MBA O650

Operations Management

Summer 2023
Instructor:
Manaf Zargoush, Ph.D.
Associate Professor / Health Policy & Management
(zargoush@mcmaster.ca)

Week 2:
Strategy,
Competitiveness, &
Productivity
Part 1:
Fundamental Concepts
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1
 Learning Objectives (Part 1)

Ø What is Strategy?

Ø What is Operations Strategy?

Ø Competitiveness and competitive factors

What do you see?

• Competition!

• What do we need for a

competition?

• If you are a
monopoly in the
market, do you need a
strategy?

If you are in a competitive environment, then you need the strategy at least to survive! 3

2
Game Theory vs. Decision Theory
Ø Game
üWhen the outcome of our actions/decisions/plans depends on someone else’s decision
üThat “someone else” could be our competitor.
üThe Problem: How should we make decisions knowing it is a function of what our competitor does?
§ Market entry
§ Time to market
§ Ordering from a supplier who also supplies to our competitor

Ø Game Theory
üAdvanced analytical method to analyze decisions under competition
§ Static vs. dynamic games
§ Continuous vs. discrete games
§ Under certainty or uncertainty
§ Under symmetric or asymmetric information
§ Intersection of Operations Research & Economics
§ Classic examples:
• Prisoner’s dilemma
• Cournot (competition on the quantity) vs. Stackelberg (leader-follower) game
• A Beautiful Mind!
üMechanism design, contract theory, etc.…
4

Game Theory vs. Decision Theory

Ø Decision
üWhen the outcome of our actions/decisions/plans does NOT depend on someone else’s
decision
üHow should we make decisions knowing it is NOT a function of what our competitor
does?

Ø Decision Theory
üAdvanced analytical methods to analyze decisions under NO competition
§ Static vs. dynamic decision-making
§ Continuous vs. discrete decisions
§ Under certainty or uncertainty
§ Under perfect, partial, or imperfect information
§ Considering attitude toward risk: risk-neutral, risk-averse, and risk-lover/taker
§ Intersection of Operations Research & Economics
§ Decision trees are a strong tool for solving uncomplex problems.
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3
Some Key Concepts
Ø Competitiveness
ü Ability and performance of an organization in the marketplace compared to other organizations that offer similar
goods or services.
ü An important factor in determining whether a company prospers, barely gets by, or fails.
ü Through some combination of quality, price, delivery time, and product/service differentiation.

Operations have a major influence on competitiveness through;

• product and service design,
• cost,
• location,
• quality,
• response time,
• Flexibility à response to change (e.g., in demand) à Resilience
• inventory and supply chain management, and
• customer service.

Ø Strategy
ü Affects long-term decisions.
§ Remember from week 1: we have 3 types of decisions: short-, medium-, and long-term.
ü The total pattern/sequence of decisions and actions with long-term goals
ü To determine the direction an organization takes to become (or remain) competitive. 6

Some Key Concepts

Ø Strategic Planning
üThe managerial process/approach that determines a strategy for the organization (e.g.,
SWOT)

Ø Operations Strategy
üLong-term plans for the operations function, i.e., for achieving operations goals.
üRelates to every component of production/operations function:
§ products,
§ processes,
§ operations resources,
§ costs,
§ delivery time,
§ scheduling, etc.
üMust be:
§ aligned with the organizational goals and strategies:
§ coordinated with other functional strategies (finance, marketing):
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4
Why Do Some Organizations Fail?
Ø Some of the major reasons:
1. Neglecting operations strategy.

2. Putting too much emphasis on short-term financial performance at the expense of research and development. What
are these?
Imbalanced
trade-off
3. Placing too much emphasis on product and service design and not enough on process design and improvement.

4. Neglecting investments in capital and human resources.

5. Failing to establish good internal communications and cooperation among different functional areas.

6. Failing to consider customer wants and needs.

7. Failing to take advantage of strengths and opportunities and/or failing to recognize competitive threats.

Competitiveness customer
Performance
organization

indicators: Competitive
key purchasing priorities
On the organization side:
criteria Prioritization
1 • The higher the
On the customers’ side: competitiveness, the harder
• Customers trade-off prices against
other purchasing criteria and
quality quality it is to focus on multiple
priorities.
choose the best value: 2
• Companies usually focus on
Quality, timelines, variety for the price ONE priority at a time:
timeliness delivery
• Companies first emphasize
3
quality, and ONLY after
their quality has reached a
price cost completive level, then focus
on delivery reliability, next
Value? 4 on low-cost operations, and
finally on flexibility.
variety flexibility

5
 Customer’s Criteria for Online Purchasing

10

Planning & Decision-Making are Hierarchical in Organizations

If you think of goals as destinations, then strategies are the roadmaps for
reaching the destinations.
Strategies provide focus, direction, relevance for decision-making.
Goals
• Organizations have overall strategies called
organizational strategies, which relate to the entire Organizational Strategy
organization.
Functional strategies Consistent

Finance Marketing Operations

Tactics Tactics Tactics

Policies and Policies and Policies and

action plans action plans action plans

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6
Planning & Decision-Making are hierarchical in organizations

