Productivity Management in Operations Management Since 1886

Lesson of  Productivity Management Course Lessons

In the Eleventh edition of "Operations Management for Competitive Advantage" Chase, Jobs and Aquilano start the preface with statement "Operations Management (OM) has been a key element in the improvement in productivity in businesses around the world." Productivity growth created by operations management creates competitive advantage.

Productivity is defined in simple terms as (output of goods and services)/(input of resources) and productivity improvement results in reduction of unit cost of products of the organization. Henry Towne, in a paper presented in 1886 in the ASME Annual meeting proposed that reducing cost of production is the responsibility of engineers entrusted with shop management and works management.

"Gain Sharing" Productivity Benefit - Towne

Involving workmen in the task of improving productivity and decreasing the cost of production received attention and Towne mentioned in 1886 itself that he will present a paper shortly on the topic

In the paper presented in 1889, with the title "Gain Sharing" Towne suggested a plan of sharing the reduction of cost production with workmen and foremen. He gave his argument of the same.

The factors affecting the profit may be divided into several distinct groups, as follows :

I. Those contributed or controlled by the owner or principal, —^such as capital, plant, character of buildings, machinery and organization ; and, to a greater or less degree, the skill, experience, industry, and ability of the owner so far as he personally manages the business.

2. Those influenced by the mercantile staff, — the buyer and the selling agent in the case supposed.

3. Those determined by causes beyond the control of the principal and his agents; such as fluctuations in cost of raw material or in the market value of the finished product, the rate of interest, losses by bad debts, etc.

4. Those influenced by the workmen or operatives ; such as care of property, economy in the use of material and supplies, and, chiefly, efficiency in the use of machinery and employment of labor.

The right solution of  "gain sharing" with persons involved in increasing profit will manifestly consist in allotting to each member of the organization an interest in that portion of the profit fund which is or may be affected by his individual efforts or skill, and protecting this interest against diminution resulting from the errors, of others, or from extraneous causes not under his control. Such a solution, while not simple, is attainable under many circumstances, and attainable by methods which experience has shown to be both practical and successful.

In the case of employees it will be best solved if it can be so formulated that  as presented to the employee, it becomes an invitation from the principal that they should enter into an industrial partnership, wherein each will retain, unimpaired, his existing equitable rights, but will share with the other the benefits, if any are realized, of certain new contributions made by each to the common interest. Let us suppose that the wages of the operatives are already fairly adjusted according to the prevailing scale, so that for the employer to offer them a portion of his profits without a guaranty of return would be equivalent to his giving  them more than the fair market value of their services; while if, under this inducement, they gave him better or more work than before, they would not receive fair recompense in case, by reason of causes beyond their control, his business yielded no profit. But let us suppose, further, that the principal, wishing to enlist the self-interest of his employees to augment the profits of the business, should offer to the operatives a proposition somewhat as follows :

"I have already ascertained the cost of our product in labor, supplies, economy of material, and such other items as you can influence. I will undertake to organize and pay for a system whereby the cost of product in these same items will be periodically ascertained, and will agree to divide among you a certain portion ( retaining myself the remainder ) of any gain or reduction of cost, which you may affect by reason of increased efficiency of labor, or increased economy in the use of material, or both; this arrangement not to disturb your rates of wages, which are to continue, as at present, those generally paid for similar services."

The system for which I have adopted the designation of " Gain-sharing " The system is now in actual use as affecting some 300 employees, has been in operation more than two years and is demonstrated to be practical and beneficial. Its most obvious application is to productive industries, especially those whose product is of a simple or uniform kind ; but it may be adapted to many others, and also to the business of large mercantile houses. It is equally applicable to cases where labor is employed either by the piece, by the day, or by contract, and in no way impairs the existing freedom of the relation between employer and employee, but tends to confer substantial benefit on both sides.

