Navigating Market Fluctuations: A Guide to Measuring Productivity

Understanding Productivity Amid Market Changes

Evaluating the productivity of a business can be challenging, especially when market fluctuations come into play. While it’s crucial to benchmark business production, it becomes even more significant when demand is either rising or falling. So, how can we track business production if sales start to decline due to market pressures?

A Simple Indicator of Productivity

One straightforward indicator can provide insight: the ratio of total sales to the number of staff. This ratio is calculated by dividing the annual sales value by the number of equivalent full-time employees, encompassing all divisions and management.

For instance, if a business has an annual turnover of $5 million and employs 12 people, the ratio is $625,000 per employee ($5,000,000 / 12). Alternatively, a business with a $100,000,000 turnover and 300 employees has a ratio of $333,333 per employee ($100,000,000 / 300). These examples don’t compare the relative performance between the two businesses, as there will be numerous differences in structure, market, product, margin, etc. The ratio number in itself is not important. What matters is the trend of this number over time.

Monitoring the Ratio

The key aspect to monitor is whether the ratio is increasing or decreasing, especially if there are no significant changes within the business structure. A decreasing ratio on a lower sales value is a warning sign that should not be overlooked.

This benchmark is effective in both rising and falling markets. In an expanding market, it can be tempting to meet demand by increasing labor. However, a decreasing ratio in a growing market strongly indicates inefficiency. While this may be justifiable in the short term, it’s crucial to ensure the ratio increases over time.

In a declining market, an increasing ratio is a strong indicator of effective management. It shows that labor is being adjusted to ensure a productive outcome, rather than merely keeping existing labor occupied.

How Programmed Timber Supplies (PTS) Can Help

PTS has consistently helped customers improve their ratio in both rising and falling markets by providing output without the corresponding labor requirement. Adjusting labor in a falling market is prudent, but avoiding the need to re-employ in a rising market is even more beneficial.