What is productivity? It is the measure of the output of an employee, whether in goods or services, or both. If productivity increases, each employee is making more products or providing more services. If I have 10 employees, each of whom makes 25 widgets per day, what happens if their productivity doubles? They make 50 widgets per day, right? When this happens, there are several possible scenarios. First, I might have a company that has a market for 500 widgets a day, have the space to warehouse them, the drivers to deliver them, and the ability to purchase the raw materials to double my widget production. But I might not. That would be the second scenario. I might be able to sell only 250 widgets per day, have no room to store them, have insufficient cash or credit to purchase the raw materials to create the widgets, and so on. In that event, what should I do? The logical step to take is to eliminate five employees, since I can maintain the production I want and need with only five employees. My profits increase because my costs have decreased.
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