Threshold productivity

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The productivity threshold is based on standard costs. These costs may be external and internal indicators. Threshold cost may be the following:

  • market price or negotiated price
  • transfer prices based on the cost calculation

Applications

Method of productivity threshold is used to rationalize the manufacturing process, and its main feature is the analysis of the decision concerning the choice of organizational solutions in the following areas:

  • maintain or discard functions in the value chain process
  • create new organizational units for implementation of the tasks necessary to achieve the general objectives of the company.

Managers should ask following questions:

  • do you want to continue specific type of business?
  • do you want to buy products, materials, ready-to-use final products, services needed for your own production?

This is the problem a choice between continuing and discontinuing activity in specific sectors and replacing it with purchase of products or services.

Among these problems is also seeking solutions to eliminate or simplify areas in which productivity is low.

The computational formulas

This method is based on the following formulas:

  • \(P = {S \over \sum\limits_{i=1}^{m} {KP_i}}\)
  • \(P_i = {S_{n_i} \over KP_i}\)
  • \(S_n=\sum\limits_{i=1}^{m} S_{n_i}\)

where:

  • S - sales revenue
  • S ni - settled proceeds from the sales in "i" link in value chain
  • KP i - threshold costs of "i" link in value chain

The productivity threshold is an indicator of the efficiency, in the case when it is higher than the actual productivity managers should stop particular activity. This also corresponds to the concept of lean management and the idea of outsourcing. Unburdened productivity - is one that is only in relation to the cost of production. Adjustment of revenue from sale is necessary. It is therefore an indicator of value which the company could achieve if it eliminated all the unnecessary costs. It is expressed by following equations:

  • \(P = {S \over \sum\limits_{i=1}^{m} {KE_i}}\)
  • \(P_i = {S_{n_i} \over KE_i}\)
  • \(S_n=\sum\limits_{i=1}^{m} S_{n_i}\)

where:

  • P - general, unburdened productivity
  • Pi - partial productivity of "i" type of activity
  • Sn - unburdened sales revenue
  • Sni - unburdened sales revenue settled on "i" type of activity.
  • KEi - productive cost of activity "i"

References

  • Ansoff, H. I. (Ed.). (1969). Business strategy: selected readings (Vol. 72). Penguin books.
  • Coelli, T. J., Rao, D. S. P., O'Donnell, C. J., & Battese, G. E. (2005). An introduction to efficiency and productivity analysis. Springer Science & Business Media.
  • Ciccone, A., & Hall, R. E. (1993). Productivity and the density of economic activity (No. w4313). National Bureau of Economic Research.
  • Deming, W. E. (1982). Quality, productivity, and competitive position. Massachusetts Institute of Technology Center for Advanced En.
  • Kendrick, J. W. (1973). Productivity Trends. Business Economics, 56-61.