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BUS 644 Week 2 Discussion 1 & 2 plus Week 2 Assignment

NO PLAGIARISM GRADUATE WRITING SKILL ONLY

Text

Vonderembse, M. A., & White, G. P. (2013).

Operations management

[Electronic version]. Retrieved from https://content.ashford.edu/
ANSWER ALL QUESTIONS AND USE SCHOLARLY SOURCES

Required Resources

Text

Vonderembse, M. A., & White, G. P. (2013).

Operations management

[Electronic version]. Retrieved from https://content.ashford.edu/

· Chapter 3: Enhancing Productivity

· Chapter 4: Quality Management

Article

Ambruch, B. (2013, October 21).

The forces that are transforming how products are made (Links to an external site.)

. Forbes. Retrieved from http://www.forbes.com/sites/ptc/2013/10/21/the-six-things-that-are-transforming-how-products-are-made/

Recommended Resources

Article

Stahl, R., & Pexton, C. (2003). Healthcare’s horizon. ASQ Six Sigma Forum Magazine, 2(2), 17-26. Retrieved from the ProQuest database.

Multimedia

July, E. (Producer) & Rodrigo, J. M. (Director). (2003).

Business is blooming: The international floral industry (Links to an external site.)

[Video file]. Retrieved from the Films On Demand database.

· Watch the following segments:

· Competition and Commercial Breeding

· Cross-Breeding New Species

· French Horticulture Industry

· French Florists and Regional Flowers

· Lava Trading and the Floral Business

Websites

American Society for Quality. (n.d).

Malcom baldridge national quality award (MBNQA). (Links to an external site.)

Retrieved from http://asq.org/learn-about-quality/malcolm-baldrige-award/overview/overview.html

NetMBA Business Knowledge Center. (2002-2010).

Operations (Links to an external site.)

. Retrieved from http://www.netmba.com/operations/

The National institute of Standards and Technology. (2013, February 28).

Baldrige performance excellence program (Links to an external site.)

. Retrieved from http://www.nist.gov/baldrige/

Discussion 1

Productivity

Many times trade-offs are necessary to increase productivity. What are important trades-offs involving the inputs to productivity? Your initial post should include real life situations and be at least 200-250 words.

Discussion 2

Product Design and Quality

Read the Forbes article, “

The Forces That Are Transforming How Products Are Made (Links to an external site.)

.” Based on the content presented in the article, what forces and important organizational activities enable a firm to build quality into its products? Explain each of these along with their benefits. Your initial post should include examples and be at least 200-250 words. Respond to at least two of your classmate’s posts.

Week 2 – Assignment

Memorial Hospital

Read the “Memorial Hospital” case study in Chapter 4 of your text. In a three- to four-page paper, respond to the guided response below.

· Discuss ways that a hospital might measure quality. Be sure to explain your reasoning.

· Explain the potential costs and failures of quality for Memorial Hospital and discuss how each can be measured.

· Discuss ideas or techniques from TQM that Janice could use to help Memorial focus on providing quality health care.

· Analyze the methods Memorial could use to assess the quality of health care it is providing.

Your paper should be in paragraph form (avoid the use of bullet points) and supported with the concepts outlined in your text and additional scholarly sources.

Submit your three- to four-page paper (not including the title and reference pages). Your paper must be formatted according to APA style as outlined in the Ashford Writing Center and must cite at least three scholarly sources in addition to the textbook.

Carefully review the

Grading Rubric (Links to an external site.)

for the criteria that will be used to evaluate your assignment.

Hemera/Thinkstock

Enhancing Productivity

Learning Objec�ves
A�er comple�ng this chapter, you should be able to:

Define produc�vity.
Describe why produc�vity is the key to an increasing standard of living.
Discuss how the rela�onship between produc�vity and the nature of work has changed over �me.
Explain labor, capital, and material produc�vity.
Calculate produc�vity in single and mul�ple factor cases.
Discuss important trade-offs among the factors of produc�vity.
Explain the rela�onship between wage rate and produc�vity.
Describe ways to enhance produc�vity.

Produc�vity improvements have a profound impact upon living standards for people around the
world. Although completely cut off from society, a group of people stranded on a tropical island
would likely employ these same improvements to increase their quality of living.

John Foxx/Stockbyte/Thinkstock

3.1 Understanding Productivity

Produc�vity is a term that is men�oned o�en in the news. It is a term that many believe is important, but they are not sure why. Produc�vity is o�en associated with increasing
efficiency and lowering costs, which have posi�ve connota�ons. In fact, increasing produc�vity is an essen�al factor for improving living standards. Produc�vity is the level of output
achieved from an ac�vity divided by the inputs consumed to make the output. While produc�vity is defined by a mathema�cal equa�on, efficiency is a general descriptor of the
�me or effort required to complete work. Generally, efficiency is used to mean achieving an outcome with a minimal amount of effort, that is, no waste; it has a similar meaning as
produc�vity.

Produc�vity = Output/Input

The above defini�on, while accurate, does not convey the central role that produc�vity and produc�vity improvements have in determining living standards for people in the United
States and around the world. To understand this impact, imagine that seven people are stranded on an island, completely cut off from the rest of society. The island has abundant
natural resources. The immediate problems are ge�ng fresh water to drink and gathering fruits and vegetables to eat. Appropriate shelter and clothing come next. The amount of
water that seven castaways are able to drink (the output) depends upon how much effort (the input) they place on loca�ng, collec�ng, transpor�ng, and storing it. As the group
becomes be�er at gathering an adequate supply of water with less effort, members of the group have more �me for gathering food, building shelters, and making clothes. For
example, rather than going to the water source each �me a person is thirsty, the group could build buckets and barrels to transport and store large amount of water that is easily
and quickly accessible. This investment in designing and building tools to make collec�ng water faster and easier frees �me for other ac�vi�es. Eventually, as shelters are built, they
could be designed and constructed so that the roofs could collect rainwater and funnel it into water barrels. This system would eliminate the labor required to collect water, thus
providing more �me for other ac�vi�es, such as growing a large variety of food, building transporta�on devices, swimming, and devising forms of entertainment.

As the seven castaways become more produc�ve, they meet their basic needs (outputs)
with less �me and effort (input). This provides free �me, which can be used to create
new products, develop be�er ways to make exis�ng products, and enjoy leisure
ac�vi�es. Put in the simplest terms, the seven castaways can only consume what they
produce. The more they produce, the more they must consume. In this simplis�c
example, the castaways clearly benefit by finding ways of “doing more with less,” which
is a phase that is synonymous with cost cu�ng, and may have a nega�ve connota�on.
Doing more with less is the way to achieve an improved living standard.

A 21st-century economy with more than six billion people is similar to the castaway
economy because the concept of produc�vity does not change. Produc�vity s�ll
measures the ability to produce goods and services (outputs) compared to the inputs or
resources used in the process. The primary difference is that most work in the economy
is done by groups of people working in organiza�ons. As discussed earlier in this text,
organiza�ons exist to meet the needs of society that people working alone cannot. It is
through these organiza�ons that people achieve the coopera�on and coordina�on to
produce the array of services and goods consumed each day. First, organiza�ons allow
individuals to specialize in work, such as produc�on, engineering, and sales. Second,
they support the development and implementa�on of technology and automa�on to
achieve greater produc�vity. Third, organiza�ons provide a mechanism to coordinate
work toward a common set of goals. Examining and redesigning organiza�onal processes
and ac�vi�es is a key source of produc�vity improvement. The following examples
illustrate these points.

1. Specializa�on—Product design for life insurance requires an es�mate of life
expectancy. This effort is cri�cal to se�ng the terms and condi�ons of the policy,
including the premium. Actuaries are sta�s�cians who specialize in making this
es�mate. Their produc�vity (ability to make the es�mate quickly and accurately) is
greatly enhanced by specializa�on. They are well trained in the techniques required to
do the job. An employee of the life insurance company with training and educa�on as
a general manager, sales manager, or accountant would require significantly more
�me and effort to do actuarial work, and the es�mate would probably be much less accurate. Similarly, the actuary would likely make a poor accountant or manager.

2. Technology and Automa�on—At today’s universi�es, students have the op�on of paying fees using electronic funds transfer (EFT) via the Internet rather than standing in line at the
cashier’s office—the approach used a genera�on ago. Not only is EFT more convenient for the student (improves the student’s produc�vity by requiring less �me to make the
payment), it also increases the produc�vity of the workforce at the university. From the university’s perspec�ve, each transac�on that shi�s from paying in person to paying using
EFT reduces the amount of �me university employees spend accep�ng the payment and entering informa�on into the computer system. This presents an opportunity to cut costs
and to do more value-added work.

3. Process Redesign—In many organiza�ons, marke�ng and sales are responsible for gathering informa�on about customers and their orders. When a customer makes a request that
requires special processing, such as a special finish on a piece of steel or a major change to a so�ware module, that informa�on is relayed from the customer through sales to the
people who do the work, and takes extra �me and effort, thereby increasing the risk of errors. Changing the process so that the customer can communicate directly with the people
doing the work increases the produc�vity of all par�cipants. This can be accomplished in a number of ways, including having the customer visit the facility and meet with the
employees, or sending employees to meet the customer. It can also be done by sharing feedback from customers in a video format and providing “made by” informa�on so the
customer know who made the product. Providing customer with the employees’ email or other points of contact is helpful. Employees tend to respond be�er when the contact with
the customer is personal.

Real World Scenarios: Procter & Gamble Work With Walmart

Some�mes, process improvements involve working across organiza�ons. In many cases, retailers are working with suppliers to develop innova�ve ways to improve the
replenishment process and reduce the resources devoted to manage this rela�onship.

Procter & Gamble (P&G) supplies Walmart with disposable diapers—a bulky, inexpensive, high sales-volume and low profit-margin commodity—so Walmart must keep
inventory low and product availability high. To accomplish this, Walmart has changed its replenishment process. Rather than placing orders with P&G, Walmart provides sales
data for each individual store. It is P&G’s responsibility to track inventory, schedule produc�on, and deliver diapers to the store.

How does this shi�ing of responsibility improve the process? P&G receives sales data from Walmart each day. P&G uses the data, along with orders from other customers, to
schedule its produc�on processes more effec�vely and generate orders for its suppliers more quickly. P&G can more easily balance its produc�on process to reduce spikes in
produc�on, which can lead to higher costs through the need for over�me produc�on and similar effects. P&G suppliers, in turn, can improve their response �me and reduce
their in-process inventory. Walmart spends less �me tracking inventory, deciding how much and when to order, and placing the order. As responsibili�es shi� between P&G and
Walmart, overall costs decline, product availability increases, and the amount of unnecessary communica�on and interac�on between organiza�ons is reduced.

Money Versus Productivity

Produc�vity is more important than money when improving the standard of living, because produc�vity determines the level of output and, therefore, consump�on, whereas money
measures the value of the output. Money in the form of revenue, profits, and income is a way for organiza�ons and individuals to track performance. Refer to the castaway example
men�oned earlier. Suppose that each castaway landed on the island with $1 billion in gold. The money does not create a single glass of water or one bit of food. It is only through
the work of the castaways that these commodi�es are gathered and produced. Methods to increase produc�vity, such as specializa�on of labor, automa�on, technology, and process
improvement, create be�er living condi�ons and a society with a higher living standard.

Ini�ally, the small island economy may use a barter system in which a castaway gathering water would trade water for food with another castaway gathering or growing food. As the
economy grows in complexity, a currency will likely emerge to facilitate the exchange of goods and services, because bartering can be cumbersome. Suppose a currency is in place,
and it is based on the gold that the castaways brought with them. Now suppose the castaways discover gold on the island. They divide the gold up evenly, so now each castaway
has twice as much gold as before and wants to buy more goods and services. The immediate impact is to increase the price for items because the quan�ty of available goods and
services has not changed. There would be no increase in the goods and services available unless produc�vity is improved or the castaways work more hours at the same level of
produc�vity. For the island economy, it does not ma�er whether or not more gold is found, the castaways could do either of these ac�vi�es: increase produc�vity or increase the
number of hours worked.

As the popula�on grows and the island economy develops, income for each individual would be determined by the value of the work they could do. If medical care, for example, is
determined more valuable than educa�on, doctors would receive a higher income than teachers. This would allow a doctor to consume more than a teacher because the value of
the doctor’s labor is judged to be higher. If an individual in a developed economy finds $1 million worth of gold in his or her backyard, that s�ll does not generate more output. It
does, however, allow the person to outbid others for the outputs of the economy and consume more. Someone else, in turn, must consume less un�l produc�vity increases.