If you think of goals as destinations, then strategies are the roadmaps for
reaching the destinations.
Strategies provide focus for decision-making.
Goals
• Organizations have overall strategies called
organizational strategies, which relate to the entire Organizational Strategy
organization.
Functional strategies Consistent
• They also have functional strategies which relate to
each of the functional areas of the organization, i.e., Finance Marketing Operations
Fin., Mark., & Op.
• Functional strategies should support the
organization's overall strategies, just as Tactics Tactics Tactics
organizational strategies should support the
organization’s goals.
Policies and Policies and Policies and
action plans action plans action plans

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Planning & Decision-Making are hierarchical in organizations

• Tactics are the methods and actions used to accomplish strategies. Goals
• More specific than strategies, and they provide guidance for
carrying out actual operations, which need the most specific Organizational strategy
and detailed plans and decision-making in an organization.
• You might think of tactics as the “how to” part of the process (e.g., Consistent
how to reach the destination, following the strategy roadmap) and Functional strategies
operations as the actual “doing” part of the process: Finance Marketing Operations

• Action plan: short-term tasks/projects : Tactics Tactics Tactics

• to accomplish a specific objective
• assigned to an individual
Policies and Policies and Policies and
• with a deadline and the resource needed.
action plans action plans action plans
• Most detailed
• Most repeating

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7
 Planning & Decision-Making are hierarchical in organizations

Management level in the organization

Goals

and planning horizon

determines From Last week:
consistency

Strategy:
Strategies
What we want to do?
determines consistency
Increasing details and specificity

Tactics Tactics:
How we want to do it?
consistency determines

Actions Actions:
What we do?

Need for CONSISTENCY:

• Vertical consistency
• Decisions → Tactics → Strategies → Goals
• Horizontal consistency
• Marketing ↔ Operations ↔ Finance 14

Examples of Organizational Strategy

1. Low cost. Outsource operations to third-world countries that have low labour costs.

2. Scale-based strategies. Use capital-intensive methods to achieve high output volume and low unit costs.

3. Specialization. Focus on narrow product lines or limited service to achieve higher quality.

4. Newness. Focus on innovation to create new products or services.

5. Flexible operations. Focus on quick response and/or customization.

6. High quality. Focus on achieving higher quality than competitors.

7. [customer] Service. Focus on various aspects of service (e.g., helpful, courteous, reliable, etc.).

8. Sustainability. Focus on environmental-friendly and energy-efficient operations.

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Hierarchical Strategy Example

Lily is a high school student. She would like to have a career in business, have a good job, and earn
enough income to live comfortably. A possible scenario for achieving her goal might look something like
this:

ü Goal: Successful career, good income. (assumptions?)

ü Strategy: Obtain a college/university degree.
ü Tactics: Select a college/university and a major; decide how to finance the education.
ü Operations: Register, buy books, take courses, study.

What is missing in the operations?

Decide how to finance college.
working, parents, loans, ...

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Three Fundamental Business Strategies

1.Low Cost
• 𝑹𝒆𝒗𝒆𝒏𝒖𝒆 = 𝑷𝒓𝒊𝒄𝒆 × 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 (Cost → Price → Sale)
• 𝑷𝒓𝒊𝒇𝒊𝒕 = 𝑹𝒆𝒗𝒆𝒏𝒖𝒆 − 𝑪𝒐𝒔𝒕

2. Responsiveness
• Ability to respond to changing demands.
• Resilience
• Those business who were not responsive/resilient did not survive Covid-19!

3. Differentiation from Competitor

• Differentiation can relate to product or service features, quality, reputation, or customer service.

• Some organizations focus on a single strategy, while others employ a combination of strategies.
• A company with multiple strategies is Amazon:
• not only does it offer low-cost and quick, reliable deliveries,
• it also excels in customer service.

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 Final PDF to printer

Examples of Organization-Operations Strategy Chapter Two Competitiveness, Strategy, and Productivity 47

Organization Operations Examples of Companies

TABLE 2.2
Examples of operations
Strategy Strategy or Services
strategies
Low price Low cost U.S. first-class postage
Walmart
Southwest Airlines
Responsiveness Short processing time McDonald’s restaurants
Express Mail, UPS, FedEx
One-hour photo
On-time delivery Domino’s Pizza
FedEx
Differentiation: High-performance design and/or TV: Sony, Samsung, LG
High quality high-quality processing Lexus
Consistent quality Disneyland
Five-star restaurants or hotels
Coca-Cola, PepsiCo
Wegmans
Electrical power
Differentiation: Innovation 3M, Apple
Newness Google
A lot of focus on Differentiation: Flexibility Burger King (“Have it your way”)
differentiation! Variety  
Volume
Hospital emergency room
McDonald’s (“Buses welcome”)
Toyota
Supermarkets (additional checkouts)
Differentiation: Superior customer service Disneyland
Service Amazon
IBM
Nordstrom
Differentiation: Convenience Supermarkets, dry cleaners
Location Mall stores
Service stations
Banks, ATMs
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computer market was less after the merger than the sum of the shares of the separate companies
before the merger. In another example, U.S. automakers adopted a strategy in the early 2000s of
offering discounts and rebates on a range of cars and SUVs, many of which were on low-margin
vehicles. The strategy put a strain on profits, but customers began to expect those incentives, and
the companies maintained them to keep from losing additional market share.
On the other hand, Coach, the maker of leather handbags and purses, successfully changed
its longtime strategy to grow its market by creating new products. Long known for its highly
durable leather goods in a market where women typically owned few handbags, Coach cre-
ated a new market for itself by changing women’s view of handbags by promoting “different
Sustainability Strategy: A Competitive Strategy
handbags for different occasions” such as party bags, totes, clutches, wristlets, overnight bags,
purses, and day bags. And Coach introduced many fashion styles and colors.
To formulate an effective strategy, senior managers must take into account the core com-
Ø Business organizations are beginning to recognize the strategic advantages of
petencies of the organizations, and they must scan the environment. They must determine
what competitors are doing, or planning to do, and take that into account. They must critically
sustainability: examine other factors that could have either positive or negative effects. This is sometimes
referred to as the SWOT approach (strengths, weaknesses, opportunities, and threats).
SWOT Analysis of strengths,
ü economic advantages, Strengths and weaknesses have an internal focus and are typically evaluated by operations
weaknesses, opportunities,
and threats.
people. Threats and opportunities have an external focus and are typically evaluated by mar-
ü promotional advantages by publicizing sustainability efforts and achievements.
keting people. SWOT is often regarded as the link between organizational strategy and opera-
tions strategy.

