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Applied Production and

Operations Management Productivity Improvement

Productivity and Quality


Chapter 2-19

Productivity Productivity Measurement


n Productivity measures to what extent the resources of Output
Productivity =
an organization are being used effectively in Input
transforming inputs to outputs. total Output
Total Productivity =
n Productivity is a measure of how well the resources of total input
a firm are used in producing goods and services.
total output
n Measure of process improvement Multifactor productivity =
Subset of inputs
n Represents output relative to input
total output
n Only through productivity increases can our standard Partial factor productivity =
single input
of living improve

Typical Impact of Productivity Improvement Examples of Partial Productivity Measures


As productivity improved Labor Machine Capital Energy
Parts per man hour
Costs were pared Productivity Productivity Productivity Productivity
Cost per unit decreased
Wages increased Units of output Units of output Units of output Unit of output
115 per labor hour per machine- per dollar input per kilowatt-
110 $2.25 Average worker's annual cash Value added per hour Dollar Output per hour
compensation increased
105 labor hour Tons of output dollar input Units of output
$2.00
100 Dollar output per per machine Inventory per energy
95 $1.75 27000 labor hour hour turnover ratio cost
Year A Year B Year C 26000 Production value (dollar sale per Production value
$1.50
Year A Year B Year C 25000 per labor hour dollar inventory) per barrel of
24000
Shipments per fuel
Year A Year B Year C
labor cost

Sadiq A. Abd Elall


M.Sc. Engineering Management
Example: Computing Productivity Measures: Example: Computing partial productivity measures
2004 2005
Productivity measure 2004 2005
Output
Pound of crystals 100,000 150,000 Output / direct labor hour 5.000 5.357
Inputs Output / direct labor dollar 0.556 0.429
Direct labor hours 20,000 28,000
Direct labor cost $180,000 $350.000 Output / kilowatt hour 0.286 0.375
Energy used 350,000kWh 400.000kWh Output / energy dollar 20.000 25.000
Energy cost $5,000 $6,000
Output / pound of raw material 0.833 0.811
Raw materials used (lb) 120,000 185,000
Raw material cost $30,000 $40,000 Output / raw material dollar 3.333 3.750

Multifactor productivity measure Total productivity measure


n Output per non-labor dollar would be: n Total Output per total cost would be:
2004, 2004,
n 100,000 / (5,000+30,000) = 2.857 lb/non-labor n 100,000 / (180,000+5,000+30,000) = 0.465
dollar. lb/dollar.
2005, 2005,
n 150,000 / (6,000+40,000) = 3.261 lb/non-labor n 150,000 / (350,000+6,000+40,000) = 0.379
dollar. lb/dollar.

n We see that the output per non-labor dollar n We see that the total per total dollar input was
was higher in 2005. higher in 2004.

Productivity Measure: n
Productivity Measure:
Productivity measures are statistics; as with all statistics, it is easy to misuse them
or to mask information unintentionally. Consider for example:
n Total or multifactor productivity measures are generally preferable to partial
measures. The reason for this is that focusing on productivity improvement in a n An employee earning $18,000 per year, who produces 1000 units of output per
narrow portion of an organization may actually decrease overall productivity. This year. A trainee of lesser skill is hired at $10,000 to assist this employee, and
can be seen by a simple example. Suppose that together they produce 17000 units per year.
A partial measure of labor productivity is (Number of units produced per year / Labor
Present Total productivity is measured by [total unit produced (total labor cost +
year) = (1700/2) = 850 units of output per labor year.
total equipment cost)] = [10,000 (50,000 + 25,000)] = 0.133 unit output per dollar
input. Because the current (one person) system has a labor productivity value of 1000 we
conclude that the productivity has decreased in term of average output per worker.
Present Labor productivity = (10,000 / 50,000) = 0.20 units of output per labor
dollar. n However, suppose that labor productivity is measured as number of units produced
per dollar input. For the one-person system,
n Suppose that a $10,000 reduction in labor can be achieved by investing in a more
advanced machine. the labor productivity is = (number of units/Dollar input) = (1000/$18000) = 0.056 units
per labor dollar.
New Labor productivity will increase to (10,000/40,000 = 0.25 units output per For the two-person system the labor productivity = (1700/$28,000) = 0.061 units per
labor dollar). labor dollar.
n Thus from partial productivity perspective, it would appear that this investment is n on this basis, hiring the trainee resulted in about 9% improvement in productivity. In this
attractive. If, however, the annual cost with the new equipment increases to situation, it is better to use the units per dollar input productivity measure since it takes
$40,000, then into account the relative value of the input, that is, the difference in wages implies a
New total productivity would be = [10,000 (40,000 + 40,000)] = 0.125 units of difference in skill level. The first measure, on the other hand, implicitly assumes that
output per dollar input. And hence overall productivity would be actually decrease. each labor-year is equivalent. The point of these illustration is that we must be very
careful when using partial productivity measures.