Productivity and the Nature of Work

Many individuals believe that produc�vity applies primarily (or exclusively) to the blue-collar workforce. People think of the number of laptop computers produced by workers on an
assembly line, or the amount of paper produced in a mill as key produc�vity data. While the produc�vity of blue-collar workers is important, blue-collar workers represent a small
and declining por�on of the workforce in developed countries.

During the 20th century and con�nuing today, there has been a substan�al shi� in the nature of work. Early in the 20th century, nearly 80% of the workforce in the United States
performed manual work, with the balance doing intellectual work, such as designing, planning, and managing. Today, that percentage has reversed. In addi�on, about 80% of the
workforce in the United States is employed in service organiza�ons. Of those employed in manufacturing, many work in management, sales, and other staff ac�vi�es, such as quality
control and engineering. Like the seven castaways, the produc�vity of everyone is important because each impacts the living standard of all. Because a large por�on of the U.S.
workforce does intellectual work, its impact upon living standards is very important. Table 3.1 presents some examples of people doing intellectual work, key measures of their
produc�vity, and possible methods to improve that produc�vity.

Table 3.1: Produc�vity measures and methods of improving produc�vity

Worker Ac�vity Measure Method of Improving Produc�vity

University
faculty

Educates students or
educates them be�er

Student credit hours taught. This does not take into account what
students have learned or other du�es of faculty, including curriculum
design, research, and service.

Increasing class size leads to more
student credit hours
Assigning more sec�ons per faculty also
leads to more student credit hours
Distance learning provides access to
educa�on that may not otherwise be
available
Innova�ve teaching methods can improve
the quality or the quan�ty of what is
learned

Postal worker Oversees the opera�on
of an automa�c sor�ng
machine

Number of pieces of mail sorted in an hour Equipment improvements that speed up
the sor�ng process
Job training

Case worker
for children’s
services

Manages the care of
children in foster homes

Number of cases under management at any �me. This does not consider
the degree of difficulty of the cases, or the quality of the service
provided.

Informa�on systems, including databases
that support care
Communica�on technology that gives
access to foster parents, service
providers, and support services

Productivity in Service Organizations

Through the last half of the 20th century, as the U.S. economy shi�ed from a manufacturing-based economy to a service-based economy, produc�vity improvements lagged because
produc�vity gains in the service sector were more difficult to achieve. With rapid advances such as the Internet, telecommunica�on, and mobile devices of all types, the ability to
improve the produc�vity of the intellectual labor force has increased dras�cally. Companies that are able to apply these technologies are gaining a compe��ve edge. For example,
Northwestern Mutual has a processing cost of $.063 cents for each dollar of premium collected from its policyholders while its compe�tors’ costs range from $.15 to $.20. It is
logical to argue that these companies have not managed their resources and technology effec�vely. Costs for telephone access, both wired and wireless, are declining as technology
is applied to reduce equipment and labor costs.

The Quality Condition

While the importance of quality may be obvious, it is worth discussing. Produc�vity calcula�ons are based on the assump�on that quality levels are maintained. If an organiza�on
produces more output with the same level of resources, but the quality of the output is lower, then produc�vity may not increase. If a company produces more computer so�ware,
but the so�ware is defec�ve and must be corrected, then the company has gained li�le. In fact, produc�vity may actually have been reduced. If a lower quality product reaches the
consumer, and the product’s value to the consumer is reduced, or the consumer must spend addi�onal resources to prepare the product for use, produc�vity is affected. The same
ideas apply to a research laboratory or an inner-city mission. If researchers’ output is higher quality, the people that use their work will benefit because the output has more value.
If the mission provides be�er nutri�on and preven�ve health care screening, the people using the services will feel be�er and the cost of health care should decline. This frees
health care resources for others.

Conversely, quality may be another way to boost produc�vity. If firms find ways to make a higher-quality product, using the same or fewer resources, then produc�vity increases
because the output has greater value. Following the so�ware example, if a firm purchases new so�ware development tools that are easier to use and result in fewer errors, the
produc�vity of its programmers and analysts increases.

It is essen�al to define and measure the inputs and the outputs of an ac�vity to calculate
produc�vity. If a manufacturing opera�on makes a single product on an automa�c machine, it is
simple to calculate the produc�vity of that machine.

iStockphoto/Thinkstock

3.2 Assessing Productivity

To calculate produc�vity, it is essen�al to define and measure the inputs and the outputs of the ac�vity. In the simplest cases, measurement is a trivial problem. If a manufacturing
opera�on makes a single product on an automa�c machine, calcula�ng the produc�vity of that machine is simple. The output over a given period of �me is measured. It is usually
be�er to measure a rela�vely long period of �me, days or weeks rather than minutes or hours. The reason is that the outputs may be greatly affected by a short-term occurrence
such as a machine breakdown.

Example: Machine Produc�vity

If a machine can make 200,000 roofing nails in 40 hours, then the produc�vity of the machine is 5,000 nails per hour. This is a single-factor produc�vity calcula�on because
only the machine is considered.

Machine Produc�vity = 200,000 roofing nails/40 machine hours
Machine Produc�vity = 5,000 roofing nails/machine hour

The resul�ng data become a benchmark that the firm seeks to improve. Suppose the firm invests in a new piece of equipment that automa�cally feeds metal to the machine
so the machine can run faster. Now, the machine is able to produce 210,000 nails in the same 40-hour period. Produc�vity has increased from 5,000 nails per hour to 5,250.
Produc�vity has increased by 5%. Change in produc�vity is the produc�vity a�er the new equipment minus the produc�vity before the new equipment divided by the original
produc�vity �mes 100. Make sure that the sign of that number is kept so it can be determined if produc�vity increases or decreases.

Percent Change in Produc�vity = (New Produc�vity – Old Produc�vity)/Old Produc�vity (100)
Percent Change in Produc�vity = (5,250 – 5,000)/5,000 (100)
Percent Change in Produc�vity = 5%

Inputs and Outputs

While this simple example illustrates the method for calcula�ng produc�vity, it does not consider that most opera�ons have more than one input and more than one output.
Economically, the inputs are:

1. Labor by managers and workers (either internally or externally)
2. Capital for land, facili�es, and equipment
3. Materials, including energy requirements

The importance of these factors varies widely for companies producing different products. For example, steel mills require large amounts of energy while Children’s Services, a social
service agency, uses very li�le. In a steel plant, the significant inputs include managers, laborers, land, facili�es, equipment, energy, and raw materials. The inputs for Children’s
Services include management and caseworkers. For Children’s Services, the investment in land and facili�es would be small compared to labor costs. Equipment investments may be
relevant for informa�on technology. Energy and raw material costs would be very small. Material costs would also be low with only small quan��es of office supplies required.

Outputs can be more difficult to define and measure. For example, how would the
produc�vity of a fast-food restaurant be measured? Would it be measured by
customers served per hour? If so, that calcula�on is problema�c because customers
may order different things. Measuring output as the number of items sold also can
be misleading because these restaurants sell various items (such as drinks,
sandwiches, and ice cream) that have different value to each customer, which is,
therefore, reflected in the prices charged.

These examples illustrate two important issues that can complicate how
produc�vity is measured: (1) How can mul�ple inputs with different economic
values be included? In the fast-food example, how does the produc�vity of labor
relate to the produc�vity of capital or materials?; (2) How can mul�ple outputs
with different economic values be calculated? Con�nuing the fast-food example, a
pizza shop may produce hot submarine sandwiches, chicken wings, and bread
s�cks. How does it value those outputs compared to a pizza? Even if the pizza shop
sells only pizza, there are different sized pizzas with different toppings that have
different economic value. In cases where there are mul�ple inputs or outputs with
different values, dollars rather than item counts or hours worked are used to
measure both inputs and outputs.

Labor Produc�vity

Labor is the most obvious input in the produc�vity equa�on. In fact, some
businesses are concerned only with measuring labor produc�vity because it is easy
to calculate and many managers believe it is one factor under their direct control.

For many service opera�ons, labor is the largest input. In service opera�ons, such as banks, hospitals, and universi�es, labor is o�en 70% or more of total costs. For manufacturing
firms, however, it is important to note that direct labor, people who work in producing goods, usually accounts for a small percent of total input costs—10% or less. Indirect labor,
which is labor that supports produc�on such as quality, supervision, and maintenance, can be two or three �mes the cost of direct labor cost. If indirect labor, management costs,

Materials and energy are o�en cri�cal inputs to manufacturing
processes, but may be insignificant within service opera�ons. For
example, laboratory supplies purchased for universi�es and hospitals
represent a very small part of the inputs required for the organiza�on.

Comstock Images/Thinkstock

Robo�c Technology in the Workplace: Inves�ng

and outside services are added to direct labor costs, the total is usually below 50% of the cost of all inputs. Some service opera�ons may be able to func�on minimally with only
labor produc�vity, but a broader perspec�ve on produc�vity may be relevant.

The simplest way to determine labor produc�vity is to measure output per labor-hour. This approach does not account for varia�ons in pay rates among workers. To calculate such
rate differences, many companies use labor costs as a measure of inputs. The equa�on for labor produc�vity is:

Labor Produc�vity = Quan�ty or Value of Units Produced/ Labor Hours or Labor Cost

The equa�on for any other individual factor of produc�vity differs only by its �tle and its divisor. For example, to calculate material produc�vity, use material quan�ty or material
costs as the divisor.

Capital Produc�vity

Another major component of produc�on is capital, which includes all money invested in land, facili�es, and equipment, as well as working capital, such as inventory. Capital
produc�vity can increase when firms invest in new facili�es and equipment that increase output. Capital produc�vity can also be increased if a company can produce the same level
of output as it previously had while reducing its inventory levels or other working capital requirements. Many firms invest in new facili�es and equipment in order to reduce labor
costs; however, the benefits of making a capital investment may greatly expand labor produc�vity and capital produc�vity may instead decline. These trade-offs are discussed later
in the text.

Service and manufacturing firms o�en have very different capital requirements. Service opera�ons o�en have rela�vely small investments in capital. For example, insurance
companies require office space, furniture, informa�on systems, and working capital, which represent a small part of their input costs. Hybrid service opera�ons, such as retail, o�en
have large investments in retail outlets, distribu�on centers, and inventory in their network of retail outlets and distribu�on centers. Manufacturers usually have very large capital
outlays to build produc�on facili�es.

Material Produc�vity

Materials and energy are o�en cri�cal inputs to manufacturing processes, but may be insignificant in most service
opera�ons. For manufacturing companies, materials o�en represent more than 50% of the input costs. A university
may purchase office and laboratory supplies as materials. A hospital’s primary materials include medicine, linens,
and food for the cafeteria. For universi�es and hospitals, materials represent a very small part of the inputs to the
organiza�on.

Trade-Offs in Productivity

Produc�vity can increase by maintaining the level of output while decreasing inputs, or by increasing output
without increasing any input. This is difficult to achieve, so trade-offs are necessary. Companies must contend with
trade-offs among the various inputs in order to achieve increases in overall produc�vity, called mul�ple-factor
produc�vity. In this case, some individual factors of produc�vity may decrease while others increase.

Trading Capital for Labor

For thousands of years, producers of food and goods have traded capital for labor. These trade-offs date back to
the �me when our early ancestors first began using tools to make life easier. The wheel and axle allowed people to
carry heavy loads across greater distances. Instead of making many trips to move a certain load, a person could
make one trip in a wheeled cart. This trade of capital, the investment in designing and building a wheeled cart, for
less labor resulted in substan�al produc�vity increases that are s�ll occurring today. This is why research and
development ac�vi�es that design and develop new technologies and devices are important for economic health
and improving living standards. In the development and applica�on of the wheel and axle to industrial and
transporta�on uses, someone or a group of people had to take the �me to research the concept, create a design,
build and test prototypes, and put the idea into produc�on. This investment required a shi� of resources from the
labor associated with doing the actual work of moving the item to be transported, to research and development
on how to move the item more efficiently. This meant that someone had to take a significant risk, but the benefits
have been tremendous. The impact of this investment on living standards can be seen everywhere.

Trade-offs involving capital and labor have
focused primarily on automa�ng ac�vi�es
previously performed by people. In the
construc�on business, trucks and bulldozers
move large quan��es of dirt and other
materials on construc�on sites. In the
automo�ve industry many boring, unpleasant, or dangerous tasks are performed by robots and other
automated devices. In retail opera�ons, checkout systems are becoming completely automated as customers
check out their items using a scanner, and pay by credit card or cash. The result is high capital costs, low labor
costs, and greater overall output—which generate an overall produc�vity increase. Higher capital costs pay for
research and development as well as equipment produc�on.

