Chapter 2

Competitiveness, Strategy, and Productivity

2-2

A Cold Hard Fact

Better quality, higher productivity, lower costs, and the ability to respond quickly to customer needs are more important than ever and…

the Bar is getting Higher

2-3

Chapter Focus

• Competitiveness• Strategy• Productivity

2-4

Productivity

• Productivity– A measure of the effective use of resources, usually

expressed as the ratio of output to input

• Productivity measures are useful for– Tracking an operating unit’s performance over time– Judging the performance of an entire industry or

country

2-5

Why Productivity Matters

• High productivity is linked to higher standards of living– As an economy replaces manufacturing jobs with lower

productivity service jobs, it is more difficult to maintain high standards of living

• Higher productivity relative to the competition leads to competitive advantage in the marketplace– Pricing and profit effects

• For an industry, high relative productivity makes it less likely it will be supplanted by foreign industry

2-6

Productivity Measures

Output Ouput OutputPartial Measures ; ;

Single Input Labor Capital

Output Ouput OutputMultifactor Measures ; ;

Multiple Inputs Labor+Machine Labor+Capital+Energy

Goods or services producedTotal Measure

All inputs used to produce them

OutputProductivity=Input

2-7

What is the multifactorproductivity?

Productivity Calculation Example

Units produced: 5,000 Standard price: $35/unit

Labor input: 500 hoursCost of labor of $25/hourCost of materials: $5,000Cost of overhead: 2x labor cost

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Solution

OutputMultifactor Productivity=

Labor+Material+Overhead

5,000 units $35/unit=

(500 hours $25/hour)+$5,000+(2(500 hours $25/hour))

=4.12

What is the implication of a unitless measure of productivity?

2-9

U.S. Multifactor Productivity

U.S. Multifactor Productivity(1975 - 2008)

80

85

90

95

100

105

110

115

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

Year

MF

P (

Ind

ex

, 20

00

= 1

00

)

2-10

Productivity Growth

Current productivity-Previous productivityProductivity Growth = 100%

Previous productivity

Productivity Growth = 23 - 25

25100% 8%

Example: Labor productivity on the ABC assembly line was 25 units per hour in 2006. In 2007, labor productivity was 23 units per hour. What was the productivity growth from 2006 to 2007?

2-11

MFP Growth - Non-Farm

MFP Growth in the Private Non-Farm Business Sector

1.9

0.4 0.61.1 1.3

0

1

2

3

4

5

1948-1973 1973-1990 1990-1995 1995-2000 2000-2007

Av

era

ge

An

nu

al P

erc

en

t C

ha

ng

e

2-12

MFP Growth - Manufacturing

2-13

Service Sector Productivity

• Service sector productivity is difficult to measure and manage because– It involves intellectual activities– It has a high degree of variability

• A useful measure related to productivity is process yield

2-14

Improving Productivity

1. Develop productivity measures for all operations

2. Determine critical (bottleneck) operations

3. Develop methods for productivity improvements

4. Establish reasonable goals

5. Make it clear that management supports and encourages productivity improvement

6. Measure and publicize improvements

Don’t confuse productivity with efficiency

2-15

Competitiveness

• Competitiveness:– How effectively an organization meets the wants and

needs of customers relative to others that offer similar

goods or services– Organizations compete through some combination of

their marketing and operations functions• What do customers want?• How can these customer needs best be satisfied?

2-16

McDonald’s Mission Statement

• McDonald's brand mission is to

"be our customers' favorite place and way to eat." Our worldwide operations have been aligned around a global strategy called the Plan to Win centering on the five basics of an

exceptional customer experience -- People, Products, Place, Price and Promotion. We are committed to improving our operations and enhancing our customers' experience.

– http://www.mcdonalds.com/corp/about/mcd_faq/student_research.html

2-17

Businesses Compete Using Operations

1. Product and service design

2. Cost

3. Location

4. Quality

5. Quick response

6. Flexibility

7. Inventory management

8. Supply chain management

9. Service

10. Managers and workers

2-18

Sample Strategies

Organizational Strategy Operations Strategy

Examples of Companies or Services

Low Price Low Cost U.S. first-class postage

Wal-Mart

High Quality High performance design and/or high quality processing

Consistent Quality

Sony TV

Lexus

Coca-Cola; electric power

Short Time Quick Response

On-time delivery

McDonald’s Restaurants

Express mail

FedEx; One-hour photo

Newness Innovation 3M

Express mail

Variety Flexibility

Volume

Burger King (Have it your way”)

McDonald’s (“Buses Welcome”)

Service Superior customer service Disneyland

IBM

Location Convenience Supermarkets

Mall Stores

2-19

Operations Strategy

• Operations strategy – The approach, consistent with organization

strategy, that is used to guide the operations function.

2-20

Strategic OM Decision AreasDecision Area What the Decisions Affect

Product and service design Costs, quality, liability, and environmental issues

Capacity Cost, structure, flexibility

Process selection and layout Costs, flexibility, skill level needed, capacity

Work design Quality of work life, employee safety, productivity

Location Costs, visibility

Quality Ability to meet or exceed customer expectations

Inventory Costs, shortages

Maintenance Costs, equipment reliability, productivity

Scheduling Flexibility, efficiency

Supply chains Costs, quality, agility, shortages, vendor relations

Projects Costs, new products, services, or operating systems

2-21

Quality-Based Strategies

• Quality-based strategy– Strategy that focuses on quality in all phases of an

organization• Pursuit of such a strategy is rooted in a number of

factors:– Trying to overcome a poor quality reputation– Desire to maintain a quality image– A part of a cost reduction strategy

2-22

Time-Based Strategies

• Time-based strategies– Strategies that focus on the reduction of time needed

to accomplish tasks• It is believed that by reducing time, costs are lower,

quality is higher, productivity is higher, time-to-market is faster, and customer service is improved

2-23

Time-Based Strategies

• Areas where organizations have achieved time reductions:– Planning time– Product/service design time– Processing time– Changeover time– Delivery time– Response time for complaints

2-24

Agile Operations

• Agile operations– A strategic approach for competitive advantage that

emphasizes the use of flexibility to adapt and prosper in an environment of change• Involves the blending of several core competencies:

– Cost– Quality– Reliability– Flexibility