The basis or starting-point of the system is an accurate knowledge of the present cost of product ( or, in the case of mercantile business, the cost of operating it ), stated in terms which include the desired factors, that is, those which can be influenced or controlled by the employees who are to participate in the result, and which exclude all other factors. In some cases the previous method of accounting or book-keeping may have been such as to supply this information, in which case the gain-sharing system can be easily and promptly organized. As a general rule it may be stated that, in the case of an account affecting the operatives in a producing or manufacturing business, the following items should be included^ viz. : labor at cost, raw material, measured by quantity only ( for which purpose an arbitrary fixed price may be assumed ) ; incidental supplies, such as oil, waste, tools, and implements at cost ; cost of power, light, and water, where means exist for correctly measuring them (for which purpose it often pays to provide local meters ) ; cost of renewals and repairs of plant ; and, finally, the cost of superintendence, clerk hire, etc., incident to the department covered by the system. In like manner the following items should be excluded^ viz. : market values of raw material ( which are liable to fluctuation ); general expenses, whether relating to management of works or to commercial administration, and, in general, all items over which the operatives can exercise no control or economy.

I will organize the system, will assume the cost of book-keeping and other expenses incident to it, and will provide all the facilities reasonably required to assist you in reducing the cost of product ; I will credit the account with the output at the cost price heretofore obtaining, namely $1 per unit, and will charge it with the items in the inclusive list ; if at the end of the year the credits exceed the charges, I will divide the resulting gain or reduction in cost, with you, retaining myself one portion — say one-half — and distributing the other portion among you pro rata on the basis of the wages earned by each during the year. " Suppose, then, that at the end of the year it was found that the cost per unit of product had been reduced from $1 to 95 cents, that the total gain thus resulting was $800, and that the aggregate wages paid during the year had been $10,000. One-half of the gain would be $400, which would equal 4 per cent, on the wages fund, so that each operative would be entitled to a dividend of 4 per cent, on his earnings during the year. This is equivalent to two weeks' extra wages, no mean addition to any income, and amounting, even in the case of a laborer earning $1.50 per day, to a cash dividend of $18 at the end of the year.

To accomplish this the Company agrees to organize the method of operation, to keep the necessary accounts, and in general to facilitate matters so far as it reasonably can ; the employees, on the other hand, agree to use their best efforts to increase the efficiency of their work, to economize in the use of supplies and material, and in general to do their share toward reducing the cost of finished products.

Hasley

Criticism of Gain Sharing

First The workmen are given a share in what they do not earn. Increased profits may arise from more systematic shop management, decreased expenses of the sales department, or many other causes with which the workmen have nothing to do. Anything given them from such sources becomes simply a gift, the result of which is wholly pernicious —in fact the entire system savors of patronage and paternalism.

Hasley Plan

The plan assumes two slightly different forms, according to the nature of the work ; one form being suited to work produced in such quantities as to be reducible to a strictly manufacturing basis, and the other form to the more limited production of average practice. In both forms the essential principle is the same, as follows : The time required to do a given piece of work is determined from previous experience, and the workman, in addition to his usual daily wages, is offered a premium for every hour by which he reduces that time on future work, the amount of the premium being less than his rate of wages. Making the hourly premium less than the hourly wages is the foundation stone on which rest all the merits of the system, since by it if an hour is saved on a given product the cost of the work is less and the earnings of the workman are greater than if the hour is not saved, the workman being in effect paid for saving time. Assume a case in detail : Under the old plan a piece of work requires ten hours for its production, and the wages paid is thirty cents per hour. Under the new plan a premium of ten cents is offered the workman for each hour which he saves over the ten previously required. If the time be reduced successively to five hours the results will be as follows :

In certain classes of work an increase of production is accompanied with a proportionate increase of muscular exertion, and if the work is already laborious a liberal premium will be required to produce results. In other classes of work increased production requires only increased attention to speeds and feeds with an increase of manual dexterity and an avoidance of lost time. In such cases a more moderate premium will suffice.

Productivity management activity was  practiced and described in a systematic manner in production shop activities by F.W. Taylor.

                                                        F.W. Taylor (Source: Wikipedia)

In the paper, "A Piece-Rate System, Being a Step Toward Partial Solution of the Labor Problem," presented to the American Society of Mechanical Engineers in 1895. F.W. Taylor [1] described a system of management, which was rapid in attaining the maximum productivity of each machine and man. Thus, productivity management as an area of management was introduced in the published literature by Taylor in 1895. 