Ø The main driver of sustainability?

ü Society is placing increasing emphasis on corporate sustainability practices in the form of
governmental regulations and interest groups.
ste67472_ch02_040-073.indd 47 01/06/17 09:11 PM

ü Democratic countries.
§ Business organizations are or should be devoting attention to sustainability goals.

Ø To be successful, they will need a sustainability strategy.

ü That requires:
1. Establish: elevating sustainability to the level of organizational governance;
2. Formulate: formulating goals for products and services, processes, and the entire supply chain;
3. Measure and improve: measuring achievements and striving for improvements;
4. Incentivize: and linking executive compensation to the achievement of sustainability goals.
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 Strategy Formulation

Ø Critical to the success of a strategy.

Ø Example
ü Walmart discovered that when it opened stores in Japan. Although Walmart thrived in
many countries on its reputation for low-cost items, Japanese consumers associated
low cost with low quality, causing Walmart to rethink its strategy in the Japanese
market.
ü Culture
ü Social structure/beliefs
ü Social values!

Ø To formulate an effective strategy, senior managers must:

ü take into account the core competencies of the organizations,
ü scan the environment. 20

Strategy Formulation – Cont.

Ø Core Competencies
ü The special attributes or priorities that give an organization a competitive edge.
Ø Environmental Scanning
ü The monitoring of events and trends that present threats or opportunities for a
company Economic conditions: general health and direction of the
§ can be internal or external economy, inflation and deflation, interest rates, tax laws, and
tariffs.
Political conditions: favorable or unfavorable attitudes toward
business, political stability, and wars.
Human resources: skills, talents, loyalty, experience, …
Legal environment: laws, government regulations, trade
Facilities & Equipment: restrictions, minimum wage laws, product liability laws and
Financial Resources: recent court experience, labor laws, and patents.
Customers: loyalty, existing relationships Technology: rate at which product innovations are occurring,
Products & Services: existing as well as NEW products current and future process technology (equipment, materials
Technology: ability to integrate tech… handling), and design technology.
Suppliers: relationship and dependency. Competition: number and strength of competitors, the basis of
competition (price, quality, special features), and the ease of
market entry.
Markets: size, location, brand loyalties, ease of entry, potential
for growth, long-term stability, and demographics. 21

11
Strategy Formulation- Cont.
Ø Core Competencies
ü The special attributes or priorities that give an organization a competitive edge.
Ø Environmental Scanning
ü Themonitoring of events and trends that present threats or opportunities for a
company
§ can be internal or external

ü SWOT Analysis (Strengths, Weaknesses, Opportunities, and Threats)

§ Strengths and weaknesses have an internal focus and are typically evaluated by
operations people.
§ Threats and opportunities have an external focus and are typically evaluated by
marketing people.
§ SWOT is often regarded as the link between organizational strategy and operations
strategy.
22

Global Strategy
• As globalization increased, many companies realized
that strategic decisions with respect to globalization
must be made.

• Two key global strategies:

1. Where parts or products are made, or where services
such as customer support are performed.
2. Where products or services are sold.

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Order-Qualifying and Winning Factors
• Customers have two purchasing criteria:
• 1- Order qualifiers
• 2- Order winners.
• Hence, in formulating a successful strategy, organizations must take into account both order qualifiers and order winners.

Ø Order qualifiers: those attributes that make the product a potential purchase (the minimum standards
of acceptability for purchase);
üallow product to be considered
üe.g., quality, timely delivery, or price
üNecessary but sufficient

Ø Order winners are those attributes that actually cause the purchase (cause the organization or
product/service to be perceived better than the other)
üallow product to be purchased
üe.g., price, delivery speed, quality
üNecessary AND sufficient 24

Order-Qualifying and Winning Factors – Cont.

• Customers have two purchasing criteria:
• 1- Order qualifiers
• 2- Order winners.
• Hence, in formulating a successful strategy, organizations must take into account both order qualifiers and order winners.

