Chapter 2: Strategy, Productivity and History

Review Questions
Why is productivity a crucial element of strategic planning?
Answer: The ability of a company to compete in the marketplace is related to its productivity.
An organization might be able to rely on a wealth of natural resources or low labor costs
temporarily, but in the long-term it will need to make efficient use of its resources. Otherwise, its
ability to develop, design, and provide products or services that meet the changing needs of
customers will be limited.
1.

Why is productivity measurement vital to P/OM?

Answer: P/OM is the custodian of the production process and is responsible for its productivity.
Productivity is a critical business variable which directly impacts operating costs and net profits.
Excellence in productivity is a major P/OM issue. Without measurement there would be no
feedback on productivity accomplishments.
2.

Why is productivity measurement vital to national government economists?

Answer: Productivity measurement is important on a national level for at least two reasons.
First, productivity measurement allows economists to determine how much productivity has
improved over a period of time. Second, productivity measurement enables comparisons of a
countrys productivity with the productivity of other countries. If productivity comparisons
cannot be made over a period of time, or with other countries in the region, it is difficult to assess
the effectiveness of steps made to improve productivity or the attainment of productivity
benchmarks.
3.

What is the importance of productivity measurement to marketing management?

Answer: Higher productivity is one way to reduce variable costs per unit. With higher
productivity, competitors price decreases can then be matched without reducing quality or profit.
Also, if the company does not listen to the customer in resolving problems, future sales
productivity can be impaired. Continuous measurement keeps the team on track.
4.

What role does the systems approach play with respect to productivity measurement?
Answer: Everyone in an organization is involved in achieving excellence in productivity.
Everyone has the ability to increase or decrease the organizations productivity. Employees sense
whether corporate culture promotes high or low productivity, and they respond to that norm. The
productivity condition is a contagion factor with systems-wide implications.
5.

Every function has some measurable accomplishment; company productivity is the composite of
the individual function productivities. Productivity issues are system-wide in that they are woven
into all parts of the supplier-producer-customer chain and the input-transformation-output
process.

6.

What is good and bad about bureaucracy with respect to productivity? In 1922, the German
sociologist, Max Weber wrote that bureaucracy is the most efficient and rational way to
organize human activity (Economy and Society). He considered bureaucracy as a major
organizational advance over what preceded it. Why is it now considered an impediment?

Answer: Flexibility is the ability to adapt to new situations. Flexibility has become very
important because of new technologies and the need to be global. Bureaucracy is the great
inhibitor of flexibility. Bureaucratic organizations are dedicated to resisting change. Once it was
an advantage to be capable of producing large volumes of identical units. Bureaucratic
organizations were able to do that. That paradigm is being replaced by one that rewards the
ability to produce smaller volumes with greater variety, as product life spans are shorter and
product design changes more frequent.
7.

How does the division of labor concept help a market research firm put together a report
for a client?

Answer: Completing a job for a client involves various tasks, which include questionnaire
creation, focus group design, data entry and validation, computer processing, production of
charts and reports, computer network support, and desktop publishing. It is unlikely that each
person at a market research firm will be adequately skilled at all tasks. Therefore, division of
labor would suggest that some employees perform only data entry while others do only focus
groups while others do only desktop publishing, etc. In this way, a highly paid owner or network
analyst will not be underutilized by performing data entry or data validation.
8.

What is the value of knowing about the six historical steps in the development of
production theory? Is the suggested seventh step likely to have an impact on the future of
operations management?

Answer: These steps show the progression of production (and service) systems from the basic
usage of tools and methods to the use of more sophisticated technologies and techniques. These
improvements have enabled organizations to make better use of resources and meet customer
needs more effectively. The seventh step, ubiquitous global competition, will impact the future
(and present!) of P/OM in various ways. Global competition will affect every stage of the supply
chain. Costs of inputs and values of outputs will be affected by currency values. Computer
networks linking the stages of the input-transformation-output model will have to be
multilingual.
How does the concept of interchangeable parts apply to
a. vacuum cleaners? b. jigsaw puzzles? c. flashlights?
9.