At some retail stores, cashiers are being replaced by technology that allows customers to scan items and make
payments themselves. While these jobs are lost, other jobs have been created to design the new checkout
equipment, develop the so�ware, manufacture the equipment, and install the system. In addi�on, produc�vity
has increased, and the cost of doing business has declined. New, be�er-paying jobs are created, and the

economy con�nues to grow. Produc�vity improvements lower the total number of jobs required. The labor
saved can be used to increase leisure �me, u�lize more people working fewer hours, or design and create new
goods and services. This is how economies grow and become stronger.

Trading Capital for Material or Energy

It also has become common to make capital investments that improve material or energy produc�vity. The
concept and issues are similar to those discussed in the prior sec�on. For example, a plas�c injec�on molding
company produces parts for Hewle� Packard’s laser printers. By inves�ng in new injec�on molding equipment
that reduces scrap, the company can produce the same number of plas�c parts (output) from a smaller
number of plas�c pellets (inputs). In addi�on to leading to an increase in material produc�vity, the investment
also reduces the amount of energy consumed because substan�al energy is used to melt the pellets prior to
injec�ng them into the molding machine. Because fewer pellets are used to make a given number of plas�c
parts, less energy is used and energy produc�vity has increased. It is not always the case that both
improvements can be achieved with a single investment, but it is not uncommon.

Subs�tu�ng Materials for Labor

In some instances, there may be advantages to spending more for materials in order to achieve a reduc�on in
labor costs. Some�mes it makes sense to have a supplier do extra work, which is reflected in the price of the materials. This reduces labor costs or processing �me for the
manufacturer. Outsourcing work has become a common prac�ce in both manufacturing and service opera�ons. Apple’s approach to manufacturing is to concentrate produc�on to
achieve economies of scale and to outsource produc�on to keep costs low and produc�vity high. Economies of scale refers to the ability to produce more goods at a lower cost by
be�er u�lizing the same fixed costs. This can be achieved by making facili�es larger, which requires less fixed costs per unit produced. Health care providers use disposable medical
supplies to avoid the cost of collec�ng and cleaning. It is more economical to incinerate or recycle these items than it is to clean and reuse them. In some instances, such as vehicle
produc�on, assembly plants want a completely finished subassembly delivered by its supply so that the plant’s employees only insert the assembled part into the vehicle. An
instrument panel is only one example of this. The cost of the component purchased from the supplier is higher, but the in-house assembly costs can be greatly reduced. The net
impact for suppliers and manufacturers is greater produc�vity and lower costs. Many service opera�ons will purchase supplies that cost more, but increase the produc�vity of their
workforce.

Improving Produc�vity Through Be�er Maintenance

Any�me equipment is involved, whether it is mechanical devices making automobiles, furniture, or telecommunica�on equipment moving voice or data, failure in the equipment
leads to lower levels of equipment and labor u�liza�on. When a pizza oven is not working because it was not properly maintained, the pizza shop loses the ability to make and sell
pizza pies. The equipment cannot be used and the labor is idle; therefore, produc�vity declines. When a so�ware developer must wait for informa�on because equipment is not
working, both the developer’s �me and the equipment are unused. As a result, a lack of effec�ve preven�ve maintenance could lead to a reduc�on in both labor produc�vity and
equipment produc�vity. Performing preven�ve maintenance when equipment is idle is cri�cal; otherwise produc�vity is disrupted.

Multiple-Factor Productivity

To cope with the trade-offs that can occur when produc�vity improvement efforts are made, mul�ple-factor produc�vity must be considered. Mul�ple-factor produc�vity
accommodates more than one input factor and more than one output factor when calcula�ng overall produc�vity. For example, if the owners of a pizza shop want to increase the
produc�vity of their ovens, they may consider decreasing the �me that a pizza cooks in the oven. To compensate for the reduced �me, the oven’s heat is increased. A single-factor
produc�vity calcula�on based on oven u�liza�on would show an increase in capital produc�vity because more pizzas are moving through the oven in a given period of �me.
However, there would also be an increase in energy consump�on, which would not be factored into the calcula�on. With mul�ple-factor produc�vity, the outputs can be measured
in dollars or the number of units produced, provided that all the units have approximately the same value.

Mul�ple-Factor Produc�vity = Quan�ty or Value of Output (Units Produced)/
(Labor + Capital + Materials + Energy + Other (Measured in Dollars))

Example: Life Insurance

Freedom Insurance Company processes claim applica�ons. The average output in one week is 600 applica�ons. Currently the staff includes six full-�me employees who work 40
hours per week and earn $24 per hour including benefits. Management has invested in computer technology, which has a weekly cost of $1,200. Materials and energy are not
used in significant amounts. What is the produc�vity of the applica�on process?

Mul�ple-Factor Produc�vity = 600 applica�ons/ ((6 employees) (40 hrs/wk) ($24/hr) + 1,200)
Mul�ple-Factor Produc�vity = 600 applica�ons/$6,960
Mul�ple-Factor Produc�vity = 0.086 applica�ons/dollar

In this case, the units of produc�vity are applica�ons-per-dollar. The number of applica�ons can be used because the value of each applica�on is approximately the same. The
inverse of this number, $11.60 per applica�on ($6,960/600 applica�ons), is the cost of processing each applica�on. Suppose Freedom decides to invest in addi�onal computer
equipment that will drive the weekly cost of informa�on technology to $1,800. One of the applica�ons evaluators is leaving the company and will not be replaced. The
remaining five processors should be able to complete 650 applica�ons per week with the new technology. What is the impact upon produc�vity?

Mul�ple-Factor Produc�vity = 650 applica�ons/ ((5 employees) (40 hrs/wk) ($24/hr) +1,800)
Mul�ple-Factor Produc�vity = 650 applica�ons/$6,600
Mul�ple-Factor Produc�vity = 0.098 applica�ons/dollar of input

Robotic Technology in
the Workplace
From Title:

Investing
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With the new investment, produc�vity increased from 0.086 to 0.098 applica�ons per dollar of input costs. The gain in produc�vity is 14%, which is a substan�al gain. The
inverse of this number, $10.15 per applica�on ($6,600/650 applica�ons), is the cost of processing each applica�on. To provide a point of comparison, a 3% to 4% increase in
produc�vity per year would be considered strong growth for a developed country.

Percent Change in Produc�vity = (New Produc�vity – Old Produc�vity)/ Old Produc�vity (100)
Percent Increase in Produc�vity = (0.098-0.086)/(0.086)(100)
Percent Increase in Produc�vity = 14%

Positive Impacts of Increased Productivity

Some have argued that produc�vity has a nega�ve impact upon jobs and the economy because fewer people are needed to complete the same amount of work. This leads to a loss
of income for the worker, and high unemployment costs and lower tax revenues for the government and the economy. This would be an accurate assessment if there was no
growth in the demand for goods and services and there was no demand for new and innova�ve products. Developed na�ons such as the United States have seen substan�al growth
in demand for goods and services and for new, innova�ve products. Developing countries including the BRIC countries (Brazil, Russia, India, and China) have rapidly growing
economies. Countries such as Vietnam and Thailand are poised for substan�al economic growth.

The impact of produc�vity improvements upon cost can easily be illustrated using the investment in computer technology in the prior example. Produc�vity increased by 14%
because more work was completed using fewer workers due to the new technology. As a result, the cost to process an applica�on was reduced by $1.45 from $11.60 to $10.15
(1.45/11.60), a reduc�on of 12.5%.

The impact on workers is not as clear. If a worker is re�ring, that worker has more leisure �me and the work that was being performed is s�ll ge�ng done, at a lower cost, by
another worker. The result is posi�ve for the worker, the company, and the economy. If the same worker resigns to take another job, the worker, the company, and the economy s�ll
benefit. The worker moves on to a be�er job, processing costs decline for the company, and the work is s�ll being performed.

If a worker does not voluntary leave a firm, the situa�on is not as clear. The company s�ll benefits because processing costs decline. What effects impact the worker and the
economy, though? If the right economic circumstances are in place, they will benefit as well. When the business environment is conducive to innova�ons and an overall growing
economy, this job loss is posi�ve rather than nega�ve because it creates slack in the labor force, or unemployment in the economy. Slack in the labor force can be put to work
crea�ng new ideas, new products, and new companies. Slack can be used to staff businesses that must hire and train new employees because a company is growing faster than its
produc�vity growth rate. At a macro level, this is precisely what has happened many �mes as the U.S. economy transi�oned from an agricultural, to a manufacturing, to a service-
based economy. Informa�on technology, the Internet, cloud compu�ng, and mobile devices are the forces driving the current transforma�on under which more people will work
from home and will change jobs more frequently as the process for crea�ve destruc�on accelerates. Crea�ve destruc�on is when new ideas or technologies replace outdated ideas
or technologies, as in the case of online video streaming replacing DVDs and DVD rental shops. Typically, during crea�ve destruc�on, jobs are gained in one area and lost in another.
To help with such transi�ons, governments offer unemployment insurance and federal and state retraining programs. Some colleges and universi�es reach out to non-tradi�onal
students in an effort to increase the educa�on and skills needed to compete in a new job market.

Cloud compu�ng companies offer ways to reduce investment in IT equipment and facili�es, while
providing a flexible and inexpensive pla�orm through which to engage and serve customers.

iStockphoto/Thinkstock

Importance of HR Management: Human Resource
Func�on

3.3 Current Trends in Productivity

Over �me, produc�vity growth in the U.S. economy has been inconsistent. There was strong growth in the 1960s, followed by low and in some cases nega�ve growth in the late-
1970s and early-1980s. As the 1990s began, produc�vity growth began to accelerate and has con�nued to show posi�ve growth. The rate of growth in produc�vity tends to be
stronger when the economy is strong and weaker when the economy slows down.

Increasing produc�vity o�en drives business performance. As organiza�ons achieve
more output with the same resources, the economy grows. Refer to the island
example men�oned earlier in the text; more is produced so there is more to
consume. At the same �me, profits expand even if the selling price of the product
does not increase. For Apple, profits grow dras�cally even when the selling price of
its products declines because the quan�ty sold increases. The cost structure of the
firm (at least the labor por�on) does not change, and there is more revenue from
increasing sales. Therefore, bo�om-line profits can expand dras�cally. For example,
as Microso� finds ways to produce and distribute more copies of its so�ware while
maintaining the same resources used in these ac�vi�es, it will generate greater
revenue and profit.

In many cases, produc�vity improvements are driven by investments in technology,
and these investments drive economic growth. For example, as retail companies
such as Walmart invest in Internet applica�ons for sales transac�ons, repair parts
and service, and adver�sing, demand for technology from companies such as Cisco
Systems and Intel accelerates. Cloud compu�ng companies such as Salesforce.com
and Brocade offer ways to reduce investment in IT equipment and facili�es while
providing a flexible and inexpensive pla�orm to engage and serve customers. As the
U.S. economy con�nues to shi� away from manufacturing and toward services,
investments in informa�on technology for service opera�ons become more
important for produc�vity growth and economic expansion.

Productivity and Wage Rates

Generally, wage rates and produc�vity are posi�vely correlated. This posi�ve correla�on means that organiza�ons with high produc�vity can afford to pay their workers be�er wages
because their workers produce more output. This correla�on has implica�ons for companies that are selec�ng loca�ons for their opera�ons. A country with a low wage rate does
not necessarily have low unit labor costs because workers in the country may have low produc�vity. For example, if someone was asked to move a pile of dirt from one point to
another and was given a shovel and a wheelbarrow to do the work, the produc�vity would be rela�vely low. On the other hand, if the person was given a bulldozer and proper
training, produc�vity would be much higher. The bulldozer operator is paid a higher wage because the operator moves more dirt faster. Wage rate is not the sole determinant of
unit labor cost. The other important factor is produc�vity, or the number of units produced.

To provide a context for the dirt-moving problem, suppose that a person with the wheelbarrow and shovel is paid $2 per hour and can move 1 cubic yard of dirt in one hour. The
bulldozer operator makes $24 per hour and can move 20 cubic yards in one hour. The labor cost to move the dirt by wheelbarrow is $2 per cubic yard ($2/hr) / (1 cubic yard/hr).
The labor cost to move the dirt by bulldozer is $1.20 per cubic yard ($24/hr) / (20 cubic yard/hr). The owner of the construc�on company is able to pay higher wages and achieve
lower costs because the investment in equipment and training has boosted produc�vity dras�cally. A�er paying the higher wage, the owner is able to save enough labor cost to pay
for the bulldozer, buy fuel to operate it, and pay to train the employee.

