Productivity, Competitiveness, Strategy

OPERATIONS STRATEGY

PRODUCTIVITY, COMPETITIVENESS, STRATEGY

Productivity is about how effective an organization is in the use of its resources.

Competitiveness is how effective an organization is in the marketplace compared with other organizations that offer similar products/services.

Strategy shapes the plans that determine the direction an organization takes in pursuing its goals.

(US companies, suffering from impressive success of foreign companies on the US marketplace place increased emphasis on operations strategy).

Productivity = Output / Input

(the index, that measures output resources [goods, services] relative to input [ labor, material, energy, and other resources]).

Productivity may encompass a range from a single operation to an entire country.

Productivity measures can be based on a single input (partial productivity) or on more than one input (multifactor productivity), or on all inputs (total productivity).

Productivity examples

Partial measures / Output/Labor, Output/Machine, Output/Capital, Output/Energy
Multifactor measures / Output/(Labor + Machine), Output/(Labor + Capital + Energy)
Total Measure / Goods or Services produced / All inputs used to produce them

Partial measures are often of the greatest interest in operations management.

Examples of partial productivity measures

Labor productivity:
Units of output per labor hour;
Units of output per shift;
Value-added per labor hour;
Dollar value of output per labor hour.
Machine productivity:
Units of output per machine hour;
Dollar value of output per machine hour.
Capital productivity:
Units of output per dollar input;
Dollar value of output per dollar input.
Energy productivity:
Units of output per kilowatt-hour;
Dollar value of output per kilowatt-hour.

The choice of productivity measure depends primarily on the purpose of measurement. If the purpose is to track improvements in labor productivity, then labor becomes the obvious input measure.

Examples of labor productivity

Yards of carpet installed / Labor hours;
Number of offices cleaned / Number of shifts;
Board feet of lumber cut / Number of weeks.

Produced measures demonstrate average performance per hour, shift, or a week.

(Similar examples can be listed for machine productivity (e.g., number of pieces per hour turned out by a machine).

E.g. 4 workers installed 720 square yards of carpeting in 8 hours.

Productivity = 720/(4*8) = 22.5 yards/hour.

E.g. A machine produced 68 usable pieces in two hours.

Productivity = 68/2 = 34 pieces/hour.

Multifactor productivity measures require inputs and outputs using a common unit of measurement, such as cost or value.

E.g. Quantity of production at standard price / (Labor cost + Materials cost + Overhead);

or Quantity of production / (Labor time + Machine time).

Productivity is used to:

-track performance over time on a department/corporate level;

-evaluate industry performance or national productivity as a whole.

In essence, productivity measures serve as scorecards of the effective use of resources.

Productivity directly relates to competitiveness – of 2 companies with the same level of output, the company with higher productivity (i.e. less input) is more competitive.

Productivity also has close relationship with a nation’s standard of living.

On the national level, wage and price increases not accompanied by productivity increases tend to create inflationary pressures on the nation’s economy.

NEGATIVE IMPACTS ON PRODUCTIVITY (AT NATIONAL LEVEL)

1. A lower propensity to save and a higher propensity to consume, which slows capital formation and attracts foreign goods.
2. Increasing government regulations add to the administrative (non productive) burden of many companies.
3. In the United States, there is an increasing demand for services, which are often less productive than manufacturing operations.
4. An emphasis on short-run performance (e.g., annual profits and sales) reduces the incentive to develop long-term solutions to problems. In addition, in periods of inflation and increased costs of borrowed money, managers are hesitant to commit funds for long term periods of time because it reduces their flexibility to take advantage of other opportunities that might arise in the meantime.

In 70s and 80s, US experienced lagging in productivity in comparison to foreign competitors.

Foreign managers were wiser in using technologies and surpassed their “teachers” in operations management.

Accurate measurement of productivity can also be difficult (e.g., how to measure white-collar productivity, or creative jobs?).

Variable job content (especially in service industries) also adds difficulty to the productivity measurement.

Also, quality differences must be taken into account when measuring productivity.

In general, productivity can be addressed only as approximate measure.

FACTORS THAT AFFECT PRODUCTIVITY

Methods, capital, quality, technology, and management.

E.g. Increasing typewriting work can go through:

methods – going to dedicated courses to improve skills;

capital – purchasing a computer instead of using a typewriter;

quality – using software features such as spell checker and error correction;

management – improving organization and preparation for typing; etc.

A common misconception is that workers are the main determinant of productivity (i.e. pushing people to work harder). However, the fact is that many productivity gains in the past have come from technological improvements.

