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Productivity Goal Setting For A New Year: Tool For SMEs

By Kelvin Chan Keng Chuen

 

What productivity measures should you use for goal setting? Productivity is about resource utilisation. It is about the creation of value for your customer verses the efficiency in utilisation of your resources. Many stakeholders in the industry including government agencies use the Labour Productivity ratio as a primary indicator to assess generated performance of an enterprise. This ratio as a primary indicator to added generated by the number of employees in the enterprise. Value added can be computed using (1) the Subtraction Method where you subtract the brought-in materials and services from sales or (2) the Addition Method where you add the manpower cost, interest, tax, depreciation, profit and in some countries, rental to obtain the value added of the enterprise.

The Value Added approach makes sense as it encourages employees to work along side with management to create value for the enterprise. Coupled with Productivity Gainsharing, employees will be motivated to continuously generate more value for the enterprise, as they will benefit from the process.

The Labor Productivity ratio is computed at the end of each financial year. Performance in productivity can then be evaluated by comparing the enterprise performance with its historical performance or industry benchmarks.

A relatively young SME in the service sector in Singapore started their productivity drive 3 years ago and established a system to assess their performance in productivity. As illustrated in the table below, the historical trend of the Labor Productivity had increased by an average of 6.8% per annum. As such, the enterprise had performed well; growth strategies adopted in the past were sound and more importantly, the efforts in managing the enterprise had paid off. When comparing the performance against the industrial average of  $22,287 per employee for this sector, the SME realized that they had outperformed the industry benchmark. This is good news! To prevent sliding in to a mood of complacency, the enterprise decided to set an ambitious improvement goal of 10% per annum for the next few years.

 

Table: Performance of Labor Productivity of a SME in the Service Sector

In the quest for improvement, the enterprise found that increasing the sales per employee or the value added to sales ratio would help to improve its Labor Productivity. The management started to review their list of services to identify and establish strategies to increase the volume of its high value-added services.  At the same time, Lean Management activities were introduced at the workplace to reduce waste in their operations. An Innovation project was initiated and had resulted in the launch of two new high value-added services that further boosted its sales. Once again the improvement efforts paid off as the SME managed to increase its productivity by 35% over the following 3 years. That’s a great achievement!

 


 

Figure : Components of the Labor Productivity Ratio

There is this SME in the printing business in South Africa that was in crisis when one of their biggest customer that contributed to 30% of their annual sales turnover decided to use another vendor. The productivity measures implemented earlier had allowed the enterprise to remain competitive by reorganizing its manpower requirements while implementing strategies to rebuild their business.

Why wait? What is the Productivity of your enterprise? Set your productivity goals to
kick-start the New Year! Do make use of the above template and approach. Assess
your historical performance and compare your performance with the industry
benchmark. When the facts are established, productivity goal setting and selection of strategies for improvement will then be obvious to you!

This article have been written by our Principal Consultant, Mr. Kelvin Chan for the Asian Productivity Organization for their APO News published in January 2012 under the category of Productivity Methodologies, Tools and Techniques. The PDF version of the Newsletter is available for downloading from the Asian Productivity Organization website at this link.

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