Operations and Productivity

1
C H A P T E R

DISCUSSION QUESTIONS 9. Productivity is harder to measure when the task becomes

more intellectual. A knowledge society implies that work is more
1. The text suggests four reasons to study OM. We want to
intellectual and therefore harder to measure. Because the U.S. (and
understand (1) how people organize themselves for productive
many other countries) are increasingly ‘knowledge’ societies, pro-
enterprise, (2) how goods and services are produced, (3) what
ductivity is harder to measure. Using labor hours as a measure of
operations
productivity for a postindustrial society vs an industrial or agricul-
managers do, and (4) this costly part of our economy and most
ture society is very different. For example, decades spent develop-
enterprises.
ing a marvelous new drug or winning a very difficult legal case on
2. Possible responses include: Adam Smith (work intellectual property rights may be significant for postindustrial
specialization/division of labor), Charles Babbage (work societies, but not show much in the way of productivity improve-
specialization/ division of labor), Frederick W. Taylor (scientific ment measured in labor hours.
management), Walter Shewart (statistical sampling and quality
10. Productivity is difficult to measure because precise units of
control), Henry Ford (moving assembly line), Charles Sorensen
measure may be lacking, quality may not be consistent, and ex-
(moving assembly line), Frank and Lillian Gilbreth (motion
ogenous variables may change.
study), Eli
Whitney (standardization). 11. Mass customization is the flexibility to produce in order
to meet specific customer demands, without sacrificing the
3. See references in the answer to question 2.
low cost of a product oriented process. Rapid product
4. The actual charts will differ depending on the specific organi- development is a source of competitive advantage. Both rely on
zation the student chooses to describe. The important thing is for agility within the organization.
students to recognize that all organizations require, to a greater
12. Labor productivity in the service sector is hard to improve
or lesser extent, (a) the three primary functions of operations,
because (1) many services are labor intensive and (2) they are in-
finance/accounting, and marketing; and (b) that the emphasis or
dividually (personally) processed (the customer is paying for that
detailed breakdown of these functions is dependent on the
service – the hair cut), (3) it may be an intellectual task performed
specific competitive strategy employed by the firm.
by professionals, (4) it is often difficult to mechanize and
5. The answer to this question may be similar to that for question automate, and (5) often difficult to evaluate for quality.
4.
Here, however, the student should be encouraged to utilize a more 13. Taco Bell designed meals that were easy to prepare; with ac-
detailed knowledge of a past employer and indicate on the chart tual cooking and food preparation done elsewhere; automation to
additional information such as the number of persons employed to save preparation time; reduced floor space; manager training to
perform the various functions and, perhaps, the position of the increase span of control.
functional areas within the overall organization hierarchy.
6. The basic functions of a firm are Marketing, Accounting/ ETHICAL DILEMMA
Finance, and Operations. An interesting class discussion: “Do all Like most of the ethical dilemmas in the text, the instructor
firms/organizations (Private, Government, Not-for-profit) perform should generate plenty of discussion with this dilemma. The
these three functions?” The authors’ hypothesis is yes, they do. authors are hesitant to endorse a particular correct answer. And
students may well be on both side of this dilemma.
7. The ten decisions of operations management are: Product De-
Many students will be inclined to accept the child labor
sign, Quality, Process, Location, Layout, Human Resources, Sup-
laws of their country. Students raised in more affluent environ-
ply Chain Management, Inventory, Planning (aggregate and short
ments may not understand children working. However, those
term), Maintenance. We find this structure an excellent way to
who had to scrape by in their youth or had parents that did may
help students organize and learn the material.
be more sympathetic to 10-year olds working.
8. Four areas that are important to improving labor productivity From an economic and self-preservation perspective many
are: (1) basic education (basic reading and math skills), (2) diet of 10-year olds do work, and need to work. There are still a lot of
the labor force, (3) social overhead that makes labor available poor people in the world. Such a decision may endorse the moral
(water, sanitation, transportation, etc.), and (4) maintaining and philosophy perspective defined as a Utilitarianism decision. A
expanding the skills of the labor force for rapidly changing utilitarianism decision defines acceptable actions as those that
technology and knowledge.

