Free Essay

Productivity in Service Sector

In: Business and Management

Submitted By yeasir
Words 3434
Pages 14
Group Assignment
Topic: Productivity in Service Sector
BRAC University
BRAC Business School
Spring 2016

Course: Production Operations Management (MSC301)
Section: 001
Instructor: Md. Tamzidul Islam
Assistant Professor, BRAC Business School

Group Members


Tasnia Jebin


Navid Anjum Khan


Rifat Shahrukh


Mohammad Muqtadir Ullah


Sadia Kamal


Atik Ilman Hossain


Date: April 4th, 2016

What is Productivity? How do we measure productivity in a service environment such as restaurant? What are the factors that affect productivity? How does one can improve it?

Goods and services are the products which have a demand in the market and generate enough revenue to make profit. Goods are tangible products which we can use, consume or otherwise have in our life. For example, cars, batteries, tables and everything which can be easily quantified by units of length, weight, volume.
However, services are somewhat different products which are more intangible in nature. These products are usually ones which are rendered by human labor but also have some goods aspect to it. For example, A Hospital has syringes, medicines, MRI machines and lots of other goods. And they also have nurses and doctors who use these goods to give the patients (consumers) satisfaction as a total product package of both goods and services.
One useful characterization of services is those things you can buy or sell but cannot carry.
So, even though the productivity of a restaurant should be measured by both its service and product aspects, we will only calculate the service aspect in this assignment as it is asked of us.

The origin of productivity began while analyzing mass production and thus was mainly calculated for tangible product manufacturing but as the rise of service industry increasing number of attempts is being made to fully understand the productivity of the service industry as well. Operations and production management is responsible for transforming numerous inputs to the desired outputs, but how do we know that this process is being done as efficiently or this process is utilizing its potential to the fullest? Productivity is the measure of efficiency of anything, ranging from person, product, service and etcetera. It is usually measured by dividing output by input. This means, how much output is a process or system producing with per unit of input provided. In other words, it is the ratio the output produced and the input provided, and this is a measure of how efficiently the process of converting inputs to outputs is carried on. Productivity in firms are used to measure how efficiently the labor, capital and other forms of input are being used and is also one of the key measure of economic growth and competitiveness. Productivity measure can be also used for international comparisons among industry practices. For example, the productivity of garment sector in Bangladesh is high because of the output generated by providing lower input (labor wages), whereas labor wages in USA or other developed nations is a lot higher and producing the garments there would drive up the cost significantly. One of the reasons, firms in developed nations outsource production in China, is because even though there are shipping costs and time involved, these costs are much less compared to the advantage of economies of scale or the lower material and labor cost they are getting by outsourcing production. We can measure productivity for machine hours, machine cost, labor cost or labor hours or even in terms of waste produced to create a certain offering. For example: machine hour productivity can be calculated by dividing the number of end products from the machine by the number of hours it operated in a certain period. Or, we can divide the value of the finished product in monetary value by the cost incurred to run the machine over a certain time to get the machine productivity per monetary unit.

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Measuring Productivity in a Service Environment
Productivity can be influenced by a lot of factors, internal and external. Internal factors being the issues that can be modified or changed according to necessity, for example, employee productivity, manufacturing procedure, managers, machineries and etcetera. On the other hand, external factors cannot be influenced in any way, rather the firm has to adapt to it. For example, political unrest, government regulations national economic factors etcetera.
Productivity growth can be attained by several other factors other than just pushing employees to be more efficient. Investment in physical capital like more labor and machineries can lead to more efficient outcomes as well as improvement of skills of the managers and workers or hire skilled ones overall. Innovation of new technology or a new method of performing a job can also lead to growth of productivity. Competition is also another driver of increased productivity.
Measuring productivity not only shows the efficiency but also helps in shaping the business strategy and model. The capacity to take in orders or the ability to meet customer demands can also be reflected from the productivity ration of a firm. Productivity also shows the capital utilization capabilities and uncovers further investment or improvement opportunities.
There are different types of productivity measurement. Productivity does not only measure end results for tangible outputs but also full service firms like (hospitals, call center) and nations and whole industries even. The calculation of productivity and its terms depend on its use and the availability of data required to calculate productivity accurately. For example, while calculating labor productivity, the output will change based on the industry that is trying to figure out its productivity. Sales productivity might consider outputs as, the number of new accounts opened, calls made or the sales volume for a time period.
In the service sector for example, productivity is a measure of the inputs required to provide the service that is expected from the receivers of the service. How this is measured can be very debatable and it will vary from organization to organization. From products, tangible products, the output is pretty clear and so are the inputs. There might be human labor involved in creating the product but the hours spent, materials used is very quantifiable and the output being one whole finished unit of whatever product is being produced. Easy enough to calculate the productivity by dividing the output by input. However for a service industry, inputs are human communications. The service providers can only go so far following a