Evolution of Productivity Management Practice by Taylor

F.W. Taylor started the productivity improvement and management practice with the system implemented by him in the works of the Midvale Steel Company, of Philadelphia . He described the system and developed it further in number of papers and books. He also implemented the system in number of companies as an executive and consultant.

Contribution of Taylor – Piece Rate System

The system described in 1895 paper [6] had the objective of rapid attainment of the maximum productivity of each machine and man. It consisted of three principal elements: 

(i) An elementary rate-fixing department.

(2) The differential rate system of piece-work.

(3) What he believes to be the best method of managing men who work by the day.

The rate fixing department is actually an engineering department in the machine shop that determined the production processes of the goods produced and operations of the machine to get maximum productivity from the machine. The department personnel also observed large number of operators working on the machines at elementary operation levels and determined the best way of doing manual elements. The choice of the best ways of machining operations and manual operations was done on the basis of time taken. Hence time study or measuring time is an essential element of this system. But it is very important to emphasize that in machine shops and in general engineering systems, improvement of the engineering aspect is the core of the productivity improvement and management system proposed by Taylor.

Taylor – Shop Management

In Shop Management presented in 1903 [7], Taylor defined art of management "as knowing exactly what you want men to do, and then seeing that they do it in the best and cheapest way." The definition identifies two activities. Managers of business or industrial organizations have to find out what goods and services the market wants and decide what their organization can produce and sell at the prevailing market prices. The second activity is then focusing on the doing the production at the cheapest way. This is an area of productivity improvement and management. Taylor’s focus in shop management paper/book is productivity improvement and management. He elaborated the system that he described in piece rate system further in shop management. He stated that there was enormous difference between the amount of work which a first-class man can do under favorable circumstances and the work actually produced by the average man of the time. The favorable circumstances in engineering sections/departments and processes are to be created by redesigning the engineering elements. Presently, industrial engineering identifies machine, material, energy and information as the key engineering elements in engineering systems. All engineering aspects of an engineering system are to be examined by industrial engineers to create favorable circumstances that facilitate operators to get maximum productivity from the machine effort as well as human effort. 

In all man-machine systems the large increase in output is due partly to the changes, in the machines or small tools and appliances, and the total gain made is due to the redesign of the system that includes machine effort and human effort. Taylor gave number of steps in organizing the productivity improvement effort.at enterprise level. He wrote that before starting productivity improvement effort, some issues should be carefully considered: First, the importance of choosing the general type of management best suited to the particular case. Second, that in all cases money must be spent, and in many cases a great deal of money, before the changes are completed which result in lowering cost. Third, that it takes time to reach any result worth aiming at. Fourth, the importance of making changes in their proper order, and that unless the right steps are taken, and taken in their proper sequence, there is great danger from deterioration in the quality of the output and from serious troubles with the workmen, often resulting in strikes. 

Four principles were given in shop management for high productivity. There are: 

1. Standardized conditions that enable an operator to complete a task with certainty. 

2. A large definite daily task that promises extra income for higher than average output. 

3. High pay for success. 

4. Loss in case of failure.

As part of productivity management, many  details in the production shop, which are usually regarded as of little importance and are left to be determined workmen, and foremen, must be thoroughly and carefully designed and standardized as part of plan of the work and directions for actual jobs are to be given based on such designs. Some of the detail specially highlighted in cases of machine shop include the care and tightening of the belts; the exact shape and quality of each cutting tool; the establishment of a complete tool room from which properly ground tools, as well as jigs, templates, drawings, etc., are issued and received back. Each machine tool must be standardized and a table or slide rule constructed for it showing how to run it to the best advantage. Modern engineering is practiced with the help of drawings for designs. Modern shop management for productivity is also to be done similarly based on process and operation designs or instruction sheets which specify the time to be taken to complete them.