Sadiq A. Abd Elall


M.Sc. Engineering Management
Productivity indexes: Example: Computing Productivity Indexes
n Productivity is a relative measure, it must be compared to
something in order to be meaningful. Productivity measure 2004 2005
n The numerical values of productivity measures do not
Output / direct labor hour 5.000 5.357
provide useful information by themselves; comparative
values across time or similar business do. Output / direct labor dollar 0.556 0.429
n Comparisons are usually made using historical productivity
Output / kilowatt hour 0.286 0.375
data;
n Historical productivity data permits a firm to observe how its Output / energy dollar 20.000 25.000
performance changes over time. Output / pound of raw material 0.833 0.811
n A productivity index is simply the ratio of a productivity
measure in some time period to the base period. Output / raw material dollar 3.333 3.750

Example: Computing Productivity Indexes Productivity in Service Organizations


n In manufacturing organizations, the physical inputs and
Productivity measure 2004 2005 2005 Index
outputs are easy to identify and the value of output is easy to
Output / direct labor hour 5.000 5.357 1.071 measure.
n In service organizations, the inputs and outputs are often
Output / direct labor dollar 0.556 0.429 0.772 intangible and, as a result, are difficult to measure.
n Productivity measure in service organizations such as:
Output / kilowatt hour 0.286 0.375 1.311 Number of claims processed per day.
The number of letter sorted per hour.
Output / energy dollar 20.000 25.000 1.250
The number of waste container served per hour.
Output / pound of raw material 0.833 0.811 0.974 Number of employees/Number of customers served.
n Productivity measures in service organizations, particularly
Output / raw material dollar 3.333 3.750 1.125 nonprofit organizations, are often stated as Benefit/Cost ratio

Using Productivity Measures: Key Variables for Improved Productivity


1. To compare the overall performance of the firm
with competitors or similar firms. nImproving efficiency.
2. To control the performance of the firm by nImproving effectiveness.
controlling the performance of individual sectors of nAchieving higher performance.
the firm, either by function or product.
nDeveloping better organizational health.
3. To compare the relative benefits accruing from the
use of differing inputs, or varying productions of the nTechnology:
same inputs. o Hard technology.
o Soft technology.
4. For internal management purpose, such as
collective bargaining with unions.

Sadiq A. Abd Elall


M.Sc. Engineering Management
The Seven Classes of Production Waste:
THE SEVEN CLASSES OF WASTE
Waste is anything other than
n What is Waste? the minimum amount of
equipment, materials, parts,
space, and workers time,
n Value for Whom?
which are absolutely essential
to add value to the product.
n Find and Eliminate Waste. Shoichiro Toyoda President, Toyota

1995 Corel Corp.

Types of Waste #1 Overproduction


n Overproduction n Making more than what is needed
n Waiting or Watching n Excess production hides problems and
n Conveyance or Transportation creates:
n Inefficient processing Extra inventory, handling, equipment usage,
n Inventory space, quality problem issues, etc.
n Unnecessary motion n Production should be determined by the
n Product defects customer, not false targets such as
1995
Corel
Corp.
utilization.

