Chapter 2

P/OM’S KEY ROLE IN

PRODUCTIVITY
ATTAINMENT
Productivity

 Productivity= Output/Input.
 Importance of productivity
 Cost cutting
 Cutting back on production time.
 Competitive advantage.
 Bouwell, Owens & Co., inc
 Service profit Chain
Internal Service quality

Employee Satisfaction

Employee retention & productivity

External Service Value

Customer Satisfaction

Customer Loyalty

Revenue Growth & Profitability

Case continues

 Provide packaging service.

 Service varies with the “level” of clients
 Goal is to design packaging so that
client’s product sells & not providing
lowest cost.
 Are able to provide customized services
which competitors are not able to
provide.
 There is continuous quality
improvement.
 Qualifies for ISO 9001 certification.
 Customer loyalty is correlated with
The measurement of
productivity
 Productivity= outputs/inputs=
measure of production efficiency.
 Efficient producer system:
Productivity= effectiveness =

 efficiency
 High customer sales volume
 low(producer expenses)
 Labor productivity
 Output= units input= dollars
 hour hour
 So productivity= units = Wages
 dollars


 Productivity measured over a specific

time,t
Productivity(t)= output(t) = Units of

output (t)
 input(t) Dollars of
labor (t)
Partial measure of productivity

 When productivity is measured with

output in terms of value in dollars,
then it is called partial measure of
labor productivity.

Labor productivity(t)= sales in dollars
 dollars of labors
Multifactor productivity

 When several factors of production

are taken into account and their
effect demonstrated then we call it
multifactor productivity. This is most
used because a number of factors
of production are involved and not
just labor.
Multifactor productivity(t)=

All outputs of goods & services (t,$)

Total input resources expended(r,$)

Trends in multifactor
productivity
 Remained stable for a period post
world war 2
 Started declining in 1973 & remained
in red for about 20 years.
 The thaw in MFP came about in early
1990’s
Capital productivity

 Measures the effect of capital as

input on production & operations.


Capital productivity (t)= units of

output(t)
 dollars of capital(t)
Second measure is purely based on

dollar value of output & is given as:

dollar value of output
 dollar value of capital
Operational measures in
organization’s productivity
 Productivity measures can be
common sense ratios.
 Is different for different
establishments & industries.
 Example shops could use productivity
to be number of footfalls per square
feet or sales generated per square
feet.
Productivity is a systems
measure
 Departments in an establishment can
have different productivity outputs
like sales, R & D, finance etc.
 However productivity of the
organization is taken as a combined
entity of all these departments.
 All the parts of supply chain focus on
delivering quality to customer
through measuring the productivity
of their activities.
Productivity is a global systems
measure
 Attaining good productivity levels has
not been possible in developing
countries.
 In developed countries, productivity
rates did advance but could not be
maintained.
 Investing in an altogether new
technology takes time and not
everyone tries to improve the quality
of management practices.
 Companies keep jockeying &
leapfrogging but no one is consistently
able to score over others when it
comes to keeping productivity
Bureaucracy inhibits flexibility &
productivity
 Bureaucracy provides a structure.
 However …….
 Low inertia in changing the
organization.
 The benefits of decentralization are
many.
 Even in big organizations functions
are split up among teams and not
carrying more than 100-200 people
Size of firms and flexibility

 Small sized firms are more flexible.

 People know each other and hence do
communicate often which helps in
problem solving.
 Easier to control and direct the
behavior of lesser number of
people.
 Group discussions and delphi
techniques are possible to come to
proper decisions
Research and development &
productivity
 Common belief: spending more on R
& D is good and leads to better
productivity. Couldn’t be far from
truth…..
 Ample evidences of big corporations
spending billions and still losing
more.
 Proper channeling of R & D funds and
checking the funds are being spent
on value generating activities.
Productivity & price demand
elasticity
 Come into picture of companies
competing on price.
 Improving quality through improving
the productivity can be
accomplished in 2 ways.
 Either lower the cost of production or
increase the number of units
produced.
 Forcing workers to produce more in
the same amount of time is a short
lived fallacy.
Elasticity relationship

 Demand is either elastic or inelastic.

 An example is V=k p^-β.
 Highly elastic demand means more
change in demand per unit change
in price compared to a less elastic
demand.
 For β=0 demand is completely
inelastic meaning no change in
demand with change in prices.
Productivity & marketing

 Demand volumes fall as prices rise subject

to the fact that quality of our product vis
a vis the competitor remain the same.
 To be competitive it is imperative to at
least match the prices quoted by our
competitors.
 If marketing lowers the price profit margins
decrease.
 Thus P/OM is supposed to find a way to
lower the costs of production while
keeping the quality same.
 Marketing tries to control demand volume
through pricing.
 P/OM tries to match supply to demand
through aggregate planning & master