Looking for a way to produce more with less, or to squeeze more revenue from your current workforce and resources? It’s time to learn about multifactor productivity. This measurement tool is a great way to see how efficiently your organization operates.
Think of this article as your primer on multifactor productivity. You’ll learn what it is, why it’s important, how to calculate it and, most importantly, when to use it.
What is multifactor productivity?
Multifactor productivity (MFP) is a measurement of how efficiently a business uses all its resources — including employees, equipment, materials, capital and energy — to create goods and services. Unlike labor productivity, which focuses solely on hours worked, MFP looks at total output compared to all inputs used.
When multifactor productivity increases, it means the organization is generating more output with the same amount of resources. This usually happens because of new business technologies, better management practices or improved worker skills. On a larger scale, improved MFP leads to economic growth, higher wages and better living standards.
Calculating MFP involves a simple multifactor productivity formula:
Total output / Total inputs = MFP
Total output is the value of goods and services produced. Total input includes labor hours, capital and other resources. Together, these tell business leaders when and where to make improvements — whether that means upgrading technology, offering better training or optimizing supply chain management.
Why is multifactor productivity important?
Business leaders should pay attention to multifactor productivity because it’s a more comprehensive measure of efficiency compared to, say, looking at just labor or just equipment. Tracking MFP allows you to identify opportunities for improvement across the entire operation. This, in turn, makes it easy to discover new ways to streamline processes, reduce waste and adopt technologies that transform business. And that leads to higher profits margins and a greater competitive advantage.
Companies with higher multifactor productivity offer more competitive prices, invest more in innovation and pay competitive wages — all while maintaining healthy profit margins. During economic downturns or supply chain disruptions, businesses with strong multifactor productivity are also more resilient and adapt more quickly to changing conditions.
Advantages of improving multifactor productivity
Focusing on MFP is a great way to make more informed decisions related to resource allocation, technology investments and workforce management. Once you understand which factors contribute to productivity spikes and dips, it’s easier to adapt strategies and stay competitive. This allows you to achieve:
- Higher profit margins: By finding ways to use resources more effectively, you reduce waste and lower production costs, leading to higher profit margins.
- A greater competitive advantage: Companies with superior multifactor productivity can offer better pricing or higher quality products than competitors, helping you win more market share.
- Better resource allocation: Identifying productivity improvements often reveals where resources are being wasted or underutilized, allowing you to redirect them to more valuable activities.
- Increased resilience: MFP-focused organizations better weather economic downturns, supply chain disruptions and labor shortages because they’ve learned to operate more efficiently.
- Improved employee satisfaction: Productivity gains that come from better workflows, tools and training lead to more engaging work environments, which in turn boosts morale and retention.
- Stronger culture: Focusing on MFP fosters a culture of continuous improvement, where employees feel empowered to innovate and seek efficiencies. This instills a sense of ownership and pride in work, resulting in a more motivated workforce aligned with company goals.
How businesses use multifactor productivity
Multifactor productivity is an ideal tool to have in your back pocket. In some instances, it helps companies thrive. In others, it’s essential for weathering storms. For example, many organizations use it:
- During periods of significant change: During a merger, for instance, MFP helps business leaders compare current and previous performance. This makes it easier to determine if changes are working well or need adjustments.
- To compare performance across locations: For example, a restaurant chain might measure multifactor productivity at each location to see which restaurants are using staff, ingredients and equipment most efficiently — then have high-performing locations share best practices with others.
- When making important investment decisions: Before buying new machines or software, a manufacturing company could calculate how the change would affect multifactor productivity. This helps leadership decide if the investment is worth the money.
- To set goals and provide bonuses: A delivery service might track multifactor productivity by combining driver time, fuel usage and vehicle maintenance each quarter. Leadership could then give bonuses when teams improve their scores, encouraging everyone to find better ways to work.
- When planning for growth: When looking to expand, a small or medium-size business might first measure current multifactor productivity to understand if the company’s ready to grow. If productivity is already high, that’s a sure sign current methods are working and can be scaled up.