#2 Waiting or Watching #3 Conveyance or Transportation


n Causes: n Causes:
Waiting for Materials Poor Layouts (Long distances between
Waiting for Equipment/Tools process operations)
Waiting for Repairs/Service Large Production Lots
Waiting for Large Lots to Finish Batch Processes
Watching Unreliable Processes Poor Scheduling
Watching for Problems

Sadiq A. Abd Elall


M.Sc. Engineering Management
#5 Inventory
#4 Inefficient processing
n Causes: n Causes:

Poorly Maintained Equipment Long Setups


Improper/ Poor Tooling Large Batch Sizes
Excess Checking/Stopping Mindset of Comfort
Improper Materials Reliance on MRP to reorder
Errors in Processing/Setup Batch Processing
Poor/no Work Instructions
n Problems (quality, scheduling, suppliers,
maintenance, attendance, etc.)

#6 Unnecessary motion #7 Product defects

n Causes: n Causes:
Poor Layouts & Facilities Poor Training
Poor Work Place Designs Poor Manufacturing Instructions
Lost Items/Searching Poor Equipment & Tooling
Lack of Needed Tooling & Equipment Poor Materials

Definitions of Quality
n ASQC: Product characteristics & features that
affect customer satisfaction.
n User-Based: What consumer says it is.
Quality Improvement n Manufacturing-Based: Degree to which a
product conforms to design specification.
n Product-Based: Level of measurable product
characteristic.

Sadiq A. Abd Elall


M.Sc. Engineering Management
Importance of Quality Dimensions of Quality for Goods
n Performance: how well the product or service
Market Gains performs the customers intended use.
n Costs & Reputation
n Feature: secondary characteristics, added
market share Volume
features.
n Companys Price
n Conformance: meeting specifications or Quality
reputation Improved Increased
industry standards workmanship.
Quality Profits
n Product n Reliability: the likelihood of breakdowns
Lower Costs
liability
Productivity or needs for repair.
n International n Durability: the length of time or amount of
Rework/Scrap
implications
Warranty use before needing to be repaired or replaced.

Dimensions of Quality for Goods - Service Quality Attributes


Continued

Serviceability: the speed, cost and ease of


Reliability Responsiveness
repair and maintenance.
Response: the treatment received by Tangibles Competence
Quality
customers before, during and after sale. Under- Access
Aesthetics: the effect on human standing
senses e.g. exterior finish.
Reputation: past performance and other Security Courtesy
1995 Corel Corp.

intangibles such as being ranked first.


Safety: how well the products users before, Credibility Communication
during and after use.

Determinants of Service Quality Determinants of Service Quality


-Continued
n Reliability: consistency and dependability. n Communication keeping customers informed in
n Responsiveness: willingness/readiness of employees languages they understand.
to provide service; timeliness. n Credibility trustworthiness, believability, honesty
n Competence: possession of skills and knowledge
n Security freedom from danger, risk or doubt.
required to perform service.
n Understanding/knowing the customer making the
n Access: approachability and ease of contact.
effort to understands the customers needs.
n Courtesy: politeness, respect, consideration,
friendliness of contact personnel. n Tangibles the physical evidence of the service.

Sadiq A. Abd Elall


M.Sc. Engineering Management
Quality Assurance: Quality Cost
n Quality Assurance refers to the entire system of policies,
n Quality Cost: are any costs that would not occur if
procedures, and guidelines established by an organization
in order to achieve and maintain quality. It consists of: perfect quality could be achieved. That is each
time work must be redone.
Quality Engineering is to include quality in the design of
products and processes and to predict potential quality problems For example, remanufacturing a defective item or
prior to production. retesting an assembly-the cost of quality increases.
Quality Control involves making a series of planned
measurements in order to determine if quality standards are
being met. If they are not, quality control also includes taking
corrective and/or preventive action in order to achieve and
maintain conformance

Quality Cost: Quality Cost Categories:


Costs of poor quality are huge, but the amounts are n Prevention costs - reducing the potential for defects.
not known with precision. In most companies, the
n Appraisal costs - evaluating products.
accounting system provides only a minority of the
information needed to quantify this cost of poor n Internal failure - of producing defective parts or
quality. service.

