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CHAPTER 12: INCREASING PRODUCTIVITY AND QUALITY THE PRODUCTIVITY-QUALITY CONNECTION Productivity: a measure of economic performance that measures

s how much is produced relative to the resources used to produce it Productivity grows if fewer resources are used to produce the right things Productivity considers both the amounts and the quality of what is produced By using resources more efficiently, quantity of output will be greater, but unless the resulting goods are of satisfactory quality, no one will want to buy them Quality: a products fitness for use in terms of offering the features that consumers want Responding to the Productivity Challenge: Since quality must be defined in terms of value to the customer, companies must design their marketing efforts to cultivate a more customer-oriented focus As quality-improvement practices are implemented, more and more firms will receive payoffs from these efforts Four factors interact in this process: customers, quality, productivity, and profits 1. 2. Measuring Productivity Most countries use labour productivity to measure their level of productivity Labour productivity of a country = (gross domestic product / total number of workers) This equation compares a countrys total output of goods and services with the resources used to produce that output Productivity Among Global Competitors Differences of productivity lie among nations due to many factors: technology, human skills, economic policies, natural resources, and even traditions Domestic Productivity Nations must be concerned about domestic productivity regardless of their global standing A country that improves its ability to make something out of its existing resources can increase the wealth of all its inhabitants and vice versa When a decline happens, an increase in one persons wealth comes at the expense of others with whom he or she shares an economic system For example, additional wealth from higher productivity can be shared among workers, investors, and customers When productivity drops, wages can be increased only by reducing profits or by increasing prices Manufacturing VS Service Productivity Manufacturing productivity is higher than service productivity Baumols disease it would be difficult to increase productivity of service sector since it was focused more on hands-on activity that machines couldnt replace Productivity gains are starting to appear among a wide array of service providers such as airlines Many of these organizations have increased their productivity by becoming more like factories, and they use modern information technology to eliminate inefficiencies Industry Productivity In addition to differences between the manufacturing and service sectors, industries within these sectors differ vastly in terms of productivity Agriculture is more productive in Canada than in many other nations because we use more sophisticated technology and superior natural resources The productivity of specific industries concerns many people for different reasons Labour unions need to take it into account in negotiating contracts since highly productive industries can give raises more easily than less productive industries Investors and suppliers consider industry productivity when making loans, buying securities, and planning their own future production Company Productivity High productivity gives a company a competitive edge because its costs are lower can offer its products at a lower price or it can make a greater profit on each item sold Increased productivity also allows companies to pay workers higher wages without raising prices

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Productivity of individual companies is also important to investors, workers, and managers Comparing productivity of several companies in the same industry helps investors in buying stock Employee profit sharing plans are often based on companys productivity improvements per year Managers use information about productivity trends to plan for new products, factories, and funds to stay competitive in the years ahead TOTAL QUALITY MANAGEMENT Businesses must take quality into account when measuring productivity Managing for Quality: Total Quality Management (TQM): all the activities necessary for getting high-quality goods and services into the marketplace Must consider all parts of the business, including customers, suppliers, and employees TQM emphasizes that no defends are tolerable and that employees are responsible for maintaining quality standards Strategic approach to TQM begins with leadership and the desire for TQM This approach involves getting peoples attention, getting them to think in an entirely new way about what they do, and then getting them to improve both processes and products Customer focus = starting point Total participation is mandatory (all employees) TQM in todays competitive markets demands unending and continuous improvement of products; after-sales services; and all of the companys internal processes such as accounting, delivery, etc Successful use of TQM requires a high level of commitment from all members of the organization 1. 2. Planning for Quality Planning for quality should begin before products are designed or redesigned Managers need to set goals for both quality levels and quality reliability in the beginning Performance Quality: the features of a product and how well is performs Performance quality may or may not be related to quality reliability in a product Quality Reliability: the consistency or repeatability of performance Organizing for Quality Perhaps most important to the quality concept is the belief that producing quality goods and services requires an effort from all parts of the organization Everyone from CEO, engineers, janitors, marketers, etc must work to ensure quality Although everyone in a company contributes to product quality, responsibility for specific aspects of total quality management is often assigned to specific departments and jobs Leading for Quality Means that managers must inspire and motivate employees throughout the company to achieve quality goals They need to help employees see how they affect quality and how quality affects their jobs and their company Leaders must continually find ways to foster a quality orientation by training employees, encouraging their involvement, and tying wages to quality of work If managers succeed, employees will ultimately accept quality ownership the idea that quality belongs to each person who creates or destroys it while performing a job