• Attributes such as price, delivery reliability, delivery speed, and quality can be order qualifiers OR order winners.
• Thus, quality may be an order winner in some situations, but in others, only an order qualifier.

• Example:
• Price is an order qualifier for Toyota and Honda.
• Customer service is an order winner for Toyota.

• Over time, a characteristic that was once an order winner may become an order qualifier and vice versa.

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Successful Business Strategies
Ø A useful resource on successful business strategies is:
Ø The Profit Impact of Market Strategy (PIMS) database:
www.pimsonline.com
ü The database contains profiles of over 3,000 businesses located primarily in the US, Canada, and western
EU.
ü Uses empirical data to identify which business strategies affect success and failure.
ü Used to develop strategies for resource allocation and marketing.
ü Using strategic metrics such as:
§ market share,
§ product quality,
§ investment intensity,
§ service quality
ü Used by companies and academic institutions to guide strategic thinking.
ü Allows subscribers to answer “strategy” questions about their business.
ü They can use it to generate benchmarks and develop successful strategies.
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Week 2:
Strategy,
Competitiveness, &
Productivity
Part 2:
Tools & Methods
27

14
Learning Objectives (Part 2)

Ø Productivity and its importance

Ø Productivity measures and their interpretations

28

Measuring
Productivity

29

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Productivity: A determinant of competitiveness
• A measure of effective use of resources or inputs

Outputs Outputs: goods and services

Productivity =
Inputs Inputs: machine, labor, material,
energy, and other resources

• An index that measures output relative to the input used to produce it.

• In business organizations, productivity ratios are used for:

• planning workforce requirements,
• scheduling equipment,
• financial analysis, and
• other important tasks.

• For:
• Non-profit organizations ☞ higher productivity means lower costs.
• Profit-based organizations ☞ productivity is an important factor in determining how competitive a company is.
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Productivity Growth
%Change in productivity

Productivity Growth =
Current Period Productivity – Previous Period Productivity
Previous Period Productivity

• For a nation, the rate of productivity growth is of great importance.

• Productivity growth is the increase in productivity from one period to the next (numerator) relative to the productivity in the
preceding period (denominator).

• Productivity growth is a key factor in a country’s rate of inflation and the standard of living of its people:
• adds value to the economy while keeping inflation in check.
• was a major factor in the long period of sustained economic growth in the United States in the 1990s.

31

16
 Productivity Growth
%Change in productivity

Productivity Growth =
Current Period Productivity – Previous Period Productivity
Previous Period Productivity

Final PDF to printer

Management
Three components
58 of productivity improvement:
Chapter Two Competitiveness, Strategy, and Productivity
Capital

TABLE 2.8 Labor productivity Units of output per labor hour

Some examples of partial Labour
Units of output per shift
productivity measures Value-added per labor hour
Dollar value of output per labor hour
Machine productivity Units of output per machine hour
32
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

EXAMPLE 2 Computing Productivity

Determine the productivity for these cases:

Three (general) types of productivity measures

mhhe.com/stevenson13e a. Four workers installed 720 square yards of carpeting in eight hours.
b. A machine produced 70 pieces in two hours. However, two pieces were unusable.

S O L U T I O N
Yards of carpet installed
a. Productivity = ____________________
Outputs Labor hours worked Outputs: goods and services

Productivity = =
720 square yards
_______________________
4 workers × 8 hours / worker
Inputs 720 yards
= _________
Inputs: machine, labor, material, energy, and other
resources
32 hours
= 22.5 yards / hour
Ø Partial measures: for a single input: Why partial could be preferred?
Usable pieces
b. output/single input
Productivity = ______________
Production time
• because of the ease of interpretation!
ü of greatest use in OM • what else?
70 − 2 = 68 usable pieces
= ______________________
2 hours • Finding the main cause(s) of low productivity
= 34 pieces / hour
Ø Multifactor measures: for more than one (but not all) inputs
output/multiple but notproductivity
Calculations of multifactor all inputs
measure inputs and outputs using a common unit of mea-
ü surement, such
A common unit of input measurements as cost.
(i.e., For instance, the measure
denominator), e.g., might
$ use cost of inputs and units of the output:
Quantity of production
_______________________________ (2–3)
Labor cost + Materials cost + Overhead
Note: The unit of measure must be the same for all factors in the denominator

Ø Total measure:
E X A Mfor
P L all
E 3inputs Computing Multifactor Productivity
output/(total
Determine inputs)
the multifactor productivity for the combined input of labor and machine time
mhhe.com/stevenson13e
using the following data: 33
Output: 7,040 units
Input
Labor: $1,000
Materials: $520
Overhead: $2,000

S O L U T I O N Output
Multifactor productivity = ________________________
Labor + Materials + Overhead
7,040 units
= ___________________ = 2 units per dollar input
17
$1,000 + $520 + $2, 000
Why measure productivity?
Ø Useful on a number of levels:

üFor an individual department or organization: to track performance over time.

§ This allows managers to judge performance and decide where improvements are needed.
§ Example: if productivity has slipped in a certain area, operations staff can examine the factors used to compute productivity
to determine what has changed and then devise a means of improving productivity in subsequent periods.

üProductivity measures also can be used to judge the performance of an entire industry or
the productivity of a country as a whole.