Taylor made the statement in his shop management paper that almost all shops are under-officered. He advocated increase in number of shop officers to as high as eight as part of his productivity improvement organization. The role of top management in introducing the productivity management activity was also described Taylor. They have to understand the benefits and challenges of introducing the change in management process and have to be prepared to handle the objections and complaints that are likely to arise. They have to approve the investment required to introduce the productivity management system and provide resources.

Taylor – Scientific Management

In the paper/book, Scientific Management, Taylor expressed the view that the principal object of management should be to secure the maximum prosperity for the employer, coupled with the maximum prosperity for each employee [8]. He further explained that the greatest permanent prosperity for the workman, coupled with the greatest prosperity for the employer, can be brought about only when the work of the establishment is done with the smallest combined expenditure of human effort, plus nature's resources, plus the cost for the use of capital in the shape of machines, buildings, etc. Or, to state the same thing in a different way: that the greatest prosperity can exist only as the result of the greatest possible productivity of the men and machines of the establishment--that is, when each man and each machine are turning out the largest possible output. Thus productivity focus of the paper “Scientific Management” is brought out clearly by Taylor. 

Close, intimate, personal cooperation between the management and the men is the essence of modern scientific or task management, which gives greatest possible productivity. The emphasis on machine in machine shops is to be noted.  Machine is to be improved by industrial engineer first and then effort of man to operate the improved machine operation has to be designed.  Taylor in 1911, claimed that at least 50,000 workmen in the United States were employed under the new scientific management system; and they were receiving from 30 per cent to 100 per cent higher wages daily. The companies that successfully employed the scientific management had increased the output, per man and per machine, on an average to double the earlier production.

Recent Publications on Productivity Management

Scott Sink authored the book “Productivity Management: Planning, Measurement and Evaluation, Control and Improvement in 1985 [3]. He also described the productivity management process with the starting point as productivity measurement. The steps in the productivity management process are given as: (1) measuring and evaluating productivity; (2) planning for control and improvement of productivity based on information provided by measurement and evaluation process; (3) making control and improvement interventions; and (4) measuring and evaluating the impact of these interventions. For productivity evaluation, standards are to be generated by one of the various methods as appropriate. The methods indicated include: 1. Estimation 2. Engineering approach 3. Historical information 4. Normative values. Both Sumanth and Sink indicated large number of productivity improvement methods and techniques which can be used for productivity improvement. 

Propokenko also described productivity management based on productivity measurement and analysis [13].  Recent research studies in productivity measurement are summarized in a book on productivity management authored by Phusawat in 2013 [15]. 

The literature reveals that Taylor started his productivity improvement publications with a management system applicable to the whole enterprise using piece rate system or day-payment system or both. But he highlighted in the paper that elementary rate fixing the primary tool or system. Differential piece rate helps in implementing the output specified by rate fixing section.  His subsequent works are also aimed at the enterprise application of shop management or scientific management. 

References

1.  Taylor, F.W., 1895,"A Piece-Rate System, Being a Step Toward Partial Solution of the Labor Problem," Transactions of the American society of Mechanical Engineers.16, 856-883.

2. Towne, Henry R.,1905, “Industrial Engineering” An Address Delivered at the Purdue University, downloaded from http://www.stamfordhistory.org/towne1905.htm

3. Sink, D Scott, 1985,  Productivity management: Planning, measurement and evaluation, control and improvement, Wiley New York. 

4. Sumanth, David J., 1984, Productivity Engineering and Management, McGraw-Hill, New York.

7. Taylor, F.W., 1903, Shop Management, American Society of Mechanical Engineers, New York 

8. Taylor, F.W., 1911, “The Principles of Scientific Management, Harpers and Brothers”, New York.

12. Mali, Paul, 1978, Improving Total Productivity : MBO Strategies for Business, Government, and not-for-profit organizations, Wiley, New York.

13. Propokenko, Joseph, 1987, Productivity Management: A practical handbook, International Labour Office, Geneva. 

15. Phusavat, Kongiti,  2013, Productivity Management in an Organization: Measurement and Analysis, ToKnowPress, Bangkok.

Updated on 9.9.2021

Pub 18.4.2019