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4. Controlling for Quality By monitoring its products and services, a company can detect mistakes and make corrections To do so, managers must first establish specific quality standards and measurements TOOLS FOR QUALITY MANAGEMENT In managing for quality, many leading companies rely on assistance from proven tools Often ideas for improving both the product and the production process comes from competitive product analysis process by which a company analyzes a competitors product to identify desirable improvements There are many specific tools that can be used to achieve TQM Here, we briefly describe the following: value-added analysis, statistical process control, quality/control studies, quality improvement teams, benchmarking, getting closer to the customer, ISO 9000 and ISO 14000, re-engineering, and adding value through supply chains Value-Added Analysis: Refers to the evaluation of all work activities, material flows, and paperwork to determine the value that they add for customers It often reveals wasteful or unnecessary activities that can be eliminated without jeopardizing customer service Statistical Process Control (SPC):

Statistical analysis techniques that allow managers to analyze variations in production data and to detect when adjustment are needed to create products with high-quality reliability Process Variation Is any change in employees, materials, work methods, or equipment that affects output quality Some amount of process variation is acceptable but too much can result in poor quality and excessive operating costs Information about variation in a process can be obtained from a process capability study

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Control Charts Are a statistical process control method in which results of test sampling of a product are plotted on a diagram that reveals when the process is beginning to depart from normal operating conditions Quality/Control Studies: Statistical processes can help keep operations up to existing capabilities, but in todays competitive environment, firms must consistently raise quality capabilities But any improvements in products or production processes means additional costs Quality/Control Studies: identify a firms current costs and reveal areas with the largest cost-savings potential Are associated with making, finding, or repairing goods and services, or preventing defects in them All of these costs should be analyzed in a quality/cost study Internal Failures: expenses incurred during production and before bad product leaves the plant External Failures: expenses incurred when defective products are allowed to leave the factory and get into customers hands Quality Improvement (QI) Teams: A TQM tool in which groups of employees work together to improve quality Many QI teams organize their own work, select leaders, and address problems in the workplace Benchmarking: Is comparing the quality of the firms output with the quality of the output of the industrys leaders With internal benchmarking, a firm tracks its own performance over time to evaluate its progress and to set goals for further improvement External benchmarking begins with a critical review of competitors to determine which goods or services perform the best; these activities and products are called best practices Getting Closer to the Customer: The most successful businesses keep close to their customers and know what they want in the products they consume ISO 9000: 2000 and ISO 14000: ISO 9000: a certification program attesting to the fact that a factory, a laboratory, or an office has met the rigorous quality management requirements set by the International Organization for Standardization (ISO) Name of the latest version, ISO 9000: 2000 indicates that it was revised in 2000 Revised standards allow firms to show that they follow documented procedures for testing products, training workers, keeping records, and fixing defects Ideally, standardized processes would ensure that goods are produced at the same level of quality even if all employees were replaced by a new set of workers ISO 14000: certification program attesting to the fact that a factory, laboratory, or office has improved environmental performance Requires firms to develop an environmental management system (EMS) a plan documenting how the company has acted to improve its performance in using resources and in managing pollution Process Re-engineering: Business Process Re-engineering: redesigning of business processes to improve performance, quality, and productivity Re-engineering is the fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in measures of performance, such as cost, quality, service, and speed 1. The Re-engineering Process There are six steps involved in the re-engineering process: State a case for action Identify the business activity that will be changed Evaluate information and human resources to see if they can meet the requirements for change Diagnose the current process to identify its strengths and weaknesses Create the new process design Implement the new design