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maximize total utility, i.e. the greatest good for the greatest
number of people.
From a U.S. corporate management perspective, companies
cannot tolerate the publicity that goes with hiring 10-year olds.
These companies need to have standards that prohibit such 1.7 Last Year This Year
actions by their subcontractors. The moral philosophy perspec-
tive might call this the Virtue Ethics position—the decision that Production 1,00 1,00
a mature person with a good moral character would deem 0 0
correct. Labor Hr. @ $10 $3,000 $2,750
Resin @ $5 250 225
Capital cost/month 100 110
END-OF-CHAPTER PROBLEMS
Energy 1,50 1,42
120 boxes 0 5
1.1 (a)  3.0 boxes / hour $4,850 $4,510
40 hours
[(1,000 / 4,850)  (1,000 / 4,510)]

125 boxes (1,000 / 4,850)
(b)  3.125 boxes / hour
40 hours
0.206  0.222 0.016
(c) Change in productivity = 0.125 boxes / hour   0.078 fewer resources
0.206 0.206
0.125 boxes  7.8% improvement*
percentage change = = 4.166%
3.0 * with rounding to 3 decimal places.
Output
1.2 Labor productivity is 160 valves/80 hours = 2 valves per 1.8 Productivity 
hour. Input
1.3 There are sundry articles about the growing “service
65 65
economy;” there are reports on labor-hours used to construct (a) Labor Productivity = =
automo- (520 × 13) $6,760
biles (which firm uses less labor than others); there are quarterly = .0096 rugs per labor $
reports on U.S. worker productivity; there are occasional reports
on productivity affected by technology. 65
(b) Multifactor
1.4 Bureau of Labor Statistics (stats.bls.gov) is probably a good Productivity (520 × $13) + (100 × $5) + (20 × $50)
place to start as any. Results will vary for each year, but overall
data for the economy will range from .9% to 3% (see footnote in 65
chapter) and mfg. could be as high as 5% and services between 1 = = .00787 rugs per $
$8,260
and 2%. The data will vary even more for months or quarters. The
data are frequently revised, often substantially 1.9 (a) Labor productivity = 1000 tires/400 hours = 2.5
tires/hour.
Units produced 100 pkgs (b) Multifactor productivity is 1000 tires/(400 ×
1.5 (a)   20 pkgs / hour
Input 5 $12.50 + 20,000 × $1 + $5,000 + $10,000) =
1,000 tires/$40,000 = 0.025 tires/dollar.
133 pkgs
(b)  26.6 pkgs per hour (c) Multifactor productivity changes from 1,000/40,000 to
5
1,000/39,000, or from 0.025 to 0.02564; the ratio is
6.6 1.0256, so the change is a 2.56 percent increase.
(c) Increase in productivity =  33.0%
20
1.6 Resource Last Year This Year Change Percent
Change

1000 1000 0.31

Labor =3.33 =3.64 0.31 =9.3%
300 275 3.33
1000 1000 2.22
Resin =20 =22.22 2.22 =11.1%
50 45 20
1000 1000 –0.01
Capital =0.1 =0.09 =–10.0%
–0.01
10000 11000 0.1
1000 1000 0.02
Energy =0.33 =0.35 =6.1%
3000 2850 0.02 0.33
 CHAPTER 1 O P E R A T I O N S A N D P R O D U C T I V I T Y 3

1.10 Last Year This Year Change Percent Change

1500 1500 0.33

Labor hrs. =4.29 =4.62 = 7.7%
350 325 4.29

1500 1500 0.02

Capital invested =0.10 =0.08 = –20%
15000 18000 0.1

1500 1500 0.05

Energy (btu) =0.50 =0.55 = 10%
3000 2750 0.50

Productivity of capital did drop; labor productivity increased as did energy, but by less than the anticipated 15%.

