters or years), and you can figure where the combined effectiveness and efficiency of your enterprise is heading.

Do it. It'll give you a rudimentary trend. Then dig out the PIA ratio studies and benchmark with comparable companies. You'll know whether you're healthy—but starting to slip—or whatever.

I said it was a crude index. Inflation should be indexed among many other things to get a solid handle on trends. And then we know that there are really three competing kings to manage in our empire:

  • King Liquidity,

  • King Productivity, and

  • King Tomorrow.


Productivity's just one of the three. No mention of the accounting fiction called "profit" in that list, is there? King Liquidity is availability of current assets to cover current liabilities. King Tomorrow is the cost of reinvestment for the future. King Tomorrow always fights with King Liquidity.

Complicated? Hey, if it was easy, we'd all build a new home in Omaha right next to Warren Buffet's.

—Roger V. Dickeson

About the Author
Roger Dickeson is a printing productivity consultant based in The Woodlands, TX. He can be reached via fax at (281) 419-8213 or e-mail at roger@prem-associates.com.
 

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