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scripted service and the problems might not even range between scripted solutions. Service productivity can be also measured with the input of hours worked but there can be times where one customer need more attention than others. Different organizations use different sources as inputs for calculating productivity. The output being for service industry being, satisfied customers. This is also not very easy to calculate as there might be several bias if you try to survey additional costs incurred to get the answers from the customers right away.
The main issue with calculating service industry is that like product manufacturing, it is not standardized. In an organization, productivity measures how certain resources are managed to accomplish timely objectives. It can also be defined as an index that measures output (goods and services) relative to input (labor, materials, energy). If organizations want to improve productivity, then they need to increase their output or decrease their input. Two kinds of productivity that can be calculated are Single factor productivity and multi-factor productivity. Single factor productivity considers the ratio of one single input type/source with the output while, multi-factor productivity uses multiple inputs to calculate the productivity ratio.
Goods and services are the products which have a demand in the market and generate enough revenue to make profit.
Goods are tangible products which can be used, consumed or, otherwise, possess. For example, cars, batteries, tables and everything which can be easily quantified by units of length, weight, and volume are goods.
However, services are somewhat different products which are more intangible in nature.
These products are usually the ones which are rendered by human labor but also have some tangible aspect to it. For example, a hospital has syringes, medicines, MRI machines and lots of other goods. And they also have nurses and doctors (employees/ labors) who use these goods to give the patients (consumers) satisfaction as a total product package of both goods and services.
Service firms can be categorized in different order on the basis of the extent of the tangibility of the service. While some of the firms are based on pure service, the usability of tangible product when conducting varies from firm to firm. For example, we have already mentioned earlier in the example of service firm. Although, hospital is regarded as a service firm, the

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services conducted there are synergized with various tangible objects. On the contrary, teaching is an approximate example of pure service product.

Productivity measurement method of a pure community good firm and a pure service firm differs from each other. The basic concept of measuring productivity is finding out the ratio between output per input. =

So, even though the productivity of a restaurant should be measured by both its service and product aspects, we will only calculate the service aspect in this assignment as it is asked of us. So, the first thing to do while measuring productivity in a service environment (goods also) is to connect the input and the output. In order to achieve this we must figure out what the input is and what is the output for that particular input. For example, a hospital’s input can be considered as doctors while output can be considered as cured patients, from a very naive point of view; a restaurants input maybe chefs and output maybe satisfied customers, a schools input can be lecturers and output can be educated students. So, it will vary among

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different service environments, however, in the end, it will always be a cause and effect phenomenon, output for input.
If we measure labor inputs such as customer service, delivery, guard duty and so on, we should consider the factors of time, effort, individual skills, leadership, and a lot of factors.
If we measure product inputs such as medicine, x-ray machine, entertainment park rides, we should consider the factors of technology, initial investment, lifetime. So, for each type of service environment we must have different variables to put in input and output and measure the productivity thereby.

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Factors that affect productivity
Factors that affect productivity can primarily be divided into four main categories. They are:

Internal Factors:
Factors that make up the firm’s structure of operation, production process, basically everything that makes the firm operate are included in this category. This includes administrative policies, human resource management issues, etc.


External Factors:
Factors that are physically outside the premises of the company but affects productivity directly/indirectly fall under this category. For example quality of raw materials, waste management infrastructure of firm, etc.


Own Factors:
Factors owned by the firm which are directly involved in the production procedure fall under this category. These factors may be tangible or intangible. For example
R&D (Research and Development), machineries, etc.


Foreign Factors:
Factors that do not directly affect productivity but affects society falls under this category. This includes traffic condition, pollution, etc.

These can be further classified into 8 types of factors that affect productivity. They are discussed below:

Technical factors: Technology and technical factors are among the top priorities in any organization/firm these days. Productivity largely depends on technology and the technical skill level of the employees in a firm. The technical factors that affect productivity includes automation of production line, technology being used in production, research efficiency and costs, etc. Using the latest technology with a high level of trained staff will result in maximum productivity while using backdated technology, manual labour with low technical skills will result in a comparatively lower level of productivity.


Production factors: Factors related to production that affects productivity includes departmentalization of production activities/procedures, co-ordination among the departments, quality of raw materials being used in production, etc. Using higher quality raw materials while the departments have positive synergy between them will result in a higher level of productivity whereas having departments with
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communication problems and unplanned physical locations will result in a comparatively lower level of productivity. iii. Organizational factor: Organizational factors are directly influenced by the production factors. Organizational factors include defining clear responsibilities for staff members, having authority figures with minimal clashes, etc. Having a staff with conflicts will minimize productivity but having an organized system of different classes of employees with clear defined roles and specializations that prevents or mitigates clashes will result in a higher level of productivity.


Personnel factors: Productivity of any organization is directly related to the personnel factors that include anything and everything involving employees and employee policies. An effective and efficient HR department is essential for a firm to operate productively. These factors include proper personnel management, fair wage policies, fair chances of promotion, financial/non-financial aids, good working conditions, training as per requirement, etc. The HR department of a firm can contribute to a high or low level of productivity.


Finance factors: Cash is the lifeline of every firm/organization. Having financial setbacks can seriously cripple productivity whereas a smooth flow of money can help productivity be at peak. Controlling capital expenses and proper financial planning are the main factors that can cast a shadow over everything else. Managing finances responsibly and utilizing the finances effectively can result in a firm being productive or not-so-productive.