Answer: Interchangeable parts, applied to vacuum cleaners, allows for inventory of assembly
parts that will fit properly and quickly into the finished product. Productivity is enhanced since
no time is spent in hand-fitting the part to the product. Interchangeable parts allow for an
inventory of replacement/repair parts that will, with high assurance, fit into the product. This
assured fit increases the productivity of the repair technician or the do-it-yourself repairer.
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Interchangeable parts have little meaning in the manufacture of a single jigsaw puzzle. Each
puzzle is diecut in one operation; there is no purpose in having one of those parts fit neatly into
another puzzle. When jigsaw puzzles are mass produced, there would be value in having part
interchangeability. Also, diecut puzzles might have such good tolerance controls on the parts that
any part from one puzzle could be a replacement on another puzzle. That would not be a
requirement however. Interchangeable parts for flashlights use the same logic as for the vacuum
cleaner.
10. What

is meant by lean (or agile) production systems?

Answer: Lean production combines a deep understanding of quality with a desire to be fastest
and a distaste for waste. Quality is enhanced by pre-engineering to minimize variability. Wasted
time is especially abhorrent. Lean production reduces wasted time with pre-engineered products
and processes, short cycle times, rapid project development, and short setup (changeover) times.
11. How

does business going global create new problems or opportunities for P/OM?

Answer: The input-transformation-output model will become even more internationalized.

International sourcing, assembly, distribution, and marketing will become common. Growing
income levels worldwide suggest opportunities for growth for goods manufacturers and for
services, but competition for these markets will be global. Offering multiple versions of a
product to suit multiple cultures is an opportunity for lean production. Dealing with international
sourcing, with the language and cultural barriers, presents a major challenge.
12. What

relationship connects productivity and pricedemand elasticity?

Answer: Elasticity and demand volume are linked as follows: If elasticity is high, price
decreases generate large demand volume increases. If elasticity is low, price decreases generate
little or no demand volume increases. If marketing plans to cut price on a good whose elasticity
is high, operations management must be prepared to produce increased quantities; increased
productivity is one way to do this. The larger quantities produced allow fixed costs to be spread
over more units, further reducing unit costs.
13. What

relationship connects productivity and qualitydemand elasticity? Is price implicitly

included?
Answer: Customers in the marketplace take both price and quality into account; quality
expectations usually override price expectations. The elasticity of demand volume with respect to
quality is analogous to price elasticity, except that relative changes in price are much more
measurable than relative changes in quality. Changes in the quality of a product alter the extent
to which other products can substitute for it. Since achievement of specified levels of quality is
in the domain of operations management, operations is clearly affected by marketing demands to
build in special features or other aspects of higher quality. The extra work, extra detail, or extra
parts may serve to reduce productivity.

14. What

are economies of scale? How do they relate to productivity and the systems approach?

Answer: Economies of scale are reductions in variable costs directly related to increasing
volumes of production output. Reductions in unit variable costs may derive from the need for
less labor per unit because of better methods. It could also arise from discounts on materials or
energy per unit of output. With economies of scale, larger outputs are associated with increased
productivity.
15. How

does telecommuting relate to productivity?

Answer: First, let us define telecommuting. It is used to describe situations where the person
does not always work in the office. Working at home part of the time or on the road is
characteristic. The Internet plays an important role. Telephones, email and texting are commonly
used to communicate. The effect on productivity is partly generic in that outputs are achieved at
lower costs. Office rentals are reduced and people generally work more than eight hours without
charging for overtime. Time wasted in traffic can be reduced and there are other benefits that
vary according to circumstances.
16. What

are the good and the bad attributes of the newsroom or open room office setting?

Answer: Flexibility in the office includes telecommuting which facilitates cutting down on
office space. Supposedly in addition to the savings (see Answer to 15) there is more quiet time to
concentrate. However, reduced office size is often accompanied by space that is not assigned. It
is available by reservation or on a first-come, first-served basis. This is most easily accomplished
when spaces are not closed by walls, i.e., the open room, also called the news room. Open room
is prone to distractions but it provides more face time for collaboration. As the text states, in a
recent survey only 27% of 600 workers preferred open room settings.
17. Explain

why consideration of flexibility in the office leads to evaluation of telecommuting.

