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Total Factor Productivity

Total Factor Productivity. Reference: Dynamic Manufacturing. TFP Starting Point. Factor Productivity The amount of output relative to amount of a specific input (e.g. units per labor hour)

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Total Factor Productivity

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  1. Total Factor Productivity Reference: Dynamic Manufacturing

  2. TFP Starting Point • Factor Productivity • The amount of output relative to amount of a specific input (e.g. units per labor hour) • Example: last year - 10 units of output per labor hour this year – 12 units of output per labor hour labor productivity increased by 20% (from 10 to 12) • Total Factor Productivity (TFP) • A combined measurement of the amount of output (of a product) relative to the sum of all resource inputs (the factors) • A means of measuring the overall performance of an operation

  3. Total Factor Productivity Base Profit Profit Increase Price Volume Productivity New Profit

  4. Productivity MeasurementIssues • How to combine inputs that are measured in different units? • Labor hours • Material weights • Energy BTUs • How to treat output ‘units’ that change over time • Standard product & options • Quality improvements • New products, line mix

  5. TFP Basic Approach • Monetarize all variables • assumes quality differentials are reflected in prices & costs • Adjust for inflation • Use $$$ as a surrogate (Implicit measure) Note: Requires units & price data for all inputs and outputs … or calculable approximations

  6. TFP Simplified Analytical Process • Restate base period (P1) results @ current period (P2) prices • Calculate real volume growth: P2 sales (output) divided by P1 sales @ P2 prices • Calculate increase (decrease) in the nominal levels of all inputs in P2 relative to their respective levels in P1 (stated @ P2 prices) … sum the ‘total factors’ • Compare % increases in factor levels to the % real volume growth … differences are approximately the factor and total factor productivity • e.g. if real volume growth is 15% and price adjusted factor levels increase 10%, period-to-period productivity is approximately 5% Alternate method …

  7. TFP Alternate Method • Compute total sales dollars per factor in the base period (P1) … i.e. divide sales dollars by the dollar cost of each individual factor and total of all factors • e.g. $7 of sales per each dollar of labor • Restate current period (P2) sales and factor costs; ‘deflate’ by the specific price increases • e.g. If nominal P2 sales are $110,000 and prices increase by 10% from P1 to P2, then the restated P2 value is $100,000 ($110,000 / 1.10) • Compute total sales dollars per factor in the current period (P2) on a restated (deflated) basis … i.e. divide deflated sales dollars by the deflated dollar cost of each individual factor • Compare increases / decreases in sales per factor dollar from P1 to deflated P2 … % changes are approximately the factor and total factor productivity

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