In the world of finance and business, it is necessary to know and distinguish between two fundamental terms to understand and achieve the proper functioning of an organization: production and productivity.

Although in a way it might seem that production and productivity are synonymous, the truth is that this is not the case, although they are two very related terms.

In this article we are going to deal with the differences between production and productivity , as well as explaining in detail their definitions and understanding what their relationship is when it comes to understanding the functioning of a company.

What are production and productivity?

Production is, in essence, the total amount of goods or services offered by a company in a given period of time. It is defined as any activity in which, through a whole process, a raw material is transformed into a consumer good or a service useful to society. Production is the main objective of an organization, given that, if it reaches a satisfactory level, the company can tackle the market in which it intends to enter.

At the beginning of the process some inputs enter the company, which can be tangible, such as materials and machinery, or intangible, such as the human effort involved in the process, either in the form of physical work or in the form of creativity, brainstorming, imagination and planning.

For a company to make a profit , the profits achieved with the final production must be greater than the expenditure invested in inputs. Otherwise, the organization will be suffering losses that may lead to its ruin after some time.

On the other hand, the term productivity refers to the degree of efficiency in the production process. In other words, it is the relationship between the materials consumed and the final products, in addition to taking into account the human capital invested and the time needed to do so. While production is focused on the final product, productivity takes into account different aspects of the whole process.

Key differences between the two concepts

Below we present the fundamental differences between production and productivity.

1. Measurement

Production measures what an enterprise has produced , either in the form of goods or services. On the other hand, productivity measures efficiency, in which the total production of the company can be included.

2. Expression

Production is measured and expressed in absolute terms, since it is focused on what is produced. For example, if a company produces 100 soaps every day we would say that it has a production of exactly 100 soaps per day. As can be seen, this is a fairly simple and easy to understand measure

On the other hand, productivity is measured in relative terms , since it includes many more variables than production and some of them are difficult to measure, it is not possible to calculate it accurately or in a concrete way.

Going back to the example of the soap company, to calculate their productivity it is not enough to know that they manufacture 100 soaps every day. It is a useful data, but it is necessary to know many more, like the materials invested, their cost, the time spent, the individual production of each employee, the machinery used and its maintenance…

3. Product and usability

Production is a measure of the total amount of products and services offered at the end of the process. By itself, it does not indicate how well the raw materials have been used .

Thus, the production measure simply allows us to know to what extent what a company produces generates profits for it or, on the contrary, causes it to make losses.

Productivity, on the other hand, is a measure of the extent to which resources have been used.

An organization is productive if it has made intelligent use of resources , has not wasted materials and has not produced waste during the process.

4. Added value

When a certain product is produced or a service is offered, the company itself gives it a value, taking into account what has been invested in the beginning and what percentage of income is desired.

On the other hand, although productivity is a measure that is difficult to calculate, it is not possible to give it an arbitrary value. It is the total efficiency of the company in the production of a product or service, with which, the costs and benefits obtained must be taken into account as objectively as possible , without the possibility of giving it an added value.

Productivity-production ratio

As we have already seen, the basic difference between the two concepts is that production refers to the amount of goods and services offered in a given period of time, while productivity refers to the level of use of resources, whether material, human or energy. Once this fundamental difference is understood, it is necessary to see the close relationship between these two terms.

It is not possible to calculate productivity without taking into account what is the production in the organization . To know how efficient a company is it is necessary to know how many products/services are offered. In this way it is possible to know to what extent there may be a loss or gain, and in what way resources are being used appropriately within the organisation.

The degree of production and productivity influence each other. For example, if a company has detected a decrease in production, it is necessary to investigate what has happened, whether workers have suffered any mishaps, whether any machines have broken down or whether any raw materials have been exhausted. Also it may be the case that the employees are not working properly , and it is necessary to invest in training or, if there is no other option, to replace them.

It can be said that paradoxical situations can occur in which the desired productivity for the company is being achieved but not what is necessary to keep the organization afloat. It can also be the case that the desired production is being achieved, however, analysing what has been invested during the manufacturing process, it can be seen that large amounts of money and materials are being wasted.

Successful companies are those that manage to produce what is necessary to make a profit and, at the same time, do not waste resources , allowing them to invest intelligently and save to ensure the wages of the workers.

In short, the best way to calculate real productivity is to take into account what the real output of the company is. It should be noted, however, that an increase or decrease in one of these two factors is not synonymous with a change in the other component, but can influence and be an indicator of a change in the organization.

Bibliographic references:

  • Fuchs, V. (1969). Production and Productivity in the Service Industries. New YorK USA, NBER.
  • Moretti, E. (2004). Workers’ Education, Spillovers, and Productivity: Evidence from Plant-Level Production Functions. American Economic Review, 94(3), 656-690.
  • Gillis, M.; Perkins, D. H.; Roemer, M.; Snodgrass, D. R. (1992). Economics of development. New York, USA, W.W. Norton & Company, Inc.