Krishnamurthy Ram Mohan, Chief Operations Officer of Punjab National Bank, delivers a speech at the forum on world internet & modern logistics of the 3rd World Emerging Industries Summit (WEIS 2015)

ALLOCATIVE EFFICIENCY  & PRODUCTIVITY AS A TOOL TO IMPROVE  TOP & BOTTOM  LINES

BY K.RAM MOHAN, COO, PUNJAB NATIONAL BANK.

3rd World Emerging Industries Summit   WEIS2015

April, 22, 2015, 14:00-16:30, Keynote speeches

JW Marriott Hotel Zhengzhou, Henan province, China

ALLOCATIVE EFFICIENCY

BROADLY ALLOCATIVE EFFICIENCY MEANS:

Allocative efficiency has to do with the degree in which a given action leads to the production of more positive results than the creation of negative results.

This basic approach to measuring benefit derived comes into play with many different types of business functions, including the creation of a client base, the organization of a business entity, and the ultimate success or failure of that entity.

In short, allocative efficiency is all about generation of substantial benefits while producing relatively few liabilities.

Allocative versus Productive  Efficiencies

It is possible to have productive efficiency without also achieving allocative efficiency.

A firm may be producing its current level of output with the best technology and a least-cost combination of inputs; i.e., it has achieved both technological efficiency and productive efficiency. This doesn't mean, however, that the firm is maximizing profits.

It may be producing a level of output that is either too small or too large relative to what will be optimally demanded in the market.

EFFICIENCY

There are 2 types of static efficiency; productive efficiency and allocative efficiency.

Productive efficiency occurs when production is at an output level where there is the least cost.

Allocative efficiency is concerned about whether resources are used to make goods and services that consumers want to purchase.

Static efficiency refers to efficiency at a given point in time whereas dynamic efficiency is related to the efficiency of resources used over a period of time.

ALLOCATIVE EFFICIENCY – HOW WE LOOK AT IT IN OUR STUDY

Allocative efficiency is looked by us as the “gap” in the “need” perceived by customer/society/market, which ultimately results in generation of “demand” for the product.

The conclusions from this “AE Matrix” is equally applicable for Productive Efficiency and Allocative Efficiency.

These are two sides of the same coin and always co-exist and these two never merge.

WHAT WE LOOK FOR IN OUR STUDY?

Like a group of blind people  touching & feeling an elephant and describing the  same, in literature the concept of  “Allocative Efficiency” has been mostly looked from perspectives of each Academicians & Practioners.

Here for our purpose we are not taking any segmented view and take it holistically  and look at the possible effective ways to  allocate the resources viz., men, machines and materials to  meet the Efficiency  demands.

METHODOLOGY FOR OUR STUDY

In a Multi Product Manufacturing or service Industry  we plotted the top line (Sales) in Y axis versus  Bottom Line (Profit) in X axis.

In case allocation of cost to each and every product, especially in a service industry like Banking is not possible, then in X axis, one can take net cost, instead of profit also.

Thus we have relatively measured the top line & Bottom lines to find out their interse  productive & Allocative eficiencies.

DATA  POINTS  TAKEN

ALLOCATIVE EFFICIENCY  - MANUFACTURING

LOW  VOLUME & HIGH  PROFIT ZONE

Quadrant 1 : low volume & high Profit.  Right bottom

Here allocative efficiency indicates that there is limited scope to improve profit. So Prescribe for efforts to improve top line through effective marketing, rather than indulging in cost cutting as a first step.

Allocate resources for marketing & HIGHER LEVELS OF PRODUCTION.

LOW VOLUME LOW PROFIT ZONE

Quadrant 2: Low volume, low profit zone.  Bottom left.

These are the products which require immediate attention by way of cost cuttings, efficiency in production etc.,

However, if nothing works, then one has to take the view whether it is worth continuing with the product line or not.

RATION RESOURCES & FOLLOW IT UP WITH COST CUTTING. REVIEW FREQUENTLY.

HIGH VOLUME & LOW PROFIT  ZONE

Quadrant 3: high volume low profit products. Top left.

Since the volume is high, there is an existing demand for the product, despite acute competition which has resulted in low margin.

Here cost cutting, efficiency improvement through automation, better supply chain management can be attempted.

ALLOCATE CAPITAL FOR TECHNOLOGY IMPROVEMENT/AUTOMATION. MONITOR TARGETS EFFECTIVELY.

HIGH VOLUME  & HIGH PROFIT ZONE

Quadrant 4: High volume high profit products. Right top.

These are Gold mines, which has to be nourished. Since these are star performers, do not try to cut cost or capital rationing etc.,

Here further scope in the  first step should lie with effective supply chain management and squeezing the surroundings rather than the system.

Since going is good, do not disturb the synergy and successful equilibrium of system but try to influence supply chain for  augmenting the profit, if possible.

Negotiate with supply chain effectively to augment profitability.

ALLOCATIVE EFFICIENCY - BANKS

ASSUMPTIONS

When product profitability can not be easily drawn, as common resources are extensively used, say like banking, the same Allocative Efficiency chart can be prepared with the following assumptions:

1. For Liability products, calculate the service cost and add interest cost.

2. For Asset products, compute Interest earned and reduce operation costs.

ASSUMPTIONS - CONTINUED

Since in this Allocative efficiency chart, we are not measuring any individual contributions, but only compare the products efficiency, as long as we use the same measuring technique, interse comparisons will hold good.

For Asset side the four quadrants are same as in case of production. For Liability, it will become a mirror image Right bottom will become Quadrant 1 and Left bottom Quadrant 2, Left top Quadrant 3 and Right top Quadrant 4.(On Negative side of X axis.