1.11 Multifactor productivity is: 1.15 1500

Old Process =
375 autos/($20 × 10,000) + ($1,000 × 500) + (640  8) + 500 + (1500  0.35)
($3 × 100,000) = 375/(200,000 + 500,000 + 1500
300,000) = 375/1,000,000   0.244
6145
= .000375 autos per dollar of inputs 1875
1.12 Before: 500/20 = 25 boxes per hour; New Process =
(800  8) + 500 + (1875  0.35)
After, 650/24 = 27.08; 27.08/25
= 1.083, or an increase of 8.3%. 1875
  0.248
7556.25
1.13 1500 × 125 = 1875
0.248  0.244
outputs Percent Change =  1.6%
 productivity 0.244
inputs
1875 INTERNET HOMEWORK PROBLEMS
 2.344
labor hours (found at www.prenhall.com/heizer)
1875 1500
New Process   800 labor hours 1.16 Last Year =
2.344 (350  8) + (15,000  0.0083) + (3000  0.6)
800 1500
 5 workers 
160 2800  124.50  1800
1500 1500
Last Year = = 2.344   0.317 doz / $
labor hours 4724.5
1500
1500 This Year =
= labor hours  640 (325  8) + (18,000  0.0083) + (2750  0.6)
2.344
 0.341 doz / $
640
 4 workers 0.341  0.317
160 Percent Change =
0.317
1.14 (a) Labor Change:
 0.076 or 7.6% increase
1500 1500
  .293 loaves / $ 1.17 Global. Its level of integration goes beyond multinational.
(640  $8) 5,120 The collection of parts and subassemblies coming from other
countries is carefully orchestrated. It is not transnational because
1875
 0.293 loaves / $ its “home” is clearly the U.S., and there is little sense of “local
(800  $8) responsiveness.”
Percent Change: 0
(b) Investment Change:
1500 1500
  .293 loaves / $
(640  $8) 5,120

1875 1875
  .359 loaves / $
(640  8) + (100) 5,220

.359  .293
Percent Change:  .225  22.5%
.293
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CASE STUDY 2. Customer service should be based on an analysis of customer

requirements. Document requirements in terms of services desired
1 NATIONAL AIR EXPRESS (supply needs, preprinted waybills, package weights, pickup and
This case can be used to introduce the issue of productivity and drop-off requirements) should all be considered. (The house of
how to improve it, as well as the difficulty of good consistent quality technique discussed in Chapter 5 is one approach for such
measures of productivity. This case can also be used to introduce an analysis.)
some of the techniques and concepts of OM. 3. Other companies in the industry do an effective job of estab-
1. The number of stops per driver is certainly a good place to lishing very good labor standards for their drivers, sorters, and
start. However, mileage and number of shipments will probably be phone personnel. Difficult perhaps, but doable. (The Work Mea-
good additional variables. (Regression techniques, addressed in the surement Supplement to Chapter 10 addresses labor standards.)
forecasting chapter, can be addressed here to generate interest).

CASE STUDY
2 ZYCHOL CHEMICALS CORP.
1. The analysis of the productivity data is shown below:

Both labor and material productivity increased, but capital equip- technology. This accounting practice will seriously impact near-
ment productivity did not. The net result is a large negative change term productivity and then later years’ productivity figures will
in productivity. If this is a one-time change in the accounting pro- benefit from the reduced depreciation flows. This highlights the
cedures, this negative change should also be a one-time anomaly. difficulty in accounting for costs in an effective managerial man-
The effect of accounting procedures is often beyond the control of ner. Decisions and evaluation of operating results should be
managers. For example, perhaps the capital allocation is based based on sound managerial accounting practices and not necessarily
on an accelerated allocation of depreciation of newly installed generally accepted financial accounting principles.
 CHAPTER 1 O P E R A T I O N S A N D P R O D U C T I V I T Y 5