34

Why measure productivity?

Ø Business leaders are concerned with productivity as it relates to competitiveness:
ü If two firms both have the same level of output, but one requires less input because of higher productivity:
§ that one will be able to charge a lower price and consequently increase its share of the market
§ Or that firm might elect to charge the same price, thereby reaping a greater profit.

Ø Government leaders are concerned with national productivity because of the close
relationship between productivity and a nation’s life:
ü High levels of productivity are largely responsible for the high standards of living for the people.
ü Wage and price increases not accompanied by productivity increases tend to create inflationary pressures on a
nation’s economy.

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Productivity in the Service Sector
Ø What are your thoughts on this based on the previous lecture?

Ø More difficult to measure, and thus to manage, because it involves intellectual

activities and a high degree of variability.
üThink about medical diagnoses, surgery, consulting, legal services, customer service, and
computer repair work → difficult to measure their productivity!

Ø More difficult to achieve improvements.

Ø Nonetheless, because service is becoming an increasingly large portion of our economy,
the issues related to service productivity will have to be dealt with.

Ø It is interesting to note that government statistics normally do not include

service firms!!!
36

Common Measures of Productivity

Type of
Productivity Formula
Measure

Partial 𝑂𝑢𝑡𝑝𝑢𝑡 𝑂𝑢𝑡𝑝𝑢𝑡 𝑂𝑢𝑡𝑝𝑢𝑡 𝑂𝑢𝑡𝑝𝑢𝑡

Productivity
𝑳𝒂𝒃𝒐𝒖𝒓 𝑴𝒂𝒄𝒉𝒊𝒏𝒆 𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝑬𝒏𝒆𝒓𝒈𝒚
(PP)
Multifactor 𝑂𝑢𝑡𝑝𝑢𝑡 𝑂𝑢𝑡𝑝𝑢𝑡
Productivity
𝐿𝑎𝑏𝑜𝑢𝑟 + 𝑀𝑎𝑐ℎ𝑖𝑛𝑒 𝐿𝑎𝑏𝑜𝑢𝑟 + 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 + 𝐸𝑛𝑒𝑟𝑔𝑦
(MFP)

Total
Productivity 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑨𝒍𝒍 𝐺𝑜𝑜𝑑𝑠/𝑆𝑒𝑟𝑣𝑖𝑐𝑒𝑠 𝑷𝒓𝒐𝒅𝒖𝒄𝒆𝒅
(TP) 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑨𝒍𝒍 𝑰𝒏𝒑𝒖𝒕𝒔 𝑈𝑠𝑒𝑑 𝑡𝑜 𝑃𝑟𝑜𝑑𝑢𝑐𝑒 𝑇ℎ𝑒𝑚 37

19
Productivity Measurements

Ø Can be calculated for

üa worker
üa department
üan organization
üa country Final PDF

Ø Should be monitored and improved continuously. Chapter Two Competitiveness, Strategy, and Productivity

Productivity can be enhance

by the use of robotic equipm
Robots can operate for long
with consistent precision an

Ø Noting that: they are more difficult to calculate in service organizations speed. The Hyundai Motor C
manufacturing plant in Mon
Alabama, uses robots for as

than in manufacturing organizations. work. This $1.4 billion autom

plant is one of the most adv
assembly plants in North Am

38

Courtesy of Hyundai Motor Group

Productivity growth is a key factor in a country’s rate of inflation and the standard of liv-
ing of its people. Productivity increases add value to the economy while keeping inflation
in check. Productivity growth was a major factor in the long period of sustained economic
growth in the United States in the 1990s.

Examples: Measurement Units for Partial Productivity

Computing Productivity Measures
Productivity measures can be based on a single input (partial productivity), on more than
one input (multifactor productivity), or on all inputs (total productivity). Table 2.7 lists some
examples of productivity measures. The choice of productivity measure depends primarily on
the purpose of the measurement. If the purpose is to track improvements in labor productivity,
then labor becomes the obvious input measure.
Partial measures are often of greatest use in operations management. Table 2.8 provides
some examples of partial productivity measures.
The units of output used in productivity measures depend on the type of job performed.
The following are examples of labor productivity:

Labour Units of output per labour hour Yards of carpet installed

____________________ = Yards of carpet installed per labor hour
Units of output per shift Labor hours

Productivity Value-added (profit) per labour hour

Number of motel rooms cleaned
___________________________
Number of workers
= Number of motel rooms cleaned per worker

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

Machine Units of output per machine hour

TABLE 2.7
Dollar value of output per machine hour Output Output Output Output

Productivity
Partial measures _______ ________ _______ _______
Some examples of di
Labor Machine Capital Energy
types of productivity
Multifactor measures Output
_______________ Output
_______________________ measures
Labor + Machine Labor + Capital + Energy

Capital Units of output per dollar input Total measure Goods or services produced

_____________________________
All inputs used to produce them
Dollar value of output per dollar input
Productivity

Energy Units of output per kilowatt-hour

Dollar value of output per kilowatt-hour
Productivity
ste67472_ch02_040-073.indd 57 01/06/1

39

20
 Numerical Examples

40

Example 1
Ø Four workers installed 720 square yards of carpeting in eight hours.