Productivity and the Workforce

Some people would argue that produc�vity improvements such the one described in the previous sec�on take jobs away from workers. A construc�on company that once employed
20 manual laborers employs only one bulldozer operator with the introduc�on of the new technology. Their claim is based on the fact that the construc�on company now employs
one bulldozer operator who does the work of 20 laborers. While this is true, it is only one component of produc�vity. Refer once again to the example of the castaways; they could
only consume what they produced. The same is true for society. If wheelbarrows and shovels had been used to build highways, there would not have been sufficient labor to build
the vast interstate systems and other road networks unless workers were taken from appliance manufacturing, teaching, medicine, and other occupa�ons to move the dirt. In
addi�on, the highway system would have cost much more to build. Produc�vity improvements, such as earth-moving equipment, are essen�al for designing and building more goods
and services at a lower cost, which increases the standard of living.

In addi�on, the net job loss in this example is not equal to 19 jobs because new jobs are created to design and
manufacture the bulldozer. Jobs are also created to sell and service the equipment. Workers and equipment are
needed to transport the bulldozer from one job loca�on to another. As a result, new jobs are created, and most
of these jobs require higher levels of educa�on than moving dirt with a wheelbarrow. Will this subs�tu�on
generate enough new jobs to make up for the 19 that were lost? The answer to this ques�on is easier to
understand when viewed broadly. Society would not have a net produc�vity gain if the same or more work is
required to design, build, sell, and service the bulldozer than was saved by the subs�tu�on of capital (the
bulldozer) for labor. Society benefits because more work is completed with fewer total resources. Also, the
remaining bulldozer operator is paid substan�ally more than wheelbarrow operators. The jobs created to
engineer, manufacture, and sell the bulldozer are also likely to carry higher salaries than the wheelbarrow
operator. Higher wages must offset the savings generated from increasing produc�vity. As a result, there are
displaced workers who become available to create new products that grow the economy.

Productivity and Leisure

Produc�vity increases do not always result in greater output. As produc�vity in the United States increases,
some of the benefits include more leisure �me for workers. In the United States, the “nominal” workweek has
been 40 hours for several decades. In the first half of the 20th century, however, the workweek was much
longer—50 to 60 hours and a six-day workweek was not uncommon. During that �me period, �me off for
holidays and vaca�on was substan�ally less than what is considered normal today. Drama�c increases in
produc�vity allowed the U.S. economy to experience an expanding living standard and a contrac�ng workweek.

Today, employees in many countries in Europe have shorter workweeks and more generous vaca�ons than
employees in the United States. However, such choices have implica�ons for the people in these European
countries. If they want to work fewer hours, there is less for them to consume unless they can find ways to
increase produc�vity.

Importance of HR
Management
From Title:

Human Resources Function
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Health care produc�vity can be increased and quality enhanced when
hospitals specialize in different areas such as pediatrics or neurology. In
this way, they avoid duplica�ng expensive equipment, highly trained
staff, and administra�ve overhead.

Ryan McVay/Digital Visions/Thinkstock

3.4 Enhancing Productivity

Produc�vity increases sound ideal, but how can a company achieve them? Some managers view produc�vity
improvements narrowly and a�ribute improvements to a�en�on to the details of the produc�on process. For
example, changing the height of a desk so that an administra�ve assistant has easier access to the keyboard may
increase produc�vity. This adjustment can be an important contribu�on in elimina�ng physical stress and
reducing fa�gue, which could lead to greater output. This narrow view, however, is far from the whole picture.
Produc�vity is affected by:

Design of opera�ons including the number, size, loca�on, and capacity of the facili�es providing the service or
producing the good.
Equipment and methods used.
Detailed analysis of the individual jobs and ac�vi�es.

Productivity and the Design of Operations

The first issue is not as simple as saying that fewer, bigger facili�es will result in higher produc�vity and lower
costs, although that tends to be true and is what conven�onal economic theory conveys. This is generally
referred to as the economies of scale argument. Effec�vely designing opera�ons matches the capabili�es of the
facili�es to the needs of the customer. For example, health care produc�vity could be increased and quality
could be enhanced if hospitals specialize. Currently, many hospitals are merging or forming alliances. These
unions permit one hospital to specialize in some areas, such as pediatrics and obstetrics, while another hospital
specializes in other areas, such as neurology and psychiatry. In this way, each hospital avoids duplica�ng the cost
of expensive equipment, highly trained staff, and administra�ve overhead.

Real World Scenarios: Shouldice Hospital

Shouldice Hospital in Ontario has specialized in the repair of hernias since 1945, when Dr. Shouldice experienced a large number of hernia cases and a shortage of doctors and
medical facili�es. Specializa�on allowed the hospital and the doctors to find innova�ve ways to perform hernia repair surgery. The hospital reduced resource requirements and
increased produc�vity.

The objec�ve of the surgery is successful repair of the hernia(s) with as li�le discomfort as possible for the pa�ents so they can return to their normal life quickly. Pa�ents
frequently return to work in a few days; the average total �me off is only eight days.

The hospital’s success has been the benchmark for the medical profession interna�onally. The hospital has repaired more than 270,000 hernias with a success rate greater than
99%. Shouldice pa�ents can walk out of the opera�ng room, and their postopera�ve recovery is rapid. By the following morning, most pa�ents can par�cipate in a gentle
exercise program. The process, from surgery to recovery, is fast and effec�ve for both the hospital and the pa�ent.

Productivity and Equipment and Methods

The equipment and methods used to provide a service or produce a good can also have a substan�al impact upon produc�vity. Providing the company’s sales force with so�ware to
iden�fy prospects, determine their needs, and track sales makes it a more produc�ve work force, just as providing a factory worker with a newer and faster piece of produc�on
equipment. Providing faculty with so�ware to manage instruc�onal materials improves produc�vity as well; the tool should fit the job. For example, if an employee is asked to move
1 million gallons of water from one point in a facility to another, an electric pump and a hose is much be�er than a bucket. In turn, neither the bucket nor the pump would be
appropriate for moving small amounts of water to make coffee at the corner restaurant.

Real World Scenarios: Segway Personal Transporter

The Segway PT is an example of a technology that could revolu�onize work and dras�cally increase produc�vity. It is the first self-balancing, electric-powered transporter and is
designed to enhance the produc�vity of people by increasing the distance they can travel and the amount of goods they can carry. Segway uses electronic gyroscopes for
balance and microprocessors to measure the rider’s intent (leaning forward or leaning backward) for forward and backward mo�on. Dean Kamen and a group of talented
engineers and designers inspired this innova�on.

More than 1,200 police departments and public safety organiza�ons around the world use the Segway PT. The Segway PT allows these officers to create innova�ve community
programs, connect be�er with the residences they serve, and patrol more area in less �me. The Segway improves visibility as the officer can see surroundings be�er and
people can see the officer be�er, and it is flexible enough to be used inside buildings, such as airport terminals, as well as outside. It also has zero emissions.

Segway PTs are currently used to patrol military bases, allowing soldiers to inspect buildings on the post in less �me. The Segway PT can cover a variety of terrain, is versa�le
and maneuverable, and provides effec�ve crowd control.

Paramedics with the Chicago Fire Department use the Segway PT to enhance response �me. They provide shorter response �me for medical emergencies, can carry enough
equipment to provide lifesaving treatment before an ambulance arrives, and can access upper floors in high-rise buildings.

When comple�ng tasks, most people will use only their dominant hand. With a small amount of
training, a person can be taught to use both hands, enabling the task to be completed in about 70%
of the �me it takes using only one hand.

Roger Wright/The Image Bank/Ge�y Images

Segway PT also enables enhanced security in shopping malls in Sonae Sierra, Portugal. The patrols are done more quickly and effec�vely on a Segway PT than on foot, thereby
increasing the produc�vity of security personnel who patrol the company’s large shopping centers. In turn, shoppers and storeowners no�ce the security personnel, and feel
safer and more secure.

Productivity and Detailed Analysis of Work

Detailed analyses of individual jobs and ac�vi�es focus on making people more
produc�ve. Analysis may suggest a be�er way to complete more work. For example,
most home dishwashers have a removable silverware rack so the rack can be moved to
a convenient loca�on and the silverware can be easily removed. When given a task such
as this, most people will use only their dominant hand. With a small amount of training,
a person can be taught to use both hands. This enables the task to be completed in
approximately 70% of the �me it would take for a person using only one hand. When
ideas like this are applied to the billions of repe��ve tasks performed each day in
service and manufacturing firms throughout the world, produc�vity improvements and
cost reduc�ons could be enormous.

Summary of Methods

Innova�on and automa�on change the way work is done and provide important
methods to increase produc�vity. When organiza�ons increase the number of customers
served, there are opportuni�es to achieve lower cost and higher produc�vity through
economies of scale. Addi�onally, as organiza�ons gain experience by serving more
customers, they learn how to do the work be�er. This is o�en called con�nuous
improvement. There are also opportuni�es to improve how work is done through
redesigning business processes, improving how individual jobs are designed, and
enhancing a firm’s human resources. The following discussion focuses on several
approaches that can be used separately or in combina�on to increase produc�vity

Technology Innova�on—Brings new ideas, methods, or equipment to the process of
making a product. In banking, computers and informa�on technology have changed
the process for reconciling checking account transac�ons and have greatly increased produc�vity. Using technology in distribu�on centers and warehouses has enabled retailers to
increase produc�vity and reduce costs.
Automa�on—Subs�tutes capital for labor. Automa�on is different from technological innova�on because exis�ng automa�on is merely applied to a new situa�on. Using
conveyors to move parts between points in a packaging opera�on can increase produc�vity. Conveyor technology has been available for decades, but it is constantly finding new
applica�ons.
Economies of Scale—Allow firms to increase produc�vity by making opera�ons larger. Both service and manufacturing opera�ons take advantage of this tac�c to improve
produc�vity and lower costs. Consolida�on in the banking industry is being driven by the need to spread fixed costs, such as informa�on systems, credit card processing, bank
infrastructure, and management, over a broader range of opera�ons. This consolida�on is also occurring in accoun�ng firms, brokerage houses, and credit card companies.
Learning and Experience—Enable firms to achieve produc�vity improvements because the workforce gains knowledge about the product and work processes. From this
knowledge, workers find be�er ways to organize work. This concept was first applied in the aircra� industry so firms could es�mate the cost of future orders. The produc�vity
improvements and the cost reduc�ons were substan�al.
Business Process Redesign—Focuses on the understanding and redesign of processes that already exist within and between companies. For example, how can a company
streamline its product development process to create more and be�er product ideas in less �me than the exis�ng process?
Job Design and Work Measurement—Enable firms to examine work at a detailed level so that it can be inves�gated and improved. This examina�on o�en occurs at the level of the
individual worker or the interface between a worker and a machine. The approach tends to examine individual movement to improve produc�vity. For example, the kitchen setup
in a fast-food restaurant is laid out so the cook can make items on the menu with ease. This is the same overall objec�ve used in a manufacturing firm to organize the assembly
area to put together a speaker or a keyboard.
Human Resources—Enable produc�vity improvements without inves�ng in facili�es and equipment, buying high-quality materials, redesigning jobs and processes, or spending for
employee training. In many organiza�ons, the rate of produc�on is labor constrained. If labor is mo�vated to do more work, produc�vity can increase without addi�onal
investments or cost increases. For example, when faculty members sign addi�onal students into their classes, they have increased produc�vity with no addi�onal costs. When
sales managers add another sales territory to their workload, their produc�vity increases without increases in costs. Mo�va�on is a powerful tool that can be used to increase
produc�vity in any job that is labor intensive.

Chapter Summary

Produc�vity is the ra�o of the outputs achieved from an ac�vity to the inputs consumed to make those outputs.
Produc�vity is a key to increasing the standard of living. Produc�vity is more important than money when driving economic growth.
During the 20th century, the nature of work shi�ed from primarily manual to primarily intellectual. As a result, the produc�vity of managers, designers, and planners is as
important as or more important than the produc�vity of blue-collar workers.
Calcula�ng produc�vity involves: (1) assessing the outputs either by coun�ng the number of outputs, or by determining the economic value of the outputs; and (2) assessing the
inputs by determining their value. Single-factor produc�vity is used when only one input factor changes. Mul�ple-factor produc�vity is used when more than one input factor
changes.
Primary inputs are labor (managers, workers, and externally purchased services), capital (land, facili�es, and equipment), and materials, including energy.
In many cases, when firms seek produc�vity improvement, trade-offs between the inputs occur. Managers may be trading capital for labor, capital for energy, or material for labor
in order to get an overall increase in produc�vity.
Wage rates and produc�vity are posi�vely correlated. Organiza�ons with high produc�vity can pay higher wage rates.
Produc�vity improvements have two impacts on jobs. First, they tend to shi� jobs from hands-on labor to behind-the-scenes labor. The hands-on jobs usually require manual
work, and the behind-the-scenes jobs tend to require intellectual work. Second, they free labor to seek opportuni�es to create new services and goods.
Technology innova�on, automa�on, economies of scale, business process redesign, learning and experience, job design and work measurement, and improvements in human
resources are all methods of enhancing produc�vity.