n External costs - occur after delivery


Juran on Quality by Design, The Free Press (1992), p. 119

Quality Cost Categories: Quality Cost Categories: continued


n Preventive costs: are those costs expended in an effort to n Appraisal Costs: are those expended on maintaining
keep nonconforming products or services from occurring and quality levels through measurement and analysis of data in
reaching the customer. order to detect and correct problems.
Quality Planning costs are those associated with the time spent Test and inspection costs are those associated with testing and
planning, designing, and implementing the total quality control inspection incoming materials, work-in-process, and finished
system. goods, including salaries of inspectors and supervisors.
Process control costs: are those costs spent on analysis of
Maintaining instruments including costs associated with calibration
production process in order to improve their operations and the of gauge and test equipment, repair, and so on.
implementation of the process control.
Process control costs include time spent by operators in gathering
Information systems costs: salaries expended developing data and analyzing quality measurements.
requirements and quality measurements.
Training costs are those associated with developing and operating
formal training programs or attending seminars on quality.
General management costs

Sadiq A. Abd Elall


M.Sc. Engineering Management
Quality Cost Categories: continued Quality Cost Categories: continued
n Internal Failure Costs: are those costs result from n External Failure Costs are those that occur after poor
unsatisfactory quality that is found prior to delivery of a quality products or services reach the customer.
product or service to the customer. Cost of customer complaints and returns include the costs of
Scrap and rework costs include material, labor, and overhead investigating complaints and taking corrective action.
associated with production losses Product recall costs of making adjustments.
Costs of corrective action arise from time spent determining the Warranty claim costs include the cost of repair or replacement of
causes of failure and correcting production problems. products during warranty periods.
Downgrading costs include lost revenue as a result of selling a Product liability costs involving legal action and settlements are a
product at a lower price because it does not meet specifications major source of external failure costs.
but is still useable.

Using Quality Cost Information Typical Quality Cost Indexes measurements


n The purpose of quality-cost measurement and analysis is to
determine the cost of maintaining a certain level of quality. n Labor-base Index = Total quality cost per labor hour.
n Such activity is necessary to provide feedback to
management on performance of quality assurance and to n Cost-base Index = Total quality cost per manufacturing-
assist management in identifying opportunities for quality cost dollar.
improvement and cost reduction.
n Sale-base Index = Total quality cost per sales dollar.
n Quality-cost indexes are usually used to analyze quality
cost data. n Unit-base Index = Total quality cost per unit of
Such cost are computed by dividing a cost for a current time production
period by a base-period value.

Computing and Interpreting Quality Cost Indexes Computing and Interpreting Quality Cost Indexes
Quarter
Watches Clocks
1 2 3 4
Cost Category Quarter
Watch Clock Watch Clock Watch Clock Watch Clock
1 2 3 4 1 2 3 4
Preventive 2 4 2 4 2 4 2 4 Cost Category
Prevention 5.7 7.1 5.0 6.7 4.4 4.7 4.3 4.3
Appraisal 10 20 13 31 16 22 9 24
Internal Failure 19 106 16 107 23 194 17 195 Appraisal 28.6 46.4 40.0 30.0 22.2 36.0 23.4 25.8

External Failure 23 16 21 14 34 14 30 12 Internal Failure 54.3 57.1 57.5 56.7 117.8 124.4 206.4 209.7

Total Quality Cost 54 146 52 156 75 234 58 235 External Failure 65.7 75.0 85.0 100.0 17.8 16.3 14.9 12.9

Direct Labor 35 90 28 86 40 94 30 93 Total Quality cost 154.3 185.7 187.5 193.3 162.2 181.4 248.9 252.7

Sadiq A. Abd Elall


M.Sc. Engineering Management
Japanese approach to quality:
International Quality Standards
n The focus of the standards is to establish quality
management procedures, through detailed
n Process Control. documentation, work instructions, and recordkeeping
n Visible, Measurable Quality. n Industrial Standard Z8101-1981 (Japan)
Specification for TQM
n Insistence on Compliance.
n ISO 9000 series (Europe/EC)
n Line-Stop Authority.
Common quality standards for products sold in Europe (even if made in
n Self-Correction of Errors. U.S.)
n ISO 14000 series (Europe/EC)
n 100 Percent Checking.
Standards for recycling, labeling etc.
n ASQC Q90 series; MILSTD (U.S.)

EC Environmental Standard ISO 14000


Core Elements:
Environmental management
Auditing
Performance evaluation
Labeling
Life-cycle assessment

Sadiq A. Abd Elall


M.Sc. Engineering Management

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