Re-engineering is a broad undertaking that requires know-how in technical matters, depends on leadership and management skills, and calls upon knowledge about customer needs and how well they are being met by the company and its competition Adding Value Through Supply Chains: The term supply chain refers to the group of companies and streams of activities that work together to create a product Supply Chain: the flow of information, materials, and services that starts with raw-materials suppliers and continues through other stages in the operations process until the product reaches the end customer 1. 2. The Supply Chain Strategy This strategy is based on the idea that members of the chain, working as a coordinated unit, will gain competitive advantage Although each company looks out for its own interests, it works closely with suppliers and customers throughout the chain Everyone focuses on the entire chain of relationships rather than on just the next stage in the chain Supply chain management can improve performance and provide higher quality at lower prices Supply Chain Management (SCM) Looks at the chain as a whole to improve the overall flow through a system composed of companies working together Because customers ultimately get better value, SCM gains competitive advantage for each supply chain member Because the smooth flow of accurate information along the chain reduces unwanted inventories, avoids delays, and cuts supply times, materials move faster to business customers and individual consumers For both, the efficiency of SCM means faster deliveries, lower costs than customers could get if each member acted only according to its own operations requirements

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Re-engineering Supply Chains for Better Results Process improvements and re-engineering often are applied in supply chains to lower costs, speed up services, and coordinate flows of information and materials As a result, materials move faster to business customers and industrial consumers Heightened concerns about supply chain risks and costs are the result of soaring energy prices and volatile financial markets, according to a report by McKinsey & Company PRODUCTIVITY AND QUALITY AS COMPETITIVE TOOLS A companys ability to compete by improving productivity and quality depends on participation by all parts of the firm Total firm involvement stems from having company-wide strategies that we consider in this section: the companys willingness to invest in innovation, its long-run perspective on its goals, its concern for the quality of work life, and its improvement of service operations Invest in Innovation and Technology: Many firms that have continued to invest in innovative technology have enjoyed rising productivity and rising incomes Adopt a Long-Run Perspective: Instead of emphasizing short-run results, many quality-oriented firms are committed to a long-run perspective for continuous improvement Continuous Improvement: the ongoing commitment to improving products and processes, step by step, in pursuit of ever-increasing customer satisfaction The Six Sigma program, which is used by many companies, continuously captures, measures, and eliminates defects in every company-wide process Emphasize Quality of Work Life: The products and services of businesses represent such a large part of total national output that the well-being and participation of their workers is central to improving national productivity Many companies are enhancing workers physical and mental health through recreational facilities, counselling services, and other programs Also, more and more firms have started programs to empower and train employees 1. Employee Empowerment Many firms are replacing the work environments of yesterday, based on the principle of management-directed mass production, with worker-oriented environments that foster loyalty, teamwork, and commitment Employee Empowerment: the principle that all employees are valuable contributors to a business and should be entrusted with certain decisions regarding their work Employee Training Employee involvement is effective when it is implemented with preparation and intelligence Training is a key method of preparing employees for productivity-improvement programs

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After training, waste diminishes and quality increases Also, team training not only teaches employees to work in groups, but it also acquaints them more fully with the companys markets and operations Improve the Service Sector: Quality for service production begins with listening to customers to determine what services they want In trying to offer more satisfactory services, many providers have discovered five criteria that customers use to judge service quality: Reliability: perform the service as promised, both accurately and on time Responsiveness: be willing to help customers promptly Assurance: maintain knowledgeable and courteous employees who will earn the trust and confidence of customers Empathy: provide caring, individualized attention to customers Tangibles: maintain a pleasing appearance of personnel, materials, and facilities