Case Studies

All-Right Manufacturing Company
Nancy Nelligan just received the following memo from her boss, the president of All-Right Manufacturing Company.

TO: Nancy Nelligan, V.P., Finance
FROM: Leo Everi�, President
RE: Produc�vity Improvement Program

I am sure you are aware of the importance of produc�vity within manufacturing organiza�ons, and All-Right is no excep�on. However, I am not sure that our
company’s produc�vity is as good as it could be. As such, I would like you to serve as coordinator of a produc�vity improvement program. As our newest execu�ve, I
think this would be a great opportunity for you to become involved and have a substan�al impact upon this organiza�on.

I have already sent memos to the other vice presidents and division managers direc�ng them to cooperate with you on this ac�vity. Please report back to me in two
months indica�ng the ac�ons you have taken and the results you have achieved.

Nancy just started working for All-Right one month ago. She had previously held a posi�on in the corporate finance department of a Fortune 500 company. In that posi�on, Nancy
was extensively involved in securing capital for expansion and acquisi�on.

In her previous posi�on, Nancy had not been directly involved in any produc�vity improvement ac�vi�es, although she was aware of the produc�vity reports produced by her
previous employer and knew how the data were collected and analyzed. To the best of her knowledge, All-Right does not collect any data or perform any calcula�ons to determine
produc�vity. The president’s vague feeling that produc�vity could be be�er supported Nancy’s belief that All-Right was not calcula�ng produc�vity.

Since joining All-Right, Nancy has met most of the other vice presidents and managers. Some of them she knows fairly well, although Nancy is s�ll regarded as the “new kid on the
block.” She has learned from discussions with the vice president of opera�ons that the company had made an abor�ve a�empt at implemen�ng ISO-9000 a few years ago, an
a�empt which had ini�ally been mandated by a memo from the president. She wondered whether the produc�vity improvement program would end the same way.

1. Was the president’s approach to produc�vity improvement the correct way to implement such a program?
2. Was the �me frame the president gave reasonable for achieving meaningful results?
3. Pretend you are Nancy and dra� a memo to the president sugges�ng the course of ac�on that you think should be taken to achieve useful results. In the memo, include a summary

of the types of data needed to calculate produc�vity.

Wholesome House Restaurants

Wholesome House Restaurants operates a chain of health-food restaurants located in suburban shopping malls. The company has tried to capitalize on increased public awareness
about healthy ea�ng by offering low-calorie, low-fat cuisine to its customers. Instead of the usual fare available at fast-food restaurants, Wholesome House offers its customers
dishes that include fish and chicken cooked without fat. In addi�on, the company’s restaurants provide fresh fruits and vegetables and whole-grain breads. Since it opened, the
company has been doing quite well. However, like most start-up companies, Wholesome House is concerned about its future. The restaurant business has become increasingly
compe��ve, and many chains that started out well have gone bankrupt.

Wholesome House’s management is concerned about rising opera�ng costs and the company’s produc�vity. Presently, its restaurant opera�ons are labor intensive because of the
cuisine it offers. Using only fresh fruits and vegetables requires extensive �me and effort for food prepara�on. In addi�on, the sandwiches and most other meals on the menu are
assembled by hand. Wholesome House has not adopted any of the assembly-line techniques for producing mass quan��es of food that fast-food restaurant chains such as
McDonald’s and Taco Bell use. On the other hand, Wholesome House is able to charge more for its products because of its market niche and because most of the restaurant’s
customers have average or above-average incomes.

Wholesome House has collected the following data concerning its opera�ons.

Two Years Ago Last Year
Net sales and opera�ng revenue $473,286,000 $631,987,000
Labor costs 120,470,000 203,405,000

Material and supplies 150,032,000 206,783,000
Services 35,991,000 45,276,000
Capital 127,486,000 250,478,000

1. Based on the informa�on provided, comment on the company’s produc�vity.
2. Can you iden�fy inputs in which produc�vity has not followed the company’s overall change in produc�vity?
3. Which areas do you think need a�en�on for future produc�vity improvements?
4. Can you suggest how the company might improve produc�vity?

Discussion Ques�ons

Click on each ques�on to reveal the answer.

1. Define produc�vity and describe why it is important.
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Produc�vity is the ra�o of the outputs achieved from an ac�vity to the inputs consumed to make those outputs. Produc�vity = Output/Input. For example, the produc�vity of a
machine that makes compact discs could be determined by dividing the number of CDs produced divided by the hours the machine worked.

Organiza�ons should strive to increase their produc�vity because it keeps prices low and makes the organiza�on more compe��ve in world markets. Employees benefit because
their wage increases are non-infla�onary, which means they can buy more with the extra money they earn.

2. Describe why produc�vity is more important than money.
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Produc�vity is more important than money, because as produc�vity increases, more products are available for consump�on. This allows the real standard of living to increase.
Money, or increases in the amount of money available without a corresponding increase in available goods and services leads to high prices for the same amount of goods and
services. Real consump�on does not increase, but prices do.

3. Explain how the nature of work has changed, and describe how that affects produc�vity.
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Over the past 100 years, the U.S. economy has shi�ed from primarily manual labor to primarily intellectual labor. Early in the 20th century, managers focused on the
produc�vity of the blue-collar workforce. Today, that part of the workforce is s�ll declining as organiza�ons focus on methods to enhance their produc�vity. Today, most of the
workforce is clerical, staff, and managerial (white-collar). To further increase produc�vity, it is essen�al that organiza�ons focus on the produc�vity of this large and growing
segment of the economy.

4. What is the difference between single-factor and mul�ple-factor produc�vity?
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Single factor produc�vity has only one input factor. Labor produc�vity is a single factor produc�vity measure. Mul�ple factor produc�vity includes more than one input factor;
such as labor, materials, and capital. In most cases, more than one input factor may change. As companies invest in equipment, their capital costs increase but labor and/or
material costs may decline. When this happens, inputs are usually transformed into dollar costs. In this way, labor, material, and capital can be added to form the denominator
of the produc�vity ra�o.

5. Describe labor produc�vity. What are its components?
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Labor produc�vity is a single factor produc�vity measure that assesses the output, o�en units produced, compared to some measure of labor inputs, o�en labor hours. Labor
includes workers on the shop floor, managers, staff, clerical, and externally purchased services. It is important to realize that direct labor accounts for the people who work in
producing the goods or services, and indirect labor accounts for the people that supports produc�on such as quality control, supervision, and maintenance.

6. Describe capital produc�vity. What are its components?
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Capital produc�vity is a single factor produc�vity measure that assesses the output, o�en units produced, compared to some measure of capital inputs, o�en machine hours or
capital dollars. Capital includes investments in land, facili�es, and equipment.

7. Describe material produc�vity. What are its components?
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Material produc�vity is a single factor produc�vity measure that assesses the output, o�en units produced, compared to some measure of material inputs, o�en materials
costs. Materials include items used to make the product as well as energy.

8. What are the important trade-offs involving the inputs to produc�vity?
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For centuries, businesses have made a series of trade-offs to improve overall produc�vity. The most significant of these is trading capital for labor. This trade-off has focused on
automa�ng ac�vi�es previously performed by people. In both service and manufacturing opera�ons, this shi�s effort from opera�ons to the development of equipment and
so�ware that support opera�ons. This has led to a fundamental change in the nature of work. Organiza�ons have also made significant investments in capital equipment and
facili�es to save material and energy costs. Finally, organiza�ons trade material costs for increases in labor produc�vity. Some�mes organiza�ons are willing to increase the cost
of incoming materials if they can achieve higher output rates from the labor force.

9. How are wage rate and produc�vity related?
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Wages rates and produc�vity are posi�vely correlated. This implies that as a worker’s produc�vity increases, the organiza�on can afford to pay the worker more because the
worker is genera�ng more output. This allows the pay increase to be non-infla�onary.

10. What are the impacts of produc�vity upon the workforce?
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The largest impact of produc�vity improvements on the workforce is to shi� the work from manual to intellectual work. Building roads has shi�ed from many workers using
shovels to fewer workers using bulldozers. These jobs are replaced in part with white-collar jobs that design equipment.

11. How does quality impact produc�vity?
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If produc�vity gains are to be meaningful, the quality level of the output must be the same or increase. Producing more output of lower quality means that the
value/usefulness of each item produced is lower. This is not the proper way to increase produc�vity.

12. Describe five ways that produc�vity can be enhanced.
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There are a variety of ways that produc�vity can be enhanced. Technology innova�on brings new ideas, methods, and equipment to the process of making a product.
Automa�on allows firms to subs�tute capital for labor. Economies of scale allow firms to increase produc�vity by making opera�ons larger. In this way, more output is achieved
from the same investment in fixed costs. Business process redesign focuses on understanding current processes and changing them so they produce more output faster and
with fewer resources (people and equipment). Learning and experience enables firms and people to work smarter. In quality management this is o�en called con�nuous
improvement. Carefully examining jobs at the detailed levels with job design and work measurement allows firms to eliminate wasted mo�on in assembly and clerical jobs.
Human resources can enable produc�vity improvements without inves�ng in facili�es and equipment, buying high-quality materials, redesigning jobs and processes, or even
spending for employee training. Because the rate of produc�on is labor constrained, labor could be mo�vated to do more work. Mo�va�on allows the workforce to do more
even when other elements such as capital investment are unchanged. They want to do more for reasons of self-sa�sfac�on or helping the organiza�on do be�er. Economies of
scale allow firms to increase produc�vity by making opera�ons larger, which allows firms to produce more at a lower cost per unit. Job design and work measurement enable
firms to examine work at a detailed level so that it can be inves�gated and improved.

Problems

1. A junior accountant working for an accoun�ng firm earned $40,000 last year in wages and benefits. The work this person performed was billed to clients at $200,000 for the year.
What is the junior accountant’s labor produc�vity?

2. A certain machine makes various-sized screws that have a market value of $50,000 per year. Materials used to make those screws cost $5,000 per year. The annual cost of owning
and opera�ng the screw-making machine totals $25,000. What is the produc�vity of that machine? What is the produc�vity of the materials? What is the overall produc�vity?

3. A company that manufactures radios had sales of $3,750,000 last year. Total labor costs for the year were $1,500,000, capital costs were $1,275,000, and materials costs were
$750,000. What was the company’s produc�vity based on this informa�on?

4. The New City Hospital has recorded its pa�ent billings and labor costs during the last two years. How has the hospital’s labor produc�vity changed?

Two Years Ago Last Year
Total billings $10,230,000 $12,450,000
Labor costs 4,375,000 5,200,000

5. The Electro-Lite Electronics Company has recently automated part of its produc�on process. The labor, capital costs, and value added by this process for the last two years are shown
below. Compare the produc�vity of labor and capital for these years.

Two Years Ago Last Year
Value added $1,365,000 $1,425,000
Labor costs 870,000 375,000
Capital costs 160,000 924,000

6. The company men�oned in Problem 3 is considering subs�tu�ng capital for labor by purchasing automated equipment to perform an opera�on previously done manually. This new
equipment will cost $200,000 per year to own and operate. What must the labor savings be in order to produce an increase in overall produc�vity?

7. Michael’s Manufacturing wants to determine the overall produc�vity of its opera�ons. The company has data for one month last year and good current data. The sales price of the
product is $40.00, the wage rate (including benefits) is $18.00 per hour, the resin cost is $.60 per pound, and the energy cost per BTU is $.50. These costs can be applied to both
years. What was the produc�vity then and what is it now? At what rate is produc�vity changing?

Last Year This Year
Produc�on (units) 2,000 2,150
Labor hours 600 550
Resin (pounds) 100 90
Capital (dollars) 20,000 23,000
Energy (BTUs) 6,000 5,700

8. Suppose the company in Problem 7 wants to increase produc�vity by 5%. How much labor savings must occur to achieve this?
9. Witkowski Tax Services processes federal income tax forms. This year in April, the company’s busiest month, the company prepared 4,500 income tax returns with an average

revenue of $60 each. In April last year, they completed 3,750 returns with an average revenue of $55 each. Below are the average costs, adjusted for infla�on.