Answer: The mixture of in-office work and telecommuting provides flexibility if all the workers
choose the best working environments all of the time. A project that would profit from
collaboration suffers if the planner chooses working from home for reasons that are more
personal than productive. Some method for assigning options that will optimize productivity
should be developed.
18. Discuss

the pros and cons of telecommuting.

Answer: Pros include less time wasted in traffic; ability to concentrate, joy of working when it is
most convenient, no wasting time with the chit-chat in the office. Cons include distractions (say
from kids or personal phone calls) at home, inability to schedule enough time to get the job done
right, the lack of collaboration. Others can be added during class.

19. What

are two kinds of modularity?

Answer: Product and process designers must work together to achieve manufacturing
modularity. This kind of modularity is designed by P/OM (with marketings blessing) into the
production process. The second kind of modularity is called external modularity because the
requirement is imposed by already accepted standards such as the Edison screw base for light
bulbs. This permits many different kinds of bulbs to be used in every lamp in the home. You can
even buy a screw in outlet that permits non-lighting appliances to be plugged into the household
electrical system.
20.

How does modular production raise productivity?

Answer: Both manufacturing and external modularity raise productivity by cutting down on the
cost of inputs while increasing the variety available from the outputs. As an example, the shoe
manufacturer makes minor adjustments to alter the size of shoes being run on the production
line. A batch of mens size 9 can be followed by a batch of mens size 10. If the production line
were not flexible in that regards, costs would soar. In the same way 40 and 60 watt LED bulbs
get the same Edison screw base which cuts variable costs per bulb while improving the inventory
situation for screw base assemblies.
Company X considers the ratio: number of complaints per day/number of employees needed
to handle those complaints, as a productivity measure that is best when it is large.
What explains the companys point of view?
To a systems thinker, there is something wrong with this point of view. What is amiss?
21.

Answer: The ratio gets greater when fewer employees take care of a larger number of
complaints. For example: 500/10 = 50 per week is not as good as 600/6 = 60 per week. However,
the systems thinker would focus on the number of complaints being received. Thus, 500
complaints per week is better than 600. The strategic goal in this case is to have more satisfied
customers. However, as an additional caveat, it takes a persuasive ability to get all dissatisfied
customers to send in a complaint. The 600 number might reflect a truer measure of customer
unhappiness. Finally, not all complaints are of equal seriousness. In fact some complaints are
really compliments and the company has got to sort out the complaints or complimentary letters
(emails) to understand the real situation.
22. Collectors

of vinyl records are paying substantial sums for poor recordings of songs that can
be purchased with much higher quality in digital form at far lower prices.
What is the anomaly that drives this situation?
Can an entrepreneur profit from this effect?
Does this opportunity have anything to do with POM?
Answers: Collectors of old vinyl recordings are buying something that has value for a variety of
reasons including the fact that it is reminiscent of a bygone era. Old phonographs to play vinyl
records could be 78 rpm (oldest), or 33 1/3 rpm (long-playing), or 45 rpm(RCA), and some
played all sizes. Recently new machines have appeared that can play the old records plus
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transcribing them to CDs or MP3s. Consider this statement by a music master: MP3s in your
music library dont do the original recordings justice. Theyre not as good as the CD version, and
far inferior to an analog source like a high-quality vinyl pressing or original master tapes. This is
a possible opportunity for entrepreneurs to make a profit if they can identify potential customers
who are willing to pay premiums for vinyl records for specific types of music or labels. The
P/OM advantage is to know how much it will cost to produce specific volumes of records having
quality characteristics that are measurable and specified. The elasticity of this market could be
dependent upon the rareness of the recording and the enthusiasm of the collectors.

Problems
Data for Problems 16:
In a 1-year period, the Productive Components Corporation (known as PCCorp) has shipped
units worth $1,200,000 to its customers. It produced units worth $250,000 for finished goods
(FG) inventory. PCCorp has $50,000 of work-in-process (WIP) units. During the same 1-year
period of time, PCCorp had a labor bill of $140,000. Its capital expenses for the year are
calculated to be $430,000. Materials were purchased costing $530,000. Energy expenses were
$225,000, and miscellaneous expenses were estimated to be $75,000.
The above information is tabulated below
Outputs
Sales (Units Shipped)
Inventory of Finished
Goods
Work-in-Process (WIP)
Total Outputs (O)
Inputs
Labor Cost
Capital Expenses
Material Cost
Energy Expenses
Misc Expenses
Total Inputs (I)

$1,200,000
$250,000
$50,000
$1,500,000

$140,000
$430,000
$530,000
$225,000
$75,000
$1,400,000

To view calculations for problems 1 to 6 see Excel file SMCh02.

