Total Factor Productivity (TFP)

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picture of a woman with handling mail in tray with letters TFP

When people try to discover whether the Postal Service is operating more efficiently or not, they often talk about TFP. What is TFP? TFP stands for Total Factor Productivity. It measures the ratio of the Postal Service’s outputs to its inputs, in other words, how much output the Postal Service produces with the inputs it uses.

The useful thing about TFP is that it measures only the quantity of items produced and used — not their price. Why is this important in a productivity measure? It measures solely how efficiently the output is produced. As an example, consider a painting business. If the price of the paint the company must buy falls, the business will be more profitable, but its total factor productivity has not changed. If the business finds a new painting method that only uses half as much paint, it also becomes more profitable. However, in this instance, it is also producing the same output with fewer inputs, and its TFP has increased.

What do you think will happen in 2010?

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For the Postal Service, inputs are labor, materials, and capital. Outputs include mail volume and special services. Since the Postal Service is a network industry, the total number of delivery points is included in the final workload measure.

The table below shows the Postal Service’s input, workload, TFP growth rates, and net income from 2000 to 2009. TFP increases do not always result in positive net income, because profitability is affected by other items like the price of inputs. Although TFP increased from 2000 to 2007, TFP declined in 2008 and 2009. As the table shows, the Postal Service cut inputs significantly in 2008 and 2009, but it was not able to cut them enough to offset the declines in workload.

chart showing input growth, workload growth, tfp growth, and net income from 2000 to 2009

If the decline in mail volume moderates, will the Postal Service be able to return to TFP growth? Also, what is your opinion of the TFP measure? Business Mailers Review recently reported that there are discussions at the Postal Service about whether to move away from TFP and use another productivity measure such as deliveries per hour. What do you think? Are there other productivity measures that you believe would be more appropriate for the Postal Service?

This topic is hosted by the OIG’s Risk Analysis Research Center (RARC).

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Permalink | Comments (14) | Dec 28, 2009

 

 

14 Responses to “Total Factor Productivity (TFP)”

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  1. 14
    dryMAILman Says:
    March 17th, 2010 at 4:18 pm

    How about ‘The Freakonomics Postulate’? We already have walk-sequenced flats.

    http://www.youtube.com/watch?v=OSNVKC8DtvU

  2. 13
    pilgrim Says:
    January 21st, 2010 at 5:30 am

    Once again: Theory is excellent.
    Practice leaves something to be desired.

  3. 12
    rustybracewell Says:
    January 16th, 2010 at 9:36 am

    when will tfp be use to measure the actual worth of supervisors in mail processing and in the AOs.

    it would result in very interesting results that might force the PFP program to be disbanded.

  4. 11
    Skippy Says:
    January 13th, 2010 at 9:38 am

    Ah yes, the census mailing. We can sure use the added volume. Anybody taking bets yet as to whether we will have another stupid log to fill out to record and count the pieces of this mailing?

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