2. An analysis of adjusted results reduces the negative impact on serve, can tell a story. This OM decision is a critical ingredient
the capital allocation but there is still a negative growth in for success of a Hard Rock Café and an integral part of the Hard
multifactor productivity. After adjustment for inflation, the Rock dining experience.
material costs are still higher in 2005. Yet, one must be aware of  Supply Chain Management: Although not discussed in the case,
the extra students should appreciate the importance of the supply chain in
volatility of the cost of petroleum-based products. Did the any food service operation. Some items like leather jackets have a
manager have control over his price increases? One should look at 9-month lead-time. Contracts for meat and poultry are signed 8
the months in advance.
changes in a petroleum based price index, including the cost of oil,  Inventory: Hard Rock, like any restaurant, has a critical inven-
over the last two years in order to gain a better understanding of tory issue that requires that food be turned over rapidly and that
the degree to which the manager had control over these costs. The food in inventory be maintained at the appropriate and often
increase in wages was beyond the manager’s control and a critical temperatures. But the interesting thing about Hard
constant rate should be used for comparing both years’ results. Yet, Rock’s inventory is that they maintain $40 million of memora-
a bilia with all sorts of special care, tracking, and storage issues.
negative result still remains. Even when material costs in 2005 are  Scheduling: Because most Hard Rock Cafes sales are driven by
converted to the original cost of $320, a negative 5% growth in tourists, the fluctuations in seasonal, daily, and hourly demands
productivity remains. The increase in the capital base is responsi- for food are huge. This creates a very interesting and challeng-
ble yet should not persist in future years if the increase was the ing task for the operations managers at Hard Rock. (Not
result of an adoption of new technology. mentioned in the case, Linear programming is actually used in
3. The manager did not reach the goal. An analysis of the some cafes to schedule the wait staff.)
changes in capital costs is warranted. Even after adjusting for in-  Maintenance/Reliability: The Hard Rock Café doors must open
flation, multifactor productivity was not positive. However labor every day for business. Whatever it takes to provide a reliable
and materials productivity was favorable. The capital investment kitchen with hot food served hot and cold food served cold must
cost (as figured by the accounting department) was so large as to be done. Bar equipment and point-of-sale equipment must also
make his multifactor productivity negative. Multifactor productiv- work.
ity has fallen by 11.61% before adjustment and by 7.88% after the 2. Productivity of kitchen staff is simply the output (number of
adjustment for inflation. meals) over the input (hours worked). The calculation is how many
meals prepared over how many hours spent preparing them. The
VIDEO CASE STUDY same kind of calculation can be done for the wait staff. In fact Hard
HARD ROCK CAFE: OPERATIONS Rock managers begin with productivity standards and staff to
MANAGEMENT IN SERVICES achieve those levels. (You may want to revisit this issue when you
There is a short video (7 minutes) available from Prentice Hall and get to Chapter 10 and Supplement 10 on labor standards and discuss
filmed specifically for this text that supplements this case. A 2 minute how labor can be allocated on a per item basis with more precision.)
version of the video also appears on the student CD in the text. 3. Each of the 10 decisions discussed in question 1 above can be
1. Hard Rock’s 10 Decisions: This is early in the course to dis- addressed with a tangible product like an automobile.
cuss these in depth, but still a good time to get the students engaged  Product design: The car must be designed, tested and ‘costed-
in the 10 OM decisions around which the text is structured. out’. The talents may be those of an engineer or operations
 Product Design: Hard Rock’s tangible product is food and like any manager rather than a chef, but the task is the same.
tangible product it must be designed, tested, and ‘costed out.’ The  Process: With an auto, the process is more likely to be an assem-
intangible product includes the music, memorabilia, and service. bly line process.
 Quality: the case mentions the quality survey as an overt quality  Quality: At an auto plant, quality may take the form of measuring
measure, but quality can be discussed from a variety of perspec- tolerances or wear of bearings, but there is still a quality issue.
tives—hiring the right people, food ingredients, good suppliers,  Location: Hard Rock Café may want to locate at tourist destina-
speed of service, friendliness, etc. tions, but an auto manufacturer may want to go to a location that
 Process: The process can be discussed from many perspectives: will yield low fixed or variable cost.
(a) the process of processing a guest, to their seat, taking the  Layout: An automobile assembly plant is going to be organized
order, order processing, delivery of the meal, payment, etc. (b) on an assembly line criterion.
the process of how a meal is prepared (see, for instance, the  Human Resources: An auto assembly plant will be more
Example box in Chapter 5 of Chef Pierre Alexander), or (c) focused on hiring factory skills rather than a passion for music
some sub-set of any of these. or personality.
 Location: Hard Rock Cafés have traditionally been located in  Supply Chain: The ability of suppliers to contribute to design
tourist locations, but that is beginning to change. and low cost may be a critical factor in the modern auto plant.
 Layout: Little discussion in the case, but students may be very  Inventory: The inventory issues are entirely different – tracking
aware that a kitchen layout is critical to efficient food pre- memorabilia at Hard Rock, but an auto plant requires tracking a
paration and that at a bar is critical in many food establishments lot of expensive inventory that must move fast.
for profitability. The retail shop in relation to the restaurant and  Scheduling: The auto plant is going to be most concerned with
its layout is a critical ingredient for profitability at Hard Rock. scheduling material not people.
 Human Resources: Jim Knight, VP for Human Resources at
Hard Rock, seeks people who are passionate about music, love to
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 Maintenance: Maintenance may be even more critical in an auto

plant as there is often little alternate routing and down time is
very expensive, because of high fixed and variable cost.