𝑶𝒖𝒕𝒑𝒖𝒕
𝑷𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒗𝒊𝒕𝒚 =
𝑰𝒏𝒑𝒖𝒕

𝑌𝑎𝑟𝑠 𝑜𝑓 𝐶𝑎𝑟𝑝𝑒𝑡 𝑖𝑛𝑠𝑡𝑎𝑙𝑙𝑒𝑑

𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 =
𝐿𝑎𝑏𝑜𝑟 ℎ𝑜𝑢𝑟𝑠 𝑤𝑜𝑟𝑘𝑒𝑑

720 𝑠𝑞𝑢𝑎𝑟𝑒 𝑦𝑎𝑟𝑑𝑠

=
ℎ𝑜𝑢𝑟𝑠
4 𝑤𝑜𝑟𝑘𝑒𝑟×8
𝑤𝑜𝑟𝑘𝑒𝑟
720 𝑦𝑎𝑟𝑑𝑠
=
32 ℎ𝑜𝑢𝑟𝑠
= 22.5 𝑦𝑎𝑟𝑑𝑠/ℎ𝑟 41

21
Example 2
ØA machine produced 70 pieces in two hours. However, two pieces
were unusable.
𝑶𝒖𝒕𝒑𝒖𝒕
𝑷𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒗𝒊𝒕𝒚 =
𝑰𝒏𝒑𝒖𝒕
𝑈𝑠𝑎𝑏𝑙𝑒 𝑝𝑖𝑒𝑐𝑒𝑠
𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 =
𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑡𝑖𝑚𝑒

70 − 2 = 68 𝑢𝑠𝑎𝑏𝑙𝑒 𝑝𝑖𝑒𝑐𝑒𝑠
=
2 ℎ𝑜𝑢𝑟𝑠
= 34 𝑝𝑖𝑒𝑐𝑒𝑠/ℎ𝑟
(35 is wrong)
Q: How much faster should the machine work to make up for the unusable products?
70 𝑝𝑐𝑠
𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝑎𝑠 𝑖𝑓 𝑡ℎ𝑒𝑟𝑒 𝑤𝑎𝑠 𝑛𝑜 𝑢𝑛𝑢𝑠𝑎𝑏𝑙𝑒 𝑝𝑟𝑜𝑑𝑢𝑐𝑡 = = 35
2 ℎ𝑟
!" !"
𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝑤𝑖𝑡ℎ 𝑢𝑛𝑢𝑠𝑎𝑏𝑙𝑒 𝑝𝑟𝑜𝑑𝑢𝑐𝑡 = = 35 ⇒ 𝑤 = = 1.94 ℎ𝑟𝑠 = 116.57𝑚𝑖𝑛 instead of 120 min ⇒ 3.5min faster 42
# $%

Example 3
Ø Determine the multifactor productivity for the combined input of labor and
machine time using the following data:
Ø Output: 7,040 units
𝑶𝒖𝒕𝒑𝒖𝒕
Ø Input 𝑷𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒗𝒊𝒕𝒚 =
• Labor: $1,000 𝑰𝒏𝒑𝒖𝒕
• Materials: $520
• Overhead: $2,000 𝑂𝑢𝑡𝑝𝑢𝑡
𝑀𝐹𝑃 =
𝐿𝑎𝑏𝑜𝑟 + 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝑠 + 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑

7,040 𝑢𝑛𝑖𝑡𝑠
=
$1,000 + $250 + $2,000
= 2 𝑢𝑛𝑖𝑡𝑠 𝑝𝑒𝑟 𝑑𝑜𝑙𝑙𝑎𝑟 𝑖𝑛𝑝𝑢𝑡
Correct?

= 𝟐 𝒖𝒏𝒊𝒕𝒔 𝒑𝒆𝒓 𝒆𝒗𝒆𝒓𝒚 𝒅𝒐𝒍𝒍𝒂𝒓 𝒐𝒇 𝒕𝒉𝒆 𝒂𝒃𝒐𝒗𝒆 𝒊𝒏𝒑𝒖𝒕𝒔

43

22
Example 4
Ø A company that processes fruits and vegetables is able to produce 400 cases of canned peaches in a one-half hour with four
workers. What is labor productivity?
𝑶𝒖𝒕𝒑𝒖𝒕
𝑷𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒗𝒊𝒕𝒚 =
𝑰𝒏𝒑𝒖𝒕
𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑
𝐿𝑎𝑏𝑜𝑟 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 =
𝐿𝑎𝑏𝑜𝑟 ℎ𝑜𝑢𝑟𝑠

400 𝑐𝑎𝑠𝑒𝑠
=
1
4 𝑤𝑜𝑟𝑘𝑒𝑟𝑠 × ℎ𝑜𝑢𝑟𝑠/𝑤𝑜𝑟𝑘𝑒𝑟𝑠
2
= 200 𝑐𝑎𝑠𝑒 𝑝𝑒𝑟 𝑙𝑎𝑏𝑜𝑟 ℎ𝑜𝑢𝑟
What if the same number of workers do the same job in 1 hour?
• Increase/decrease?
• By how much?
400
𝐿𝑎𝑏𝑜𝑟 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 = = 100 = 𝒉𝒂𝒍𝒇 𝒕𝒉𝒆 𝒑𝒓𝒆𝒗𝒊𝒐𝒖𝒔 𝒑𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒗𝒊𝒕𝒚
4×1 44

Example 5
Ø A wrapping-paper company produced 2,000 rolls of paper one day. Labor cost was $160, material cost was $50, and
overhead was $320. Determine the multifactor productivity.

