# WORKSHEET #27: Create Countable Measures of Productivity

Step 1:
Assign each cost organization its specific customer benefit targets:

• Name the key customer benefits the Company must offer to its customers. Include a physical measure for each of these benefits.

• Break these benefits into the component parts that each functional cost organization must provide.

• Assign responsibility for the achievement of the component parts of the benefits to the functional cost organizations.

Step 2:
Count the People, full time equivalents (FTEs), in the Company and in each functional cost organization. Full time employees count as one each. Part time employees count as a fraction of an FTE, according to the percentage of full time employment that the employee works. For example, an employee who works half time would count as one half FTE.

Step 3:
Gather the full salary and benefit costs for all employees in Step 1.

Step 4:
Divide the full costs of all People by the number of FTEs to arrive at the average rate of cost per FTE for the functional cost unit. You will use this average cost when calculating the savings in rates of costs from new ideas to create Efficiency of the People Input.

Step 5:
Determine the major categories of outside Purchases in the functional cost unit:

• Obtain the total annual spending on each category of outside Purchase.

• Determine the annual number of units of outside Purchases used in the functional cost unit.

• Divide that total spending in each category by the units of outside Purchases in the category to arrive at an average rate of cost for each category of Purchase. You will use this average cost when calculating the savings in rates of costs from new ideas to create Efficiency of the Purchase Input.

Step 6:
Calculate the total Capital costs of the functional cost unit. This step is practical only if the Company allocates assets and/or Capital to the functional cost unit.

• Obtain the total assets of the unit.

• Subtract from these assets the Free Liabilities of the unit, including all non-interest bearing liabilities, such as payables and reserves, to determine the amount of Capital used in the functional cost organization. This is the unit’s Net Capital Employed.

• What is the unit’s total annual percentage pre-tax and after-tax cost of this Net Capital Employed? These rates of cost are the same as those for the Company as a whole.

• Multiply the annual pre-tax and after-tax cost of Capital by the amount of Capital used in the organizational unit to determine its annual Capital costs.

Step 7:
Create the key measure of Output, a measure of the customer benefits:

• List the potential candidates for the primary measure of Output, including customer orders, customer shipments, or other customer transactions.

• Determine the best measure for the Company to use as its measure of final Output. This measure would give the Company the most comprehensive coverage of the sum of the customer benefits offered by the Company.

• Count the number of units of the chosen Output, e.g. customer orders, as the principal measure for all future measures of Productivity and Economies of Scale. The same count applies to all calculations of Productivity and Economies of Scale in a year.

Step 8:
Count the Intermediate Cost Drivers (ICDs) produced by the organizational unit in providing the unit’s share of customer benefits from Step 1:

• Name each unique ICD.

• Determine an approach to counting the occurrences of each unique ICD.

• Count the ICDs completed annually by the functional cost organization.

Step 9:
Count the Inputs of Building Block Costs used for each Intermediate Cost Driver.

(This worksheet will focus on People Inputs. This is usually the most important Building Block Cost in the Company. Once the Company becomes adept at using these techniques on People, it can modify them to apply to the Inputs of Purchases and Capital.)

• Assign the FTEs in the functional cost organization to each of the unique ICDs.

• Calculate the annual number of FTEs required to produce the total occurrences of each unique ICD.

Step 10:
Calculate the Productivity and its two components for the functional cost organization:

• The Productivity of the entire functional cost organization is the ratio of the number of Inputs (here Inputs = FTEs) divided by the number of Outputs.

• Calculate the Efficiency for each Input (here Input = People = FTEs) by dividing the number of FTEs (Inputs) by the number of occurrences of each unique ICD. Complete this step for each unique ICD.

• Calculate the Effectiveness of each unique ICD by dividing the number of occurrences of each unique ICD by the number of Outputs. Complete this step for each unique ICD.

• The Productivity measure for each unique ICD is then the product of Efficiency, i.e., [(number of FTEs divided by the number of occurrences of the ICD] x Effectiveness (number of occurrences of the ICD/number of Outputs)]. This measure creates a number of FTEs per Output associated with each unique ICD of the organizational unit. The sum of the Productivity measures for each unique ICD done by the organizational unit should total the Productivity of the full number of FTEs of functional cost organization.

Step 11:
Calculate the ratio of the number of unique ICD to the number of Outputs. A key objective for future cost reduction is to reduce the number of unique ICDs that the functional cost organization uses. So, another helpful measure is to calculate the ratio of the number of unique ICDs in the functional cost organization unit to the number of Outputs. The functional cost organization can, then, focus part of its Productivity improvement efforts at reducing the number of unique ICDs.