SELF TEST #27: Create Countable Measures of Productivity
What is Productivity?
Productivity can measure physical costs. When we use it this way, it is the physical units of Input required to produce a physical unit of Output.
What are the components of Productivity?
Productivity is the product of the Efficiency of the Input times the Effectiveness of the Intermediate Cost Driver. The Efficiency of the Input is the number of physical units of Input required to produce a physical unit of ICD. The Effectiveness of the ICD is the number of physical units of the ICD required to produce a physical unit of Output.
What measures of final Output for the customer are available for the company’s use?
Virtually all companies can count customer accounts, customer shipments, customer invoices, or customer orders. The company should use the measure of Output that is most helpful and accessible to the company. Usually the best measure to use is a measure of customer orders.
If we would like to measure Productivity, how should we proceed?
The best way to measure and manage Productivity is to create physical ties between costs and customer benefits. We do this by counting the Building Block Costs of People, Purchases and Capital. We tie those physical units of costs to each functional cost organization. We, then, count the Intermediate Cost Drivers that each functional cost organization creates. Finally, we establish a tie between the Intermediate Cost Drivers and the measure of final Output for customers. These steps enable us to create a direct linkage between Inputs, Intermediate Cost Drivers and Outputs.
What are People costs?
People costs include all costs related to the employees of the company. Normally, these costs include salaries, wages and benefits. There may also be other costs that increase directly with the number of people in the organization. These costs might include office supplies, telecommunications and other costs of that nature. These latter costs may be included either as Purchase costs or as costs of People.
What categories of People costs might exist?
There are at least three categories of People costs: “Do”, “Supervise” and “Think” people:
Do" Employees: Employees of the company who have no one reporting to them. These employees are the primary executors of the company's activities. They are usually the most numerous and least costly of the company's employees. Their numbers vary most directly with the number of Outputs.
"Supervise" Employees: Employees of the company who have a few people reporting to them or who are technical specialists. These employees are usually middle-rated, exempt employees. They are less variable with Output than “Do” employees, but more than “Think” employees.
"Think" Employees: The more senior employees in the organization. These employees set policies and have middle managers reporting to them. These employees are the least variable with Output.
What is the Capital of the company?
The Capital of the company, called the Net Capital Employed, is the total assets of the company less the Free Liabilities. Free Liabilities include all non-interest bearing liabilities, including payables and reserves. This Net Capital Employed is made up of the sum of all debt plus all forms of equity.
Is it enough that the company is able to measure its Productivity and control its change?
No, it is not enough. Even before the company measures its Productivity, it must assure itself that each functional cost organization understands the benefits that the company must supply the customer in order to succeed in the marketplace. Each functional cost organization has responsibility for a part of these benefits. The company should ensure that each functional cost organization is prepared to deliver the customer benefits that the customer needs in order to increase the company’s share of the market.