In the world of finance and business, it is necessary to know and distinguish two fundamental terms to understand and achieve the proper functioning of an organization: production and productivity.
While in some ways it may seem that production and productivity are synonymous, the truth is they are not, although they are two closely related terms.
In this article we will discuss the differences between production and productivityIn addition to carefully explaining their definitions and understanding what their relationship is when it comes to understanding how a business works.
What are production and productivity?
Output is, in essence, the total amount of goods or services that a company offers during a given period. It is defined as any activity in which, through an entire process, a raw material is transformed into a consumer good or a service useful to society. Production is the main objective of an organization, because, if it reaches a satisfactory level, the company can address the market to which it intends to enter.
At the start of the process, inputs enter the business, which can be tangible, such as materials and machines, or intangible, as would be the case with the human effort involved in the process, either in the form of physical labor. or in the form of creativity, brainstorming, imagination and planning.
For a business to make a profit the profits made with the final production must be greater than the expenses invested in the tickets. Otherwise, the organization will suffer losses which can lead to ruin after some time.
On the other hand, the term productivity refers to the degree of efficiency that exists in the production process. That is, it is about the relationship between the materials consumed and the final products, in addition to taking into account the human capital invested and the time required for it. While production focuses on the end product, productivity takes into account different aspects of the whole process.
Main differences between the two concepts
Below, we present the basic differences between production and productivity.
Production measures what a company has produced, Either in the form of goods or services. Instead, productivity measures efficiency, in which the company’s total output can be included.
Production is measured and expressed in absolute terms because it focuses on products. For example, if a company produces 100 soaps per day, we would say that it produces exactly 100 soaps per day. As you can see, this is a fairly straightforward measurement that is easy to understand.
In contrast, productivity is measured in relative terms, Since by including many more variables than production and some of them being difficult to measure, it is not possible to calculate it in a precise or concrete way.
Returning to the example of the soap factory, to calculate its productivity we do not have enough to know that it manufactures 100 soaps every day. This is a useful fact, but much more needs to be known, such as the materials invested, their cost, the time spent, the individual production of each employee, the machinery used and its maintenance …
3. Product and usability
Output is a measure of the total amount of products and services offered at the end of the process. By itself, it does not indicate to what extent the raw materials were used.
Thus, the measurement of output simply allows us to know to what extent what is produced by a company generates profits or, on the contrary, causes losses.
Instead, productivity is a measure that lets us know how well resources have been used.
An organization is productive if it has made intelligent use of resources, Did not waste materials or produce waste during the process.
4. Added value
When a certain product is produced or a service is offered, the company itself assigns a value to it, taking into account what was initially invested and the desired percentage of income.
Productivity, on the other hand, although it is a difficult measure to calculate, cannot be given an arbitrary value. It is the total efficiency of the company in the production of a product or a service, with which, the costs and benefits obtained must be taken into account as objectively as possible, Without the possibility of giving it added value.
As we have already seen, the fundamental difference between the two concepts is that production refers to the amount of goods and services offered in a given period, while productivity refers to the level of resource use, which ‘they are material, human or energetic. Understanding this fundamental difference, it is time to examine the close relationship between these two terms.
It is not possible to calculate productivity without taking into account the production in the organization. To know how effective a business is, you need to know how many products / services are offered. In this way, it is possible to know to what extent losses or gains may occur and to what extent the organization’s resources are being used appropriately.
The degree of production and productivity influence each other. For example, if a company has detected a drop in production, it is necessary to investigate what happened, if workers suffered setbacks, if a machine broke down or if part of the raw material has been exhausted. too much employees may not work properly, Being necessary to invest in training or, in case there is no other option, to replace them.
It should be noted that there may be paradoxical situations where the desired productivity for the business is achieved but not what is necessary to be able to keep the organization afloat. It may also be that the desired production is achieved, but by analyzing what has been invested during the manufacturing process, one can see that large amounts of money and materials are wasted.
Successful businesses are those that manage to produce what is needed to make a profit and, in turn, they don’t waste resources, Allowing you to invest intelligently and save to ensure workers’ wages.
In short, the best way to calculate real productivity is to consider what the real production of the business is. It should be noted, however, that one of these two factors increasing or decreasing is not synonymous with a change in the other component, but it can influence and be an indicator that there has been some change in the ‘organization.
- Fuchs, V. (1969). Production and productivity in service industries. New York United States, NBER.
- Moretti, E. (2004). Worker Education, Spills and Productivity: Evidence of Plant Level Production Functions. American Economic Review, 94 (3), 656-690.
- Gillis, M .; Perkins, DH; Roemer, M .; Snodgrass, DR (1992). Development economics. New York, USA, WW Norton & Company, Inc.