Last Year This Year
Labor hours $3,000 $3,200
Management costs 25,000 28,000
Computer technology 15,000 20,000
Rent for office 2,000 2,200
Office supplies 3,000 3,600

a. What is the produc�vity this year and last year for each factor and overall?
b. How has the produc�vity changed for each factor and overall?
c. What can be done to further improve produc�vity?

Click here to see solu�ons to the odd-numbered problems.
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Key Terms

Click on each key term to see the defini�on.

crea�ve destruc�on
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When new ideas or technologies replace exis�ng products, such as when sales and jobs decline in exis�ng companies and grow quickly in the companies with new ideas.

direct labor
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People who make a product or provide services; the hands-on workforce.

economies of scale
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The ability to produce more goods at a lower cost by be�er u�lizing the same fixed costs. There is a most efficient size for a facility and there is a most efficient size for a firm;
building sufficient sales and produc�on volume is necessary to maximize the fixed costs of an organiza�on.

indirect labor
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Labor that supports the produc�on of a good or service such as quality, supervision, and maintenance.

produc�vity
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Output from an ac�vity divided by total input to the ac�vity.

Andy So�riou/Photodisc/Thinkstock

Quality Management

Learning Objec�ves
A�er comple�ng this chapter, you should be able to:

Define quality from both an internal and an external orienta�on.
List the dimensions of service quality and quality for manufacturing.
Understand how to gather customer expecta�ons to ensure that the firm has captured the voice of the
customer.
Summarize the philosophies of W. Edwards Deming, Joseph Juran, Philip Crosby, and Genichi Taguchi.
Explain how quality is built into a good or service.
List and explain the components of total quality management (TQM).
Describe the purpose and use of quality func�on deployment.

From electronics and automobiles to clothing and produce, quality control is important to ensure that
only the best items reach the consumer.

©Adrian Burke/The Image Bank/Ge�y Images

4.1 Introduction to Quality Management

Price and quality are two cri�cal dimensions when deciding to purchase a good or service because these are key elements in the value proposi�on. That is, what does the buyer
give up versus what does the buyer receive? When value proposi�on is high the benefits to the buyer substan�ally exceed the costs. Quality is a cri�cal element in the purchasing
decision because quality involves cri�cal factors such as the safety of an airplane flight, the effec�veness of a surgical procedure, or the performance of an automobile. Quality is
mul�faceted because the quality of a service or good is judged on several factors. For example, the quality of an airplane flight not only includes the safety factor; it also includes
depar�ng and arriving on �me, the comfort of the surroundings, and baggage handling. For an automobile, quality is not only performance; it also includes safety and specific
features such as video entertainment systems and global posi�oning devices.

While quality is essen�al for organiza�onal success, for many companies it is
difficult to use quality to differen�ate their products from their compe�tors’
products for two reasons. First, customers may not consider products for purchase
that do not have high quality. Second, compe�tors have recognized the value that
customers place on quality, and are striving for high quality by con�nuously
monitoring customer expecta�ons, inves�ga�ng and implemen�ng new
technologies that enhance quality, and quickly imita�ng compe�tors’ improvements
in features and performance. To use an analogy from poker, high quality has
become the ante, or minimum bet, to play at the table. Despite these challenges,
companies such as Apple, FedEx, and Google have been able to develop and
maintain very strong reputa�ons for high quality while some of their compe�tors
have not. RIM has fallen behind Apple; FedEx has taken package delivery from the
U.S. Postal Service; and Google is well ahead of Yahoo!. Simply put, companies that
have a strong reputa�on for quality have been able to integrate quality throughout
the organiza�on, adop�ng an approach that infuses quality into company decision
making. This approach has a variety of names; the one used here is quality
management. The purpose of this chapter is to explain the nature of quality and
how an emphasis on quality can be spread throughout the organiza�on.

Perspectives on Quality

When asked, customers can ar�culate some of the criteria that determine whether a product has high quality. For example, a hotel room should be clean and comfortable, and the
guest should feel safe. A washing machine should get the clothes clean. However, defining quality is not always that simple. The factors included in quality assessment of a hotel
room depends, at least in part, on its use. For a resort hotel, the pool, restaurants, beaches, and workout facili�es are part of the quality decision. For a person who is stopping for
one night at a hotel while driving on the interstate, the ameni�es included in the resort hotel do not ma�er. Traveling guests only care whether or not the room is clean,
comfortable, and convenient. In the earlier example of the washing machine, one customer may want a large capacity washer that minimizes water use, while another may want a
small, stackable washer-drier unit that is quiet. As a result, it is not possible to fully define quality, because quality is determined by the customer and how the customer will use a
product. As a result, the defini�on of quality has both an internal orienta�on—quality from the company’s perspec�ve, and an external orienta�on—quality from the customer’s
perspec�ve.

Internally Oriented Defini�ons of Quality

Defini�ons of quality that have an internal orienta�on directly measure characteris�cs of the product, such as the number of packages delivered on �me or the thickness of an
engine part. Two examples of internally oriented defini�ons of quality are:

1. Quality is the degree to which a specific product conforms to its design characteris�cs or specifica�ons. Surgeons must follow the proper procedure as the surgical team closes the
incision, thereby ensuring that no sponges or other items are le� in the pa�ent. Robots must place the spot welds in the proper loca�on on the body of the automobile in order to
maximize its strength.

2. Quality can be measured as the amount of a specific, desired a�ribute, such as window �nt or cheese on a pizza.

One shortcoming of internally oriented defini�ons is the company’s assump�on that the product specifica�ons match what the customer wants—an assump�on that may not be
correct.

Externally Oriented Defini�ons of Quality

Quality with an external orienta�on focuses on the customer, and typically includes a discussion of “fitness for use.” In other words, quality cannot be effec�vely measured in the
abstract. For example, a resort hotel with the finest food, cleanest rooms, best beaches, and friendliest staff does not meet the needs of the cross-country traveler who will spend
only a few hours in the room. When quality is measured by customer wants, the resort hotel does not have the right fit for the cross-country traveler, so it is not the right quality.
Quality is the capacity to sa�sfy customers’ needs.

In some cases, customers may not know that they have a need for a product because customers may not imagine what is possible. A few years ago, when Ford Motor Company
introduced the SYNC system to manage mobile phone, music, and other digital technology in its vehicles, it was done to sa�sfy a desire from car owners, but one that was not
clearly ar�culated. SYNC set new expecta�ons for communica�on and entertainment systems in vehicles.

Although it may appear that externally oriented defini�ons of quality are s�ll somewhat vague, companies known for high-quality goods and services specifically define the
parameters of quality. Quality means consistently mee�ng or exceeding the customer’s needs and expecta�ons. Quality begins with an external process that iden�fies the
customers’ needs and expecta�ons. Then, those needs and expecta�ons are translated into an internal process to guarantee they are met or exceeded. One way of formalizing that
process is called quality func�on deployment, which is discussed later in this chapter. Quality func�on deployment takes customer expecta�ons and transforms them into specific
ac�ons designed to meet those expecta�ons.

Consumers have different expecta�ons when staying in a motel or
when staying in a 5-star resort. The level of quality will be evaluated
differently for each of these locales because quality is based upon
mee�ng or exceeding the customer’s needs and expecta�ons.

Comstock/Thinkstock

Understanding Customer Expecta�ons

It would seem that a company that wants to achieve excellent external quality would simply ask its customers
what they want and provide these things to them. Asking customers what they want is useful and provides
important informa�on, however, it is not sufficient for the following reasons. First, customers o�en have unspoken
desires. If you survey customers and ask open-ended ques�ons such as what they want on an airplane flight, they
are much more likely to say on-�me arrivals and departures, faster check-in �mes, and be�er and faster security
screening by TSA. It is not likely they would say they do not want to crash. Customers assume that the airline
understands safe transporta�on as a basic need, so it is unspoken despite that it is the most important need of the
customer. Referring to the poker analogy used earlier, safety is part of the ante that every airline must have to
remain in the game. Second, customers operate in the environment of what is known, and o�en do not think
about what is possible. If a company opera�ng 200 years ago asked its customer how they might like to
communicate in the future, it is unlikely that the customers would have described voice over wire telephones. If
customers were asked 50 years ago about the future of person-to-person communica�on, it is unlikely that
customers would have men�oned wireless communica�on devices, the Internet, and high-speed data services.
Twenty years ago, few customers would have thought to ask for the ability to download video to their wireless
device. Mobile phones were large, clumsy devices that could only make phone calls and were unreliable.
Organiza�ons must go beyond asking customers what they want and understand what their customers value, such
as how they do their work and what makes customers happy. If companies understand these needs, firms are able
to see how new ideas and new technology may help customers do more work or enjoy a be�er lifestyle. Firms
should ask the following ques�ons when they want to understand customers’ expecta�ons:

1. Ask customers what they want.
2. Ask customers specific ques�ons about a�ributes of the product that are not men�oned by the customer:

Probing the customers with specific ques�ons about their needs may lead to unspoken expecta�ons.
3. Ask customers about their opera�ons or how they will use the product: Knowing how the customer func�ons and

how they use the product can lead to a be�er understanding of what and how new ideas and technologies could
help them. The success of Facebook, Twi�er, and Apple are based on crea�ng services and goods that customers
would use despite the customer not understanding the product and its applica�on prior to product launch.

4. Ask customers how their customers use the products: Knowing the needs of the customers’ customers can help
the organiza�on be�er understand the impact of its product on the value-crea�on chain and, therefore, meet the
needs of the final customer in this chain.

Motorola’s Six Sigma System: A CEO Goes Back to
the Classroom

4.2 Dimensions of Quality

Understanding the dimensions of quality is an important step in transforming customers’ needs and
expecta�ons into internal processes. The differences between goods-based and service-based organiza�ons have
some significant impacts on the way quality is determined and measured. For example, because services are
intangible, the quality of services will be based much more on human percep�on. As a result, the dimensions of
service quality are somewhat different than the characteris�cs of quality for manufactured products.

Service Quality

The following five dimensions of quality are o�en used by customers to judge service quality. Understanding
these dimensions helps firms to define quality and determine what steps are needed to improve quality.

1. Reliability—ability to perform the promised service dependably and accurately.
2. Responsiveness—willingness to help customers and provide prompt service.
3. Assurance—knowledge and courtesy of employees and their ability to convey trust and confidence.
4. Empathy—provision of caring, individualized a�en�on to customers.
5. Tangibles—appearance of physical facili�es, equipment, personnel, and communica�on materials, including

access and effec�veness of Internet-based informa�on.

Some examples of these five dimensions are shown in Table 4.1. The reliability and responsiveness of a service
are at the core of how customers evaluate service quality. This is because customers expect the service to be
performed well and to be complete at the �me demanded by the customer. Most services rely on people to
design the opera�on systems and to do the work. A hairdresser’s reliability and responsiveness clearly impacts
the client served in a beauty shop. Likewise, it is people who determine how the system of service providers for mobile devices works, including the likelihood of dropped calls,
clarity of voice, and speed of data downloads. If a company fails to provide reliability and responsiveness, it is more likely to lose a customer than if other factors or services fail. In
other words, it does not ma�er how nice the furniture in your hotel room looks if the staff is rude.

Table 4.1: Examples of service quality dimensions

Reliability Did the express package arrive on �me?
Was my DVR repaired correctly?

Responsiveness Did the florist deliver the flowers as ordered?
Does the hotel send up an extra pillow as requested?
Does the credit card company respond quickly when I have a ques�on about my statement?
When an employee says he will call me right back, does he?

Assurance Can the salesperson answer my ques�ons about the computer on sale?
Does the car mechanic appear to know about my car?
Does my physician politely and knowledgeably answer my ques�ons?

Empathy Does someone in the restaurant recognize me as a regular customer?
Is the salesperson willing to spend the �me to understand my par�cular needs?
Does my advisor work with me to develop a program of courses for my specific career goals?

Tangibles Is the hotel room furniture clean and modern?
Does the auto repair shop appear neat and �dy?
Is my bank statement easy to understand?

Real World Scenarios: Southwest Airlines

Southwest Airlines combines reliability with subjec�ve quality dimensions for a winning combina�on in the airline industry. The dire situa�on for many airlines has been
demonstrated by bankruptcy filings, companies closing, mergers, and record losses. While legacy companies such as United, American, and Delta have been losing money,
Southwest has maintained profitability and also has remained at the top of customer sa�sfac�on rankings. Southwest does this by maintaining a clear focus on the customer
and mee�ng the customers’ needs. Customers want low fares and reliable, high-value service, and Southwest provides fares that are consistently below those of compe�tors’.
In addi�on, fees are not charged for luggage transport. Southwest o�en resists a�empts by its compe�tors to raise prices because it is a low-cost provider. It keeps costs low
primarily because its employees are mo�vated, energe�c, and are stakeholders in the company. In addi�on, Southwest empowers its employees to do what they can to solve
any customer problems that arise.

