Productivity is the value of services or
products produced minus the cost of production such as labor and
materials. There are two ways to increase productivity. One way is to
increase the number or the value of the services or products. the second way is
to decrease the cost to produce the services or product.
If a company decides to increase productivity
by decreasing the cost of of the product by using cheaper parts if you are into
manufacturing. You may decide to cut down cost of producing the product by
using a cheaper software. If you are into services, you may decide to lay off
your more expensive experienced employees and hiring cheaper, less
inexperienced employees. In the short run this makes sense. You will produce
the same number of products, sell them for the same price and have cheaper cost.
In the short run cutting cost by cutting
quality makes sense. You will produce the same number of products and it will
cost you less money and will show a higher productivity value. But a few months
later the cheaper parts begin to break down. Now you need repair and you order
parts. So manufacturing is delayed due to mechanical breakdown. You will have
no production during the down time. Add to that the cost of parts and labor to
fix the broken parts. So within a few months, the cheaper parts are already
costing you more money. Now because you were using cheaper parts, the product
itself is not of the same quality. Your customers start to complain about the
drop in quality. You lose customers.
Your product is being returned for repair
and that is adding to the cost and it is angering your customers. Some of the
products may have to be recalled because the drop in quality may actually be a
hazard. The recall has a large cost, The drop in quality can lead to lawsuits,
also adding to the cost of production. The customers that you do mange to keep,
now want to pay a lower price. Who will pay for a luxury car that has the
quality of a cheap car?
Of course, it is important to save on cost in
manufacturing. It will increase productivity but only if you find a way to cut
cost without cutting the quality of the product.
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