Management factors: A firm’s management team is the adhesive that holds a firm together. Having a management crew riddled with conflicts and unfair policies will drive away employees as well as reduce a firm’s productivity. The management of any firm should provide good working conditions, motivational environment, fair policies, etc as well as have a management team which can plan and execute managerial functions effectively and efficiently. Making optimum utilization of available resources, good employee relations, and having a professional, competent, sincere team of managers will directly affect productivity. A mismanaged firm/organization will never be productive enough.


Government factors: A country’s government and political situation directly affects a firm’s existence and operations. The factors that affect productivity include local rules and regulations as well as government policies on business and political affiliations. Page |7


Location: The physical location of an organization has a huge impact on productivity because a lot of things directly related to productivity are dependent on location. This includes the physical location of the source of raw materials, infrastructure of the location, distance between supply chain points, distance between suppliers and buyers, transportation costs, etc. A firm placed at an optimal distance away from suppliers, buyers and with a strong infrastructure will be more productive than a firm with infrastructure issues and away from a commercial location/zone.

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Productivity Improvement
Productivity growth is the increase in productivity from one period to the relative next to the productivity in the preceding period. Therefore,
Productivity Growth =

* 100

Positive result indicates that productivity has been improved than previous productivity of the company and vice versa. In service sector, productivity improvement measurement is very much challenging because the benchmark is very much relative here. However, through intellectual activities and high degree of variability the situation can be turned into positive.
As productivity in the service sector is difficult to measure and improve, it needs to be worked on within the organization especially regarding the personnel.
Working on some significant points, productivity can be improved or productivity growth can be made positive, for example:

Measurement or benchmark or standardization:
Other than measure performance, productivity can never be improved. Mostly traditional productivity measures fail to capture that growth because it has been concentrated in improved quality of services and it can not even reach the actual benchmark. Therefore, accuracy in measurement or setting bench mark is highly necessary. For example, for the customer service manager who can efficiently deal with 12 customers on an average in an hour, is wrong to set a benchmark for him in less than that or more than 15. Moreover it varies from person to person. This thing should also be taken into consideration.


Efficiency and Effectiveness
Efficiency measures based on the output/input ratio can be supplemented with effectiveness measures in index form which can be more effective. Moreover, effectiveness is another option. Other than fulfilling the customer requirement, a hundred percent efficient service can also become hundred percent ineffective. It also should be considered as multifactor productivity measures because service is always composed of different factors, thus the productivity.

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Moreover, this is also needed to be taken into consideration whether improving productivity of one factor is not going to hamper the productivity of other factors because this is way nothing good other than increasing the input level.

Development of methods following the best performing firms
Following the best performing company and their strategies how they develop their productivity, small organizations should come up with the ideas or training or methods for each factor of productivity for their firms.


Improving physical capital
Improving physical capitals like factory buildings, manufacturing plants, and machineries can also improve productivity in delivering service if it affects the whole servicescape. For example, the decoration or service design of a restaurant can affect productivity of the waiters reducing the service time.


Reducing Service Level
Reducing service level also helps to increase productivity. For example, if an order for meal takes lesser steps to be placed and reached to the main chefs, it reduces the waiting time and also fastens the processing time for the meal. It also minimizes probability of the number of error happened.


Improving technology
Improving technology and using more recent technology in the best way possible can make the whole system more productive.


Integrated information system:
Integrated information system can increase the productivity level as well by sharing required information so that everyone can access easily.


Reasonable and well defined goal
A well defined specific goal which is direct and measurable can increase the labour productivity because outdated technology usually reduces productivity and customer satisfaction level.


Work evaluation:
Proper evaluation in required to ensure the sustainable productivity goal. Comparing between the benchmark or Key Performance Indicator with the actual performance on

P a g e | 10

a regular basis and finding out on which factor the productivity is rising or decreasing and sorting it out with the best way possible can ensure the sustainable productivity improvement. 10. Reward system:
Rewarding the personnel based on their performance will increase the labour productivity. 11. Dissolving obsolete service line
The traditional way needs not be in the system which ultimately reduces the productivity level. Therefore, the service scape is required to be designed and kept up to date according to customer requirement.
Moreover reducing wastage, employee lay off, labour turnover, improving quality etc. can improve the level of productivity in a bigger manner.

P a g e | 11

Providing quality service while maximizing efficiency by helping the highest number of clients possible and keeping them satisfied at the same time is the best determinant of an efficient and productive organization.

7 Ways to Improve Productivity of Service. (2014). The Next
Generation Library. Retrieved 1 April 2016, from Boosting productivity in the services sector Issues paper- April 2013. (2014). The New
Zealand Productivity Commission. Retrieved 1 April 2016, from How to Increase Productivity in the Services Sector. (2016). Retrieved 2 April
2016, from
Long, M., & Shah, C. (2016). Labor and Skills Forecasting For the Service Industries:
Productivity In The Service Industries. Services Skills Australia. Retrieved 2 April 2016, from
Managing Our Way to Higher Service-Sector Productivity. (1997). Harvard Business
Review. Retrieved 2 April 2016, from
Stevenson, J. W. (2012). Operations Management (11th ed., pp. 53-62). New York:

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