Quality of Goods

In examining the dimensions of quality for goods, it is important to recall that a good is tangible, and therefore, direct contact between the customer and the employees who make
the good does not o�en occur. As a result, the factors that comprise the quality of goods are quite different from the factors that comprise quality service. People at all levels of the

Motorola’s Six
Sigma System
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manufacturing organiza�on are s�ll cri�cal when determining quality because they design and build the product. The impact of these employees on the customer, therefore, is
transmi�ed through the customers’ use of the product. The following list describes the factors that determine quality for goods. As can be expected, these focus on specific
a�ributes of the product and do not include human factors, with the excep�on of serviceability:

Performance—primary opera�ng characteris�cs of a product.
Features—secondary characteris�cs that supplement the product’s basic func�oning.
Reliability—length of �me a product will func�on before it fails, or the probability it will func�on for a stated period of �me.
Conformance—degree to which a product’s design and opera�ng characteris�cs match pre-established standards.
Durability—ability of a product to func�on when subjected to hard and frequent use.
Serviceability—speed, courtesy, and competence of repair.
Aesthe�cs—how a product looks, feels, sounds, tastes, or smells.
Perceived Quality—image, adver�sing, or brand name of a product.

For the quality of goods, performance and features are important dimensions of the product. These are o�en key elements in the purchase decision whether the product is a mobile
device, a vehicle, or an appliance. Reliability is common to both services and goods, but as expected with a good, it is linked directly to how the product performs. Conformance is a
posi�ve dimension in some applica�ons, but may be nega�ve in other applica�ons. When purchasing paint that is to match an exis�ng color, a replacement door, or new brakes for
a car, conformance to specifica�ons is vital. Conversely, non-conformance may be desirable for other items such as clothing or furniture. Durability is another trait of goods that can
be measured and assessed, and is o�en more important for goods that provide func�on rather than form, such as markers for white boards, hand mixers, and can openers. Most
people want these products at low cost and want them to last a long �me. The last three characteris�cs are more subjec�ve in nature. With serviceability, the customer o�en
interacts directly with the employee who is doing the work, so this factor has similar characteris�cs to service quality. Aesthe�cs refers to how a product looks, which is subject to
individual tastes, and is o�en difficult to assess. Perceived quality is similar to aesthe�cs because customers may have different expecta�ons.

Costs of Quality

Tradi�onally, companies thought of quality costs only as those that were necessary to produce higher quality. In fact, as many companies have discovered, higher quality can mean
reduced costs because of savings from reduced scrap, rework, and customer warranty claims. Whether performing a medical test or assembling a mobile device, correctly
comple�ng a job the first �me improves quality and lowers costs. Iden�fying and elimina�ng steps in a process that do not add value for a customer has the poten�al to reduce
selling price. While it may not be true in every instance, there is truth in the statement that “quality is free.” Consider the following three categories of the costs of quality:

1. Failure costs—can be internal to the organiza�on or external involving the customer.
2. Appraisal costs—investment in measuring quality and assessing customer sa�sfac�on.
3. Preven�on costs—put a stop to the quality problem.

Failure Costs

Failure costs are incurred whenever any product or component of a product fails to meet requirements. Such costs can be divided into two categories: internal or external. Internal
failure costs are those associated with defects found before the product reaches the customer. Examples of this include the costs of correc�ng errors in a customer’s bank account,
discarding food that was improperly cooked, scrapping defec�ve parts, or reworking products that contain defects. In some cases internal failures can be dangerous to employees,
such as when a building collapses while under construc�on because of defec�ve materials.

External failure costs are incurred a�er a product has reached the customer. This can include the cost of warranty repair work, handling complaints, or replacing products. The costs
of lost goodwill and possible liability if someone is injured or killed because of an external failure can be considerable. The costs of external failure can be especially devasta�ng if
customers are lost.

Highlight: Product Liability

There are huge costs associated with quality problems when products reach customers. There are dozens of examples, including sudden accelera�on in Toyota’s vehicles, tread
separa�on on Firestone �res, mistakes in surgeries, and structures that unexpectedly collapse because of poor design or construc�on. These problems can generate lawsuits
that are expensive to combat (and more expensive to se�le), and nega�vely affect the reputa�on of the company. Another example is Boeing’s a�empts to deal with problems
that arose soon a�er the release of its 787 Dreamliner. Worries about the poten�al for ba�ery fires led to jet’s grounding soon a�er its release. The company’s ability to
address the problems will impact the demand for its products and the profitability of the company.

Appraisal Costs

Appraisal costs are the costs incurred to measure quality, assess customer sa�sfac�on, and inspect and test products. Ac�vi�es that are designed to improve quality by be�er
understanding the current performance level of a product are included in appraisal costs. Appraisal costs could include the cost of conduc�ng a customer sa�sfac�on survey, hiring
an individual to visit, and inspect each property in a hotel chain, or tes�ng new notebook computers to be sure they will operate as intended. In electronic components, most
failures take place during the first 90–180 days of opera�ons or during the wear-out period at the end of the product’s life, and the defect rate between these two events is very
low.

Highlight: Feedback for Hotels

Hotels such as Marriot, Hya�, and Sheraton have resorts across the United States and around the world. These firms want to know what their customers like and dislike so that
each hotel can make sure that a guest’s stay is enjoyable. Hotel managers spend much �me and effort to collect feedback from their customers. They examine past pa�erns of
use in an effort to make the next stay even be�er. These firms search their records to determine what customers purchased in their gi� shops and restaurants, which tours
were booked through the concierge, and which room service requests were made. In this way, these hotels can a�empt to ensure a sa�sfied customer and another stay at the
hotel chain. Because there is a large investment in a hotel’s facility, a room that is not booked for one day loses revenues that can never be recovered. This is unlike a washing

machine that does not sell today but can be sold tomorrow. In addi�on to the physical facili�es, there is substan�al management overhead within a hotel and at its
headquarters. This overhead must be paid whether or not a room is booked. The labor at the hotel that cares for the grounds, prepares the food, and checks in guests is paid
whether or not the room is rented. Most of the costs associated with running a hotel are fixed and are not alleviated when a room is not rented. Thus customer sa�sfac�on is
cri�cal for success.

Preven�on Costs

Preven�on costs result from ac�vi�es designed to prevent defects from occurring. Preven�on costs can include ac�vi�es such as employee training, quality control procedures,
special efforts when designing products, or administra�ve systems to prevent defects. One example is the cost of modifying a bank’s computer system to request confirma�on
whenever a teller’s entries are unusually large or unusually small. Electronic confirma�ons are also seen on entry screens for online purchases and other applica�ons. For example,
an error message will appear if a digit in a telephone number is missing, and the customer will not be able to advance to the next screen. Conversely, if an extra keystroke is made
in an a�empt to enter a phone number, the system will not accept it. Cri�cal informa�on, such as e-mail addresses, require the customer to enter the data into these systems twice.
The two entries are compared, and if they are the same, the user can advance to the next screen. Double-entry greatly reduces the chance of an incorrect entry. There are many
examples of this in manufacturing as well, but customers do not see them. Manufacturers design assembly systems so that a part can only be assembled in one correct way. If it fits
or snaps in place, it is correct. Parts are color-coded to ensure they are placed correctly on the right product. Thousands of preventa�ve measures have been implemented to
reduce the cost of maintaining quality in manufacturing.

Highlight: Poka-Yoke: Mistake Proofing

Poka-yoke is an approach adopted by many companies to prevent defects. This term is a rough approxima�on of Japanese words that mean “mistake proofing.” For example,
Dell uses color-coding on its connec�ons so that when customers set up their computers at home, they are less likely to plug the printer cable into the monitor connec�on.
This results in a be�er experience for the customer and higher customer sa�sfac�on.

At one �me there was a philosophy that companies should trade off the costs of preven�on for the costs of failure. This resulted in the belief that companies should be willing
to accept an op�mum level of defects. Many companies now find that a reputa�on for high quality has benefits that far outweigh any addi�onal preven�on and appraisal costs
associated with achieving high quality.

Six Sigma

For many years, companies accepted a 1% to 3% rate of defects in goods and services, which is as many as three defects per hundred units. A few years ago, Motorola, a
worldrecognized quality leader, set for itself a goal of Six Sigma quality. Six Sigma relates to the firm’s ability to produce error free products. For the sta�s�cian that is six standard
devia�ons rather than three standard devia�ons, which is o�en discussed when applying the normal distribu�on. While three standard devia�ons equals approximately 2.6 defects
per 1,000 units, or 99.74% error free, six standard devia�ons equals 3.4 defects per 1 million units, or 99.99966% error free. The old standard of 1% to 3% defects, which is not very
restric�ve, would generate about 34,000 defects per 1 million. Six Sigma increases expecta�ons and a�empts to slash defects dras�cally.

Six Sigma is a collec�on of ideas and programs that are intended to improve the quality of a service or a good by using tools that iden�fy the root cause of the defects and then
implement programs to eliminate the underlying problem that caused the defects. Tools such as a fishbone chart allow the firm to trace a problem that the customer sees to the
root cause of the problem. For example, long delays in baggage delivery at the airport could be the result of insufficient staffing, insufficient baggage handling equipment, or poor
loading procedures that make it difficult to find the right bags. Then, tools such as simula�on or mathema�cal modeling (which are discussed in a later chapter) can be applied to
determine how the problem may be solved and the baggage handling process improved. Six Sigma helps the firm make its processes consistent because when Six Sigma is achieved
a defect (late baggage delivery) occurs only 3.4 �mes out of 1,000,000. Six Sigma may be good enough for baggage delivery, but some�mes, Six Sigma is not enough. Passengers on
the airlines want results that are be�er than 3.4 crashes for every 1,000,000 airline flight, or about one crash in 300,000 flights. There would be several crashes each day if a three
sigma standard was used, and dozens of crashes per day if a 3% defect rate was allowed.

Six Sigma develops a cadre of specialists within an organiza�on called “Black Belts” and “Green Belts,” who are experts in specific methods. Six Sigma follows a set of steps that
inves�gates the opera�ons process and leads the team toward outcomes that can be measured, analyzed, improved, and controlled. The effec�veness of the baggage handling
process is measured by customer wait �me, and the airline should have a performance target. The outcomes of these processes are important to the company and, ul�mately, to
the customer.

Six Sigma is based upon the implementa�on of ongoing, well-documented, and highly visible ac�vi�es. It is common for highly placed execu�ves in the firm to be Black Belts and to
train new Green Belts and Black Belts. These firms want their employees to live and breathe quality, so that quality improvement efforts are sustainable.

American sta�s�cian W. Edwards Deming was highly influen�al in the
development of quality management.

©Be�mann/Corbis/AP Images

4.3 Foundations of Quality Management

The groundwork for today’s philosophies about quality was implemented over a long period by many different
people. Some of the best-known individuals working in quality control have been wri�ng, teaching, and lecturing
for many years. In fact, two, W. Edwards Deming and Joseph M. Juran, are credited with major influence on the
approach to quality in Japanese organiza�ons.

W. Edwards Deming

Un�l his death in 1993 at the age of 93, W. Edwards Deming was probably the most influen�al individual within
the specialty of quality. Deming began his career as a sta�s�cian and became involved in quality when he worked
with Walter Shewhart, the founding father of sta�s�cal process control. Sta�s�cal process control (SPC) is the use
of sta�s�cal methods to determine when a process that produces a good or service is ge�ng close to producing
an unacceptable level of defects. When the process crosses a par�cular threshold, it is moving out of control. A�er
World War II, Deming went to Japan under the auspices of the U.S. government as part of an effort to rebuild
Japan’s economy. His influence on the Japanese was so great that today, Japan’s highest prize for quality is the
Deming Prize. Surprisingly, Deming was largely ignored in the United States un�l the 1980s. Beginning in the 1980s,
Deming lectured extensively to large audiences throughout the country un�l his death in 1993.

Deming’s philosophy is illustrated by his wellknown 14 points for the transforma�on of management, shown in
Table 4.2. Today, there is s�ll confusion and disagreement about what is meant by some of Deming’s points;
however, Deming’s basic premise notes that the system, not employees, causes defects. Management is
responsible for changing the system, and must accept that responsibility instead of blaming employees when
defects occur. Because of his background, Deming also stressed the use of sta�s�cal process control, and
encouraged training all employees in its use.

Table 4.2: Dr. W. Edwards Deming’s 14 points for the transforma�on of management

1. Create constancy of purpose toward improvement of product and service. Aim to become compe��ve and to stay in business, and provide jobs.