- To combat rising costs: When the price of materials goes up, a furniture maker might focus on improving multifactor productivity to offset costs without raising prices. For example, a quick assessment may reveal new ways to reorganize the workshop, reduce waste or train workers on more efficient techniques.
How to calculate multifactor productivity in 6 steps
Multifactor productivity might sound complicated, but it’s actually a straightforward concept. Here’s how to calculate it:
1. Define the output
Start by determining the total value of goods and services your business produces in a specific time period. This could be the number of products manufactured, services delivered or revenue generated.
2. Identify and measure inputs
Next, identify all your inputs. This includes everything that goes into making your products or services — labor, energy used, materials, supplies, capital and so on. Be sure to factor in everything, from laptops to offices to hours worked.
3. Assign dollar values
For this step, convert everything to dollar values. This allows you to compare different types of inputs, such as hours of labor versus pounds of material, using the same metrics. For now, just assign a dollar value to each individual component.
4. Calculate total input value
Once you have your individual dollar values, add them up. This is your total input value.
5. Calculate MFP
Lastly, use the basic multifactor productivity formula to calculate your MFP: Total output / Total inputs. For example, if your business produced $500,000 worth of goods using $400,000 worth of combined inputs (labor, materials, equipment, etc.), your multifactor productivity would be:
$500,000 / $400,000 = 1.25
In other words, for every dollar of input, your business generates $1.25 in output.
6. Track your progress
Repeat steps one through five above on a regular basis and compare your results. Using the example above, if your score increases from 1.25 to 1.30, you know to build on current strategies since productivity is improving. If it drops to 1.20, it’s time to do your research and uncover what’s making your business less efficient.
And remember: The specific measurement methods might vary by industry, but this basic approach works for most businesses.
Multifactor productivity examples: How it works
To better understand what MFP measurement actually looks like, let’s consider the example of a manufacturing company that produces automotive parts.
First, business leaders calculate how much revenue the organization generated over the past six months. Then they make a list of all the inputs that go into the company’s production process — account labor hours, machinery use, raw materials and energy consumption. After assigning dollar values and adding everything up for the MFP formula, they discover productivity has dipped since they last calculated it.
This prompts the team to dive deeper, which leads to a new discovery — significant energy waste occurs during off-peak hours. So leadership explores not only energy-efficient machinery but also alternative energy sources, such as solar panels, to further reduce costs and improve efficiency.
Then, when they recalculate MFP six months later, productivity has once again increased. The team now shares its findings and best practices with other departments, creating a ripple effect that encourages a company-wide initiative aimed at optimizing resource use.
Components that influence multifactor productivity
Various components affect multifactor productivity, from internal management practices to external economic conditions. Key influences include:
- Technology and innovation: New tools, machines, software and production processes help workers do more with less effort.
- Worker skills and education: The more skills employees develop, the better they get at their jobs. Productivity often increases simply because the business invests in training.
- Management practices: Good managers create efficient workflows, set clear goals and resolve problems quickly. When an organization has strong leaders who organize work well and motivate employees, everyone accomplishes more with the same resources.
- Scale and efficiency: The larger the operation, the more efficiently the company can produce goods and services. For instance, a big bakery producing 1,000 loaves at once has lower costs per loaf than a home-based baker, thanks to specialized equipment and bulk ingredients.
- External factors: Government regulations, weather events and market conditions are all examples of influences beyond your business’ control. Think of it from a construction company’s perspective. Business productivity might drop during extreme weather — and then improve when building codes change to allow new, faster methods.
Take multifactor productivity to the next level with ActivTrak
Understanding multifactor productivity is crucial for any organization looking to stay competitive. It allows you to identify areas for improvement, streamline processes and allocate resources more strategically. This leads to significant cost savings and increased profitability over time.
Ready to get started with MFP? Create your free ActivTrak account to collect valuable employee activity data. We’ll provide you with detailed insights on workforce performance and operational efficiency — metrics to help paint a clear picture of multifactor productivity across your entire organization.
