There are a variety of factors, such as the quality of your equipment, the management of materials flow, and general economic considerations (e.g., inflation or recession), that can affect your business's profits. However, your business's profitability depends, in large part, on the quality of your employees' performance. You can evaluate the quality of your employees' work through productivity measurements.
Choose a convenient measure of productivity, based upon the type of operation your business is involved in and what you're producing. You'll also need to choose a time frame in which to measure it. Productivity will mean something different to each business.
One standard measure of productivity is output per worker-hour, or the ratio between the number of hours worked to total output. You can also measure your productivity per week or month if each unit of production takes more than an hour to create.
Output can be measured in terms of volume or quantity of items produced, or dollar value of items produced or services provided. For example, a graphic designer's productivity may include aspects of how many jobs he or she completes in a month, as well as how quickly the jobs were produced. A company that builds and sells widgets, on the other hand, might measure productivity in terms of the number of units built and sold over a month's time.
Manufacturing. If you manufacture goods, consider using output per worker-hour or the number of worker hours required to produce a single product. For example, suppose the following:
- You have 5 employees who each work 160 hours per month to produce 100 widgets.
- The unit cost of a widget is: 5 employees x 160 hours = 800 worker-hours
- Worker hours divided by 100 widgets per month equals 8 worker-hours per widget.
- If you pay each of the workers $5.00 per hour, then the production cost of the unit is:
- $5.00 x 800 worker-hours = $4,000 per month
- $4,000 per month divided by 100 widgets per month equals $40 per widget.
Service industries. It can be a bit harder to measure productivity in a service industry due to the somewhat intangible nature of the product involved. Service industries can measure productivity by considering the number of tasks performed or the number of customers served in a given time period. Other measures might be whether the service delivered measured up to company or customer standards and whether performance deadlines were met.
Professional employees can keep personal timesheets to indicate the number of hours spent on a given task. Quantity of work is a possible measure, such as number of service calls made per day or the number of contracts written. Clerical workers can be given specific amounts of work to determine the relative time it takes to complete a given task.
Sales performance. The most effective means of measuring performance by sales representatives is by taking into account and measuring each of these factors:
- The volume of sales in dollars per given unit of time: sales volume alone won't indicate how much profit or loss each sale represents, as a salesperson may make too many concessions or sell to poor credit risks in order to make the sale.
- The number of calls made upon existing accounts: the number of calls made by a sales rep alone doesn't indicate if those accounts with the most profit potential are being serviced.
- The number of new accounts opened.
- The dollar amount expended per sale: comparing sales over given periods of time, say monthly periods each year, will not account for changes in price, product, competition, or routes.
Other methods. Another method for measuring productivity involves determining the time an average worker needs to generate a given level of production. You can also observe the amount of time that a group of employees spends on certain activities (such as production, travel, or idle time spent waiting for materials or replacing broken equipment). The latter method can reveal if employees are spending too much time away from production on other aspects of the job that can be controlled by the business.
Improving productivity. Once you've figured out how to measure your business's productivity, you need to determine whether your productivity is where it should be. This task can be tricky, especially if you're getting this information for the first time. Factors to take into consideration are:
- the cost per unit compared with the price
- your competitors' productivity levels, cost per unit, and price.
Some of this information may be available from your trade or industry association, or through networking with contacts in similar businesses. Once you've established a baseline measure, you can assess your productivity periodically and be able to spot trends and track your progress over time.
How to improve productivity? Identify potential problem areas. The quality of leadership in the business can have an effect on productivity, so make sure that you, as a leader, ensure that your business isn't suffering from:
- poor planning or scheduling of work
- unclear or untimely instructions to employees
- an inability to adjust staff size and duties during light or heavy workload periods
- poor coordination of material flow
- the unavailability of needed tools
- excess travel time.
Ultimately, the key to improving productivity lies with the employees themselves and the way that you work with those employees. Studies have shown that most workers think it's important to do their best at their jobs. Chances are that most of your employees feel that way. People want to do a good job, and you should provide them with every opportunity to do so. It becomes your challenge to tap into that desire to perform and make it work for your business.