Ch2 Productivity, Competitiveness, and Strategy

1. Ch2 Productivity, Competitiveness, and Strategy

2. Productivity • Single-factor measures • Output / (Single Input) • All-factors measure • Output / (Total Inputs)

3. Measures of Productivity Single-factor Output Output Output Outputmeasures Labor Machine Capital Energy All-factors Output measure All inputs

4. Single Factor Single-factor Output Output Output Outputmeasures Labor Machine Capital Energy If we produce only one product, the numerator can be either the total units of the product or the total $ value of the product. If we produce several products, the numerator is the total $ value of all products. The denominator can be the units of input or the total $ value of input.

5. Example: Single Factor Productivity 10,000 Units Produced Sold for $10/unit 500 labor hours Labor rate: $9/hr What is the labor productivity?

6. Example: Labor Productivity • 10,000 units / 500hrs = 20 units/hr • (10,000 units * $10/unit) / 500hrs = $200/hr • 10,000 units / (500hrs * $9/hr) = 2.2 unit/$ • (10,000 units * $10/unit) / (500hrs * $9/hr) = 22.22 • The last one is unit-less

7. Some Single Factor Measurements • Labor Productivity • Quantity (or value) of output / labor hrs • Quantity (or value)of output / shift • Machine Productivity • Quantity (or value) of output / machine hrs • Energy Productivity • Quantity (or value of output) / kwh • Capital Productivity • Quantity (or value) of output / value of input

8. All Factors All-factors Goods or Services produced measure All inputs used to produce them If we produce only one product, the numerator can be either the total units of product or total $ value of the product. If we produce several products, the numerator is the total $ value of all products. Usually, the numerator is the total $ value of all outputs. The denominator is total $ value of all inputs.

9. Example 10,000 Units Produced Sold for $10/unit 500 labor hours Labor rate: $9/hr Cost of raw material: $30,000 Overhead: $15,500

10. Example : All-Factor Productivity Output Labor + Materials + Overhead AFP = (10,000 units) * ($10) (500)*($9) + ($30,000) +($15,500) AFP = AFP = 2.0

11. Training Methods Technology Management Factors Affecting Productivity

12. Competitiveness Price Flexibility Quality Time

13. Four Dimensions of Competitiveness • Price • Low Labor • Low Material • Low Overhead • Quality • Characteristics that satisfy customer expectations above what competitors offer • Consistent quality over time (Reliability)

14. Four Dimensions of Competitiveness • Time • Lead Time • Reliability in Lead Time (on time) • Flexibility • Variety • Volume

15. Formulation of Operational Strategy (SWOT) • Competing edges of the system (Strengths and Weaknesses) • The special attributes or capabilities that give an organization a competitive edge. • Environmental Scanning (Opportunities and Threats) • The considering of events and trends that present threats or opportunities fora company.

16. Competitive Edges • Human Resources • Technology, Facilities and Equipment • Financial Resources • Customers • Product and Services • Suppliers

17. Threats and Opportunities • Main Threats and Opportunities • Competitor’s activities • Changes in consumer needs and preferences • Technological changes • Economic trends (GNP, unemployment, inflation, interests, taxes, tariffs) • Legal, political, and environmental issues

18. Traditional and Recent Strategies • Traditional Strategies • Cost Reduction Reduce cost in all activities • Product DifferentiationDifferentiate all parts and products • New Strategies • Quality-based • Time-based

19. Quality Based Strategy • Focuses on quality in all aspects of an organization. • High quality not only in product but also in design, production, service and organization. • Quality at the source, zero defect, any defect stops the whole production system. • Order qualifiers: Characteristics that customers perceive as minimum standards of acceptancein the product. • Order winners: Characteristics that cause the product to be perceived better than that of competitors.

20. Time based strategies • Focuses on reduction of time needed to accomplish tasks. • Cycle time reduction results in: Higher Productivity, and therefore Lower Costs (both direct cost and overhead). • The less time a product stays in a factory the less time it has to absorb overhead costs.

21. Japanese Strategies Over Time • Low Price / Cheap Labor • Economy of Scale Strategy: • Inject capital to increase labor productivity • Focused Factory Strategy: • Quality, avoid diseconomy of scale • Flexible Factories Strategy: • Cope with changes in consumer preferences • Continuous Improvement Strategy • Zero Defect, Perfect Reliability (Car Industry)

22. Questions • What are the factors that affect productivity? • List the four key ways that organizations compete. • What is “Reliability”? • What two key aspects are studied to formulate the Operations Strategy? • List the five main groups of aspects studied under threats and opportunities. • What are two classes of traditional strategies. • What are two classes of new strategies. • Briefly define “order qualifiers” and “order winners”. • Why time based strategy results in a lower cost. • What were the main concepts in each of the 5 development strategies of Japanese Industries.

23. Assignment 1.1…………….. Due at the beginning of the next class • A company that makes shopping carts for supermarkets recently purchased new equipment, which reduced the labor content needed to produce the carts. Information concerning the old system (before adding the new equipment) and the new system (after adding the new machines) includes: • Old System New System • Output/hr 80 84 • Workers 5 4 • Wage $/hr 10 10 • Machine $/hr 40 50 • Compute labor productivity for both the Old System and the New System. • Compute AFP productivity for both the Old System and the New System. • Suppose production with old equipment was 30 units of cart A at a price of $100 per cart, and 50 units of cart B at a price of $120. Also suppose that production with new equipment is 50 units of cart A, at a price of $100 per cart, and 30 units of cart B at a price of $120. Compare all-factor productivity for the old and the new systems.

24. Assignment 1.2…………….. Due at the beginning of the next class • A company has introduced a process improvement that reduces the processing time for each unit and increases output by 25% with less material but one additional worker. • Under the old process, five workers could produce 60 units per hour. Labor costs are $12/hour, and material input was $16/unit. • For the new process, material input is now $10/unit and overhead is charged at 1.6 times direct labor cost. Finished units sell for $31 each. • Compute single factor productivity of labor in the old system. (Compute it in four possible ways.) • Compute all factor productivity for both old and new systems. • Factor Old System New System • Output 60 60(1.25) = 75 • # of workers 5 6 • Worker cost $12/hr $12/hr • Material $16/unit $10/unit • Overhead 1.6(labor cost) 1.6(labor cost) • Price 31 31

25. Assignment 1.3……… For your own practice A milk factory seeks advice from an external consulting company concerning its business and production processes. The final consulting report describes several steps to increase productivity including implementation of cutting-edge processing techniques through more powerful filtering systems. Calculate the labor productivity for the existing as well as the proposed system. Find the All-Factor Productivity for both systems. Assume that current processing includes 700 gallons of Grade-A milk sold at $2.40/gallon and 300 gallons of Grade-B milk at $1.90/gallon. Furthermore, assume that under the proposed system, processing will include 600 gallons of Grade-A milk at $2.40/gallon and 400 gallons of Grade-B milk at $1.90/gallon. Compare all-factor productivity for both the existing and the new system.