𝑶𝒖𝒕𝒑𝒖𝒕
𝑷𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒗𝒊𝒕𝒚 =
𝑰𝒏𝒑𝒖𝒕
𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑
𝑀𝐹𝑃 =
𝐿𝑎𝑏𝑜𝑟𝑐𝑜𝑠𝑡 + 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑐𝑜𝑠𝑡 + 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑
2,000 𝑟𝑜𝑙𝑙𝑠
=
$160 + $50 + $320
= 3.77 𝑟𝑜𝑙𝑙𝑠 𝑝𝑒𝑟 𝑖𝑛𝑝𝑢𝑡
Correct?

= 𝟑. 𝟕𝟕 𝒓𝒐𝒍𝒍𝒔 𝒑𝒆𝒓 𝒆𝒗𝒆𝒓𝒚 𝒅𝒐𝒍𝒍𝒂𝒓 𝒐𝒇 𝒕𝒉𝒆 𝒂𝒃𝒐𝒗𝒆 𝒊𝒏𝒑𝒖𝒕𝒔

2000
What if the labor cost doubles? 𝑀𝐹𝑃& = '()*+ -*./ 0*1)'2. = 2.9 ≠ 0.5 𝑡ℎ𝑒 𝑝𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑀𝐹𝑇; 𝑊𝐻𝑌?
• Increase/decrease?
• By how much? (2×160) + 50 + 320 45

23
Example 6 (important example)
Ø Compute the multifactor productivity measure for an eight-hour day in which the usable output was 300 units, produced by
three workers who used 600 pounds of materials. Workers have an hourly wage of $20, and material cost is $1 per pound.
Overhead is 1.5 times the labor cost.

𝑶𝒖𝒕𝒑𝒖𝒕
𝑷𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒗𝒊𝒕𝒚 =
𝑰𝒏𝒑𝒖𝒕
𝑈𝑠𝑎𝑏𝑙𝑒 𝑂𝑢𝑡𝑝𝑢𝑡
𝑀𝐹𝑃 =
𝐿𝑎𝑏𝑜𝑟 𝑐𝑜𝑠𝑡 + 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑐𝑜𝑠𝑡 + 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝑐𝑜𝑠𝑡
$
𝑳𝒂𝒃𝒐𝒓 𝒄𝒐𝒔𝒕 = 3 𝑤𝑜𝑟𝑘𝑒𝑟𝑠 × 8 ℎ𝑟 × 20 = $ 480
ℎ𝑟
$
𝑴𝒂𝒕𝒆𝒓𝒊𝒂𝒍 𝒄𝒐𝒔𝒕 = 600 𝑝𝑜𝑢𝑛𝑑𝑠 × 1 = $ 600
𝑝𝑜𝑢𝑛𝑑𝑠
𝑶𝒗𝒆𝒓𝒉𝒆𝒂𝒅 𝒄𝒐𝒔𝒕 = 1.5×𝑳𝒂𝒃𝒐𝒓 𝑪𝒐𝒔𝒕 = 1.5×480 = $720
𝑪𝒐𝒔𝒕 𝒐𝒇 𝑰𝒏𝒑𝒖𝒕𝒔 = $480 + $600 + $720 = $1800

300 𝑢𝑛𝑖𝑡𝑠
𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 = = 𝟎. 𝟏𝟔𝟕 𝑢𝑛𝑖𝑡𝑠 𝑜𝑓 𝑜𝑢𝑡𝑝𝑢𝑡 𝑝𝑒𝑟 𝑑𝑜𝑙𝑙𝑎𝑟 𝑜𝑓 𝑡ℎ𝑒 𝑎𝑏𝑜𝑣𝑒 𝑖𝑛𝑝𝑢𝑡𝑠 (𝑜𝑟 𝑠𝑖𝑚𝑝𝑙𝑦 𝑢𝑛𝑖𝑡𝑠 𝑝𝑒𝑟 𝑑𝑜𝑙𝑙𝑎𝑟 𝑜𝑓 𝑎𝑏𝑜𝑣𝑒 𝑖𝑛𝑝𝑢𝑡𝑠)
$1800

Is it low or high?
46

Example 7
Ø A health club has two employees who work on lead generation. Each employee works 40 hours a week and is paid $20 an
hour. Each employee identifies an average of 400 possible leads a week from a list of 8,000 names. Approximately 10
percent of the leads become members and pay a one-time fee of $100. Material costs are $130 per week, and overhead costs
are $1,000 per week. Calculate the multifactor productivity for this operation in fees generated per dollar of input.
𝑶𝒖𝒕𝒑𝒖𝒕
𝑷𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒗𝒊𝒕𝒚 =
𝑰𝒏𝒑𝒖𝒕
𝑂𝑢𝑡𝑝𝑢𝑡
𝑀𝐹𝑃 =
𝐿𝑎𝑏𝑜𝑟 𝑐𝑜𝑠𝑡 + 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑐𝑜𝑠𝑡 + 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝑐𝑜𝑠𝑡

