Productivity Thinking

“How productive are you?” it is a simple question right? It is a question that many managers struggle to answer despite the platitudes given in board rooms and staff meetings about efficiency and being productive.   Most economist will agree that productivity can be defined as the measurement of output per unit of input.   More simply stated productivity is output divided by input.  An organization can easily calculate this equation and easily to determine the level of productivity in the organization.  It is done in most organizations quite frequently and without the explicit statement of a productivity report.  More commonly though it is called an Income Statement.

First we must understand and agree on the purpose of a business before we continue.  The goal of any for-profit business organization is to produce profit.  The common counterpoints are often that the business must provide great products and services, be a great place to work and provide jobs, be a good community member, and the list goes on.  In any event the challenge is to place any other item as the primary goal of the business and ask how it will do it sustainably without profit.  Profit is the goal and through profit these secondary and important items can be accomplished.  The question of “how productive are you?” is really asking “how profitable are you in relation to the inputs (resources) utilized.”

Knowing that we are really measuring profitability of our activities the picture becomes much clearer and easier to calculate.   Our income statement shows us the sales of the organization in the revenue line or total sales (S).   Next we need to find the variable cost of our sales.  How much did it cost to produce one widget (if you are a service business you still sell a widget it might be a billable hour or car washed but it is still a widget).  If the organization sells a product the income statement will also have a cost of goods sold line which may be helpful to determine the variable cost.  In a service business we may have to reorganize some items to find the total variable cost (TVC) but it is still easily calculated.  If we take the total sales (S) minus the total variable cost (TVC) we find the throughput (T) of the organization.  The throughput of the organization is the rate it produces profit.  Some organizations call this the contribution margin or income before general and administrative cost. Next the income statement has the total operating expenses (OE) which do not include total variable cost.  Next we can calculate the productivity of the organization as throughput (T) divided by operating expenses (OE).

The ratio of throughput to the operating expenses shows us how productive we are at utilizing the resources required to produce profit.   If the ratio is less then one the organization by definition would be unprofitable.  Calculating productivity in using this equation forces a manager to think in terms of activities that generate revenue and those activities that do not generate revenue.  As managers we cannot eliminate non-revenue producing functions but we can work to control them and leverage those resources to support revenue producing activities.

Productivity = (T / OE )  where T = (S – TVC)

Understanding the customer experience is a key element to the sales process that is often overlooked by management. I am confident that if one were to gather a hundred managers in a conference room and ask them if the customer experience matters, they would all agree it does. Gallons of ink have been used in business press and business books to explain the virtues of managing the customer experience to maximize profits yet still so many businesses fail to do so.

I visited Pep Boys on Monday to purchase a fuel additive for my car which is having trouble running on the 10% ethanol gas some gas stations are forcing on me. Not to digress but I have a direct correlation even though I admit I am not a mechanic or automotive engineer. As I was saying; I found my fuel additive for $12.99 and proceeded to the checkout. Several employees were chatting amongst themselves in various parts of the store, although none offered to help. I was okay with this since I knew what I wanted and am capable of finding it myself. As I approached to the checkout I could see that it was not being staffed so I turned and went to the service desk where a clerk was waiting without a customer. I am not a regular to Pep Boys so it seemed plausible that the service desk provides checkout services during slower periods of the day. This is how Circuit City now operates. I placed my $12.99 bottle of fuel additive on the counter and smiled reaching for my wallet to pay. The clerk obviously not amused asked what I wanted and seemed annoyed by my suggestion that he accept my payment. He redirected me back the the checkout counter and paged another employee to attend to me, then proceeded to shuffle paperwork. The paperwork of that employee and the conversations of the other employees were far more important than selling me the products on the shelves of the store. I may have had a small purchase but it was 100% more than the next customer behind me (there were none). Realizing it might be awhile for a clerk to come take my money I was trying so hard to spend I left my bottle on the counter and left politely. As Patrica Seybold explains in “The Customer Revolution” we receive poor customer service because we accept it. I highly doubt the Pep Boys manager on duty Monday recognized that he/she lost a sale due to poor customer service and educated the staff how to do better, but I have hope.

I ended up making my purchase at Autozone up the street from Pep Boys where I was greeted by cheerful service and promptly checked out amongst many customers. My positive experience at Autozone will surely lead to increased sales and thus profits. Providing quality customer service is just one element of the customer experience but it is a vital ingredient that is the easiest to control. Employees work at your direction, train them to be great customer service agents and they will be.