Value-added productivity (VAP)
By Staff -- Manufacturing Business Technology, 4/1/2004 12:00:00 AM
Measuring the overall performance of an organization is one of those popular projects that are far more difficult than the accountants would have you believe. And, as savvy managers know, what matters most is how you compare to competitors.
"The problem with old measures like these is that different companies have very different cost structures and different supply chain strategies," says Rick Hoole, supply chain practice director with Boston-based consulting firm PRTM. "For example, the semiconductor industry has companies that fabricate their own wafers, while others are 'fab-less.' "
Hoole points to value-added productivity (VAP) as an alternative measure that takes differences into account and tells you how you stack up in an apples-to-apples way. There are two ways to measure VAP:
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Subtract external revenue purchases from total revenue, and divide by full-time headcount or equivalent, or;
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Subtract external revenue purchases from total revenue and divide by total payroll expenditures.
The per-employee metric compensates for vertical integration. For example, material costs for fab-less semiconductor companies are relatively high. They have less value add on the materials, but far fewer employees. The opposite trend holds true for a supplier with its own fab.
The alternative—measuring by labor cost—accounts for different strategies. For example, when you compare assembly-intensive electronics manufacturers, you may be looking at one that has set up domestically, and has a small number of skilled employees in a highly automated plant. It's not very meaningful to compare this organization to a competitor in China focused on cheap labor. The payroll numbers may be similar, but the strategies are vastly different. "The alternate equation compensates for the different manufacturing strategy," says Hoole.