IMPROVING PRODUCTIVITY

1. Develop productivity measures (a very critical starting point!)
2. At system level, decide, which operations are most critical; identify bottlenecks (note, increasing productivity at non-bottleneck operations will not affect the productivity of the system and vice versa).
3. Develop methods for improving productivity (soliciting ideas from workers [organizing teams], studying other companies’ workflow, reexamining the way the work is done).
4. Establish reasonable goals for improvement.
5. Make it clear that management supports and encourages productivity improvement. Consider incentives to reward workers for contributions.
6. Measure improvements and publicize them.
7. Do not confuse productivity and efficiency. (Efficiency is a narrow concept that pertains to getting the most out of a given set of resources; productivity is a broader concept that pertains to effective use of overall resources. Effective moving a lawn-mover is working on efficiency; using a power-mover, instead, would address productivity).

COMPETITIVENESS

Business organizations compete with one another in a variety of ways. Key among them are price, quality or service differentiation, flexibility, and time to perform certain activities.

Price. From production perspective, a company must focus on lowering production costs instead of price.

Quality. (Relates to how well the product or service will serve its purpose). Key components: materials, workmanship, and design.

Product differentiation. A group of features (design, cost, quality, ease of use, location, warranty) that cause a product or service to be perceived by the buyer as more suitable than competitor’s.

Flexibility. Ability to respond to changes (the more flexible a company is – the better). Changes can be demand, product mix, etc.

Time. (Broad aspect). Product delivery time, development time, rate at which improvements are made, etc.

(Since 1950s, US lost its competitive edge at many industries [especially automobile] to Japanese and European. Automobile industry dropped from more than 50% world share in 1960 to 24% over the next 20 years. Japanese grew from 1% to 24%!

MIT reveals the following reasons:

-decision making based on short-term horizons (no strategy!); overemphasis on short-term financial results has led to underinvestment in R&D;

-failing to recognize threats by foreign competitors, neglecting manufacturing function relative to other functional areas, insufficient investment into physical and human capital;

-lack of cooperation among departments (too little communication among marketing, product design, process design, engineering, and manufacturing); firms have ended up with products unsuitable to customer needs and wants, products that needed redesigning, products unsuitable to the manufacturing capabilities of an organization, and products lacking sufficient quality to be competitive in the marketplace;

-viewing labor as cost factor to be minimized instead of a valuable resource; underestimating the importance of training, motivation, adaptability;

-weaknesses in technological practice, often characterized by emphasizing product development at the expense of process development (led to failure bringing new products rapidly to the market).

<Discussion: remedies to the problems above>

STRATEGY

(Has long-term impact on the nature and characteristics of an organization).

In large measure, strategies affect the ability of an organization to compete (or serve its intended purpose in case of non-profit organizations).

Mission – the reason of existence.

E.g. Hospital – provide health care; construction company – build new, single-family homes; insurance firm – provide life insurance (or, perhaps, full range of insurance services).

Mission statement is a simple and clear answer to the question of “What the business are we in?”

The mission statement should serve to guide formulation of strategies for the organization as well as decision making at all levels. (Without the statement a company has little direction for formulating strategies).

Mission statement formulates goals (e.g. capture certain percent of a market share, achieve certain level of profitability, etc.). Goals and mission establish the destination for an organization.

Strategies are plans for achieving goals.

If goals are destinations, then strategies are road maps for reaching the destinations.

Strategies provide focus for decision making.

Organizations have overall strategies called organization strategies, which relate to the entire organization; they also have functional strategies, which relate to each of the functional areas of the organization.

The functional strategies should support the overall strategies of the organization, just as the organizational strategies should support the goals and mission of the organization.

Tactics are methods and actions used to accomplish strategies. They provide guidance and direction for carrying out actual operations, which need the most specific and detailed plans for decision making in an organization. Tactics are, basically, “how to” part of the process (e.g. how to reach the destination, following the strategy road map) and operations as the actual “doing” part of the process.

OPERATIONS STRATEGY

(Deals with the operations aspect of an organization).

OS is related to products, processes, methods, operating resources, quality, costs, lead times, and scheduling.

At three levels (strategic, tactical, and operational) the operations are related to:

strategic: product design, choice of location, choice of technology, new facilities;

tactical: employment levels, output levels, equipment selection, facility layout;

operational: scheduling personnel, adjusting output rates, inventory management, purchasing.

Key to successful formulation and implementation of OS is synergetic work together rather than competing internally.

Historically, in the 1970s and 1980s, operations strategy in the US was often neglected in favor of marketing and financial strategies. (This could be due to that CEOs did not come from operations backgrounds and, perhaps, did not fully appreciate the importance of the operations function). Mergers and acquisitions were common, leveraged buyouts were used, and conglomerates were formed that joined dissimilar operations. Decisions were made often by individuals who were unfamiliar with the business, frequently to the detriment of that business. As a result, foreign competitors got the edge on the markets.

Now, quality and time is becoming the central concern of the US companies.

Survey results focus for 1990 (manufacturing executive and managers questioned) had become:

strategic issues: quality management and manufacturing strategy;

tactical issues: quality control, and manufacturing planning and control systems;

key element for both organization and operation strategies: strategy formulation.