Calculate the labor productivity for PCCorp with respect to units shipped.
Answer: 8.57.
1.

Solution
The labor productivity with respect to units shipped = Units Shipped/Labor Cost
= 1,200,000/140,000 = 8.57.
Calculate the multifactor productivity composed of labor and capital for units shipped plus
finished goods for PCCorp.
Answer: 2.54
2.

Solution:
Multifactor productivity of labor and capital for shipping and Finished Goods
= (shipping + FG)/(labor + capital) = (1,200,000 + 250,000)/(140,000 + 430,000)
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= 1,450,000/570,000 = 2.54.
What is PCCorps total productivity?
Use (sales + FG + WIP) for output and sum of all costs for inputs..
Answer: 1.07
3.

Solution:
Total productivity = total output/total input = 1,500,000/1,400,000= 1.07.
What is PCCorps capital productivity?
For output, use (sales + FG + WIP) and use capital expenses for input.
Answer: 3.49
4.

Solution:
Capital productivity = total output/capital = 1,500,000/430,000 = 3.49.
The value of the units shipped must be reduced because $350,000 worth of them have been
returned as defective. Of the finished goods units (FG), $150,000 worth been returned as
defective. All work-in-process (WIP) units are within tolerances. Rework on the defective units
reduces their value by 70 percent. What is the cost of the quality problem that has surfaced?
Discuss what this means in terms of total productivity. Show that total productivity has dropped
significantly (See problem 3 above).
Answer: 0.82
5.

Solution:
Total current worth of defective goods = 350,000 (shipping) + 150,000 (FG) = $500,000.
Rework decreases value of defective units by 70 percent. Therefore, cost of quality problem =
$500,000 .7 = $350,000. This reduces the value of the total output by $350,000 as follows:
1,500,000 350,000 = $1,150,000.
This defective rate also reduces total productivity from 1.07 (see Problem 3) to
1,150,000/1,400,000 = 0.82.
Calculate the multifactor productivity composed of capital, materials, and energy consumed
for the total reworked output, which consists of units shipped plus FG plus WIP.
Answer: 0.97
6.

Solution:
Multifactor productivity of capital, materials, and energy for total reworked output (as discussed
in the previous problem) = total reworked output/(capital + materials + energy) = 1,150,000/
(430,000 + 530,000 + 225,000) = 1,150,000/1,185,000 = 0.97. Note: See Problem 2 where labor
costs have been by-passed in the calculation.
Productivity measures the ratio output values to the cost of inputs. Good productivity is shown
by high ratio values; improved productivity is shown by higher ratio values over time. Does the
following equation capture the meaning of productivity?
Productivity = pV/(vc)V, where,
7.

p = price per unit

V = volume sold per year
vc = variable cost per unit
Answer:
Defining productivity as pV/(vc)V only considers variable costs and not direct costs. If the direct
costs are minimal, or if the accounting system does not assign fixed costs to the products, then
this may be a useful measure. Otherwise, capital productivity must be considered. This is an
opportunity to design appropriate multifactor productivity indexes.
8 Because V is in both the numerator and the denominator of the productivity equation,
Productivity = pV/(vc)V
Reduce the equation to: productivity = p/(vc) and interpret the results.
Is productivity well described by the ratio of price per unit to variable cost per unit?
Answer:
The V in the numerator and denominator cancel out leaving this productivity measure as p/(vc).
This is the same ratio of price to variable cost that was discussed in Problem 7. If the product can
be sold at the price that is charged and a profit can be made, then price is some multiple of the
variable cost. That multiple reflects productivity of the system including the design, product
utility, quality and the success of marketing. The same observation applies regarding fixed costs
that was given in Problem 7.