𝑂𝑢𝑡𝑝𝑢𝑡 = 𝑃𝑜𝑠𝑠𝑖𝑏𝑙𝑒 𝑙𝑒𝑎𝑑𝑠 × #𝑤𝑜𝑟𝑘𝑒𝑟𝑠 × 𝐹𝑒𝑒 × 𝐶𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 = 400×2×$100×0.1 = $8,000

𝑳𝒂𝒃𝒐𝒓 𝒄𝒐𝒔𝒕 = #𝑤𝑜𝑟𝑘𝑒𝑟𝑠 × 𝑡𝑜𝑡𝑎𝑙 ℎ𝑜𝑢𝑟𝑠 𝑜𝑓 𝑤𝑜𝑟𝑘 𝑝𝑒𝑟 𝑤𝑒𝑒𝑘 ×ℎ𝑜𝑢𝑟𝑙𝑦 𝑤𝑎𝑔𝑒 = 2×40×20 = $1,600
𝑴𝒂𝒕𝒆𝒓𝒊𝒂𝒍 𝒄𝒐𝒔𝒕 = $130
𝑶𝒗𝒆𝒓𝒉𝒆𝒂𝒅 𝒄𝒐𝒔𝒕 = $1,000
𝑪𝒐𝒔𝒕 𝒐𝒇 𝑰𝒏𝒑𝒖𝒕𝒔 = $2,730

$𝟖, 𝟎𝟎𝟎
𝑷𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒗𝒊𝒕𝒚 = = 𝟐. 𝟗𝟑
$𝟐, 𝟕𝟑𝟎

Both the output and the labor input were a function of the #workers!
Good for productivity or bad?
47

24
Example 7
Ø A health club has two employees who work on lead generation. Each employee works 40 hours a week and is paid $20 an
hour. Each employee identifies an average of 400 possible leads a week from a list of 8,000 names. Approximately 10
percent of the leads become members and pay a one-time fee of $100. Material costs are $130 per week, and overhead costs
are $1,000 per week. Calculate the multifactor productivity for this operation in fees generated per dollar of input.
Both the output and the labor input were a function of the #workers!
Good for productivity or bad? 5.00

4.50

4.00

3.50

3.00
MFP

2.50

Leads=400
2.00

1.50

1.00

0.50

0.00
2 3 4 5 6 7 8 9 10 11 12

w
48

Example 7
Ø A health club has two employees who work on lead generation. Each employee works 40 hours a week and is paid $20 an
hour. Each employee identifies an average of 400 possible leads a week from a list of 8,000 names. Approximately 10
percent of the leads become members and pay a one-time fee of $100. Material costs are $130 per week, and overhead costs
are $1,000 per week. Calculate the multifactor productivity for this operation in fees generated per dollar of input.
Both the output and the labor input were a function of the #workers!
Good for productivity or bad? 5.00

4.50

4.00

3.50

3.00
MFP

2.50
Leads=400
Leads=300
2.00 Leads=200
Leads=100
1.50

1.00

0.50

0.00
2 3 4 5 6 7 8 9 10 11 12

w
Answer: It’s a function of some other factors such as the number of possible leads 49

25
Example 8
Q1: What is the labor productivity for the following case:
Output
10,000 Units Produced
Sold for $10/unit

Input 1:
500 labor hours
Labor rate: $9/hr What type of productivity measure was asked here?
PP, MFP, or TP?
Input 2:
Cost of raw material: $5,000

Input 3:
Cost of purchased material: $25,000

50

Example 8 - Cont.
𝑶𝒖𝒕𝒑𝒖𝒕
𝑷𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒗𝒊𝒕𝒚 =
𝑰𝒏𝒑𝒖𝒕
WXYZXY ^_,___ X`aYb
Ø𝑃𝑃TUV = = = 20 𝑢𝑛𝑖𝑡𝑠/ℎ𝑜𝑢𝑟
[\U]V!"# c__ dVb

Øor we can arrive at a unitless figure:

WXYZXY$ ^_,___ X`aY×^_ $/X`aY
Ø𝑃𝑃TUV = [\U]V$
= c__ dV×f $/dV
= 22.22 $⁄$ = 22.22

Can you think of any advantages or disadvantages of each approach?

• Unitless is good for comparison → an index
• But the one with units is good for interpretation.
51

26
Example 8 - Cont. 𝑶𝒖𝒕𝒑𝒖𝒕
𝑷𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒗𝒊𝒕𝒚 =
Q2: What is the multifactor productivity? 𝑰𝒏𝒑𝒖𝒕

𝑂𝑢𝑡𝑝𝑢𝑡
𝑀𝐹𝑃 =
𝐿𝑎𝑏𝑜𝑟 + 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝒔
• 𝐿𝑎𝑏𝑜𝑟 𝐶𝑜𝑠𝑡 = 500×9 = $4,500
• 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑅𝑎𝑤 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝑠 = $5000
• 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑑 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝑠 = $25,000

$(10,000 ×10)
=
$4,500 + $5000 + $25,000

$100,000
=
$34,500

= 2.9 52

End of Week 2

Read Chapter 1 of your textbook!

HW Assignment #1: Due Next Week

53

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