STRATEGY FORMULATION

To formulate the effective strategy, senior management must take into account the distinctive competencies of the organization, and they must scan the environment.

Distinctive competencies are those special attributes or abilities possessed by an organization that give it a competitive edge. (See competitiveness above).

Factors may include: price (combination of low costs of resources [labor, materials], low operating costs, low production costs), quality (high performance and consistent quality), time (rapid or on-time delivery), flexibility, customer service, location.

- Customer needs must be matched with operations capabilities.

- Competitors’ offers must be taken into account (matching the surpassing competitor’s characteristics!).

Environmental scanning (is the considering of events and trends that present either threats or opportunities for the organization).

These may include: competitors’ activities, changing customer needs, legal, economic, political, environmental issues, the potential of new markets, technological changes (e.g. HDTV standard), and the like. The issues may be global, national, regional, and local.

(Formation of EU is critical for world-level companies, like Kodak, General Motors, Coca-Cola; but is essentially unimportant for, say, supermarkets; the companies, that are local suppliers for global companies would be affected, however).

For Operations, the factors are distinguished b/w external and internal <marketing analogy>.

This reminds a SWOT analysis framework with environmental scanning.

Note! Technological changes can be an opportunity and a threat.

Products: HDTV, computer chips, 3G/4G cellular communication, improve construction designs, etc.

Services: faster order processing and delivery.

Processes: robotics, automation, CAD, POS scanners, flexible manufacturing systems, etc.

Obvious benefit is a competitive edge.

The risk is that incorrect choices, poor execution, and higher-than-expected operating costs will create competitive disadvantages.

External factors (Stephenson, p. 51)

Economic conditions.

Political conditions.

Legal environment.

Technology.

Competition.

Markets.

Internal factors

Human resources.

Facilities and equipment.

Financial resources.

Customers.

Products and services.

Technology.

Suppliers.

Other (patents, labor relations, company and product image, distribution channels, maintenance of facilities and equipment, etc.)

NEW STRATEGIES

Traditional strategies tended to emphasize cost minimization or product differentiation. These are abandoned in favor of quality and time strategies.

Quality-based strategies focus on satisfying the customer by integrating quality into all phases of the organization. (This includes the product itself, plus process: i.e. design, production, after-sale service). (We will review these strategies in detail later).

Time-based strategies focus on reducing the time required to accomplish various activities (e.g., develop new products or services and market them, respond to a change in customer demand, or deliver a product or perform a service). By doing so, organizations seek to improve service to the customer and to gain a competitive advantage over rivals (who take more time to accomplish the same tasks).

TIME-BASED STRATEGIES

Time reduction is achieved in the following areas:

-Planning time (time needed to react, to develop strategies and tactics, to approve changes to facilities, to adopt new technologies, etc.)

-Product/service design time.

-Processing time (time needed to produce goods and provide services; this can involve scheduling, repairing equipment, wasted efforts, inventories, quality, training, etc.).

-Changeover time (time needed to change from producing one product to another; may involve new equipment settings and attachments, different methods, equipment, schedules, or materials).

-Delivery time.

-Response time for complaints (from customers, employees).

(The quintessence is JIT technology).

From a memo: Time-Based Innovation.

Japanese vs. Western manufacturers.

Japanese / Western
In manufacturing: stress on short production runs and small lot sizes.
In innovation, they favor smaller increments of improvements, but introduce them more often. / More significant improvements made less often.
In organization of product development work, the Japanese use factory cells that are cross-functional teams. / Most Western new product development activity is carried out by functional centers.
In the scheduling of work, Japanese factories stress local responsibility, just as product development scheduling is decentralized. / The Western approach to both requires plodding centralized scheduling, plotting, and tracking.

LEAN PRODUCTION

(New time-based approach to the production of manufactured goods).

(Comment on Stephenson, p.55 story).

Historically: craft production (custom products) is replaced by mass production (standardized products).

Mass production is intolerant to disruption and is inflexible; it is also operated by low-skilled personnel; maintenance is done by specialists.

<Discuss>

Lean production systems are named so because they use much less resources – less space, less inventory, fewer workers – to produce a comparable amount of output. LP systems use a highly skilled work force and flexible equipment. (In effect – they incorporate advantage of both mass production (high volume, low unit cost) and craft production (variety and flexibility). Plus, quality is higher than in mass production.

Workers in lean production systems are taught to stop production if they discover a defect, and to work with other employees to find and correct the cause of the defect so that it won’t recur. This results in an increasing level of quality over time and eliminates the need to inspect and rework at the end of the line.

LP characteristics.

LP use small production batch sizes.

LP use lower amounts of inventory.

Technical experts are still used, but more as consultants rather than substitutes for workers.

LP use teamwork; workers play important role in operating and improving the system (individual creativity is inferior to team success).

Worker responsibility is much greater than in traditional production.

Organizational structure is flat (and carrier paths not steep).

Workers tend to become generalists rather than specialists.

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