Total Factor Productivity

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
Profit Increase
Base Profit
Price
Volume
Productivity
New Profit
4
Productivity Measurement Issues

• 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 _at_ current
  period (P2) prices
• Calculate real volume growth P2 sales (output)
  divided by P1 sales _at_ P2 prices
• Calculate increase (decrease) in the nominal
  levels of all inputs in P2 relative to their
  respective levels in P1 (stated _at_ 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