2. Adopt the new philosophy. We are in a new economic age. Awaken to the challenge. Learn the responsibili�es, and take on leadership for change.

3. Cease dependence on inspec�on to achieve quality. Eliminate the need for inspec�on. Build quality into the product in the first place.

4. End the prac�ce of awarding business on the basis of price tag. Instead, minimize total cost. Move toward a single supplier on any one item, on a long-term
rela�onship of loyalty and trust.

5. Improve constantly and forever the system of produc�on and service, to improve quality and produc�vity and thus constantly decrease cost.

6. Ins�tute training on the job.

7. Ins�tute leadership.

8. Drive out fear, so everyone may work effec�vely for the company.

9. Break down barriers between departments.

10. Eliminate slogans, exhorta�ons, and targets for the workforce asking for zero defects and new levels of produc�vity.

11a. Eliminate work standards (quotas) on the factory floor. Subs�tute leadership.

11b. Eliminate management by objec�ve. Eliminate management by numbers, numerical goals. Subs�tute leadership.

12a. Remove barriers robbing the hourly worker of his right to pride of workmanship. Change the responsibility of supervisors from sheer numbers to quality.

12b. Remove barriers that rob people in management and in engineering of their right to pride of workmanship. Abolish the annual or merit ra�ng and management
by objec�ve.

13. Ins�tute a vigorous program of educa�on and self-improvement.

14. Put everybody in the company to work to accomplish the transforma�on. The transforma�on is everybody’s job.
Source: Deming, W. E. Out of the crisis. Cambridge, MA: MIT Center for Advanced Engineering Study, 1986.

Joseph M. Juran

Joseph M. Juran, who was an ac�ve lecturer un�l 1995 when he re�red, was also a colleague of Walter Shewhart, and lectured and taught in Japan a�er World War II. Some have
argued that Juran’s contribu�on to Japan’s quality efforts was even greater than Deming’s. Like Deming, Juran emphasized management’s responsibility for ensuring quality. Juran,
however, focused on the customer by defining quality as “fitness for use.” He also emphasized the need for con�nuous improvement and stressed that quality must be built on
three elements: quality planning, quality control, and quality improvement.

Philip Crosby

Philip Crosby became interna�onally recognized with the publica�on of his 1979 book, Quality Is Free. In that book, and in later publica�ons, he argues that failure costs are much
greater than most companies had thought. By reducing failure costs, companies can save money, hence the �tle of Crosby’s book. Crosby is most o�en recognized for emphasizing
the importance of considering all costs of quality. He is also responsible for promo�ng the idea that all errors must be eliminated, indicated by his slogan “do it right the first �me,”
and the concept of zero defects.

Genichi Taguchi

Japanese companies were among the world’s first to place a strong emphasis on quality, so it is not surprising that several people from Japan have made significant contribu�ons to
the field of quality. Genichi Taguchi’s ideas are par�cularly important. Taguchi first gained prominence shortly a�er World War II, working with research facili�es to develop Japan’s
telephone system. A�er no�cing that considerable �me and effort were expended in experimenta�on and tes�ng, Taguchi developed procedures for designing experiments so that
more informa�on could be obtained with fewer experiments. Taguchi has also contributed an en�re philosophy about how products should be designed, and that philosophy now
forms an important part of quality management.

Taguchi argues that quality must be designed into a product. His point is that quality cannot be achieved through inspec�ons a�er the good is made or the service is provided. Thus,
an important part of Taguchi’s philosophy is based on the concept of robust design— designs that guarantee high quality regardless of varia�ons (such as employee errors) that may
occur during the processes that produce the product. For example, McDonald’s has designed a ketchup dispenser that puts precisely the right amount of ketchup on each burger,
elimina�ng varia�ons in product quality that may result from employees dispensing too much or too li�le.

Building Quality into Product

Design for manufacture and assembly (DFMA) emphasizes that products should be designed so they are simple and inexpensive to produce. This concept has also been applied to
service opera�ons under the term design for opera�ons (DFO). Both concepts underscore that the design of the product and the process by which the product is made are key
factors when determining quality. Quality inspec�on does not improve the underlying quality of the product or the process. Building quality into a product, rather than trying to
inspect it into the product, is described in the following:

1. Product Design: This is how the product, either a good or a service, func�ons. It determines the features, func�ons, aesthe�cs, and performance of a product, which are essen�al
parts of the product’s quality. For example, the capabili�es of an electronic device such as a notebook computer are determined by product design. The product design determines
the capability of the display, the size and performance of the processor, and Wi-Fi accessibility. Product design also determines the reliability, durability, serviceability, and other key
quality elements. The ability of Travelocity to provide robust and reliable service depends upon how it designs its servers, the user interface, and access to travel data. In large
measure, the cost to produce the good or to provide the service is determined when the product is designed. Product design is one of the most important decisions a firm will make.

2. Process Design: This is how the product, either a good or a service, is produced. Process design includes the methods that the firm uses to transform the product ideas created in the
product design into the good or service that the customer is purchasing. In manufacturing, process design includes selec�ng the materials, facili�es, and equipment used to make
the product as well as determining the labor skills needed to execute the process plan. In restaurants, decisions regarding the quality of the purchased food are important. In health
care, facili�es and equipment selec�on are also a very important decision. In banking, materials are really not an issue and facili�es and equipment are limited to office space, ATMs,
and basic office equipment. By their nature, process design for service opera�ons heavily depends upon people skills. In many service opera�ons, labor costs represent 70% or more
of the cost of providing a service.

3. Work Execu�on: This is the performance of the plan created in the product and process design. If the product design and the process design represent the football game plan, then
playing the game is the work execu�on. The success of this depends on how well the plan is communicated to the workforce, whether the workforce has been selected so it has the
basic skills to execute the plan, and how well the workforce has been trained to do the work. When these func�ons are performed well, the product and process designs should be
well executed, and a high-quality product should be produced.

4. Inspec�on: This is an assessment of the quality of the good or service. If the first three steps are properly performed, then inspec�on is, theore�cally, unnecessary. Inspec�on
provides feedback about how well the product is designed and built. Its primary benefit is to iden�fy quality problems and connect them to their sources. Defects may be caused by
a poor product design (such as a defec�ve so�ware interface), a poor process design (such as equipment that is unsuitable for the product), or poor work execu�on (such as an
untrained worker or poorly executed maintenance plan). Inspec�on does not increase the quality of the products being produced, but it may prevent defec�ve products from
reaching the customer. The primary purpose of inspec�on is gaining informa�on that helps the firm improve quality by changing design and work execu�on.

American Express u�lizes the total quality management (TQM) approach that emphasizes con�nuous
improvement and customer focus, among other things.

©Todd Gipstein/Corbis

The Customer Knows Best: Profi�ng from
Collabora�on

4.4 Total Quality Management

Total quality management (TQM) is an approach to quality management that originated in Japan and was adopted successfully by many companies throughout the world, including
American Express and GE. TQM is an organiza�on-wide philosophy that embodies the following components:

Focus on the customer
Quality func�on deployment
Responsibility for quality
Team problem solving
Employee training
Fact-based management
Philosophy of con�nuous improvement

Each of these components is discussed next, in detail. It should be stressed, however,
that they apply to all aspects of a company’s opera�on, from design of products and
processes to distribu�on and a�erthe- sale service. Further, all parts of the company
must be involved, including those which do not usually interact with external customers,
but instead serve other parts of the company.

Focus on the Customer

Customers are usually those outside a company, specifically the people or the
organiza�ons that purchase the good or service the company produces. However, it is
also possible to think of internal customers as parts of an organiza�on that u�lize
informa�on or other outputs from another func�onal area inside the organiza�on, such
as accoun�ng. In a hospital, the laboratory could think of the physician who requests lab
work as its customer. Thus, a customer can be anyone, whether inside or outside an
organiza�on, who receives the output from an ac�vity or process.

Juran’s defini�on of quality as fitness for use provides the groundwork for focusing on the customer. Unfortunately, many companies in the past have iden�fied what they thought
the customer wanted without actually asking the customer. Companies that use TQM rely on what is called the voice of the customer.

The voice of the customer describes what customers want and what they like and do not like. Listening to the
voice of the customer is essen�al to be successful. To do this, many companies get to know their customers
personally. For example, some companies hold focus groups, in which customers are contacted to discuss their
wants, needs, and expecta�ons, and to respond to proposals to change the good or service produced.
Companies ask ques�ons about how the customer uses their product. If a company understands its customers,
it can be�er meet or exceed their needs and expecta�ons. Listening to the voice of the customer is more than
providing customers with what they request. Simply stated, customers are likely to verbalize what it is with
which they are familiar. If a new technology is available and customers are not aware of it, they will not know
how to describe their need. If the company understands the customer and the customers’ wants, it may have
ideas and technologies that could be applied to meet a future need. For example, which customers told Apple
that they wanted a small portable device that could download and play music on the run (the iPod)? Apple
has succeeded by an�cipa�ng what technology customers may want and how they could use these products.

Quality Function Deployment

The quality of a product, whether that product is a manufactured good or a service, is largely dependent upon
how well the product and the processes for producing it were designed. Listening to the voice of the customer
provides a company with valuable informa�on. That informa�on, however, usually describes the customer’s
needs or expecta�ons, such as the need for transac�ons at a bank to be handled quickly and accurately, or the
expecta�on that a room reserved at a hotel will be available when the guest arrives. Those needs and

expecta�ons must be transformed into design characteris�cs for the product and process. Quality func�on deployment (QFD) is one method that can be used to make that
transforma�on by rela�ng customer needs and expecta�ons to specific design characteris�cs through a series of grids or matrices.

Figure 4.1 shows the basic form of the matrix used in QFD, which is o�en called the house of quality because of its shape. The customer needs, or “WHATs,” are listed along the
le�-hand side of the matrix. Design characteris�cs related to these needs are listed along the top as “HOWs.” The rela�onship matrix in the middle (WHAT versus HOW) indicates
the nature of the rela�onship between each customer need and each design characteris�c. Figure 4.2 shows the house of quality for a limited set of customer needs related to an
automobile. As shown, the need for good gas mileage is posi�vely related to the design characteris�c of fuel economy, nega�vely related to accelera�on, and has no rela�onship to
turning radius. In some cases, the simple plus or minus signs used in Figure 4.2 are replaced by other symbols indica�ng the strength of the rela�onship, from strongly nega�ve to
strongly posi�ve.

Figure 4.1: The house of quality

The Customer
Knows Best
From Title:

Profiting from Collaboration
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Figure 4.2: House of quality for an automobile

When designing products and processes, companies o�en face trade-offs, such as that between fuel economy and accelera�on. The house of quality can help a company evaluate
trade-offs. The roof part of the house shows how each design characteris�c affects other design characteris�cs. The right-hand side of the house shows the importance of each
customer need, and can also indicate customer percep�ons about how well the company is performing rela�ve to compe�tors. Performance on each design characteris�c can be
compared against compe�tors along the bo�om. Thus, less emphasis may be placed on a customer need that is not very important, or on a design characteris�c in which the
company already outperforms the compe��on. The house of quality shown here is only a simple example; those developed by companies can be very complex.

This first house of quality translates the voice of the customer into design characteris�cs, but characteris�cs alone will not indicate to the firm how to make a car. Those design
characteris�cs must be transformed into parts characteris�cs, as shown in the second house in Figure 4.3. Parts characteris�cs define how the engineering characteris�cs will be
achieved, but the parts characteris�cs can only be achieved when the process is planned to do so. Thus, a third house is required to convert the parts characteris�cs into
opera�onal processes that describe how the parts are to be produced to obtain the required characteris�cs. In the fourth house, the opera�onal process is the basis for determining
the produc�on requirements, which specify inspec�on details, measuring methods, operator training, and related details.

Using the four steps shown in Figure 4.3, the voice of the customer has been deployed throughout the en�re organiza�on. Further, all parts of the organiza�on have worked
together to achieve that deployment.

Phil Condit: Improvement and Benchmarking;
Boeing Reinvents the Airplane

Figure 4.3: Successive houses of quality deploy the voice of the customer throughout the
organiza�on

Responsibility for Quality

In the past, many companies used quality control (QC) departments to ensure quality. Unfortunately, this prac�ce allowed others in the organiza�on to assume that the QC
department was solely responsible for quality. Organiza�ons that embrace TQM have realized that everyone must accept responsibility, from the company CEO to the person who
cleans the parking lot. Each individual contributes to quality (or lack thereof) in some way. In addi�on, company suppliers must also accept responsibility for their role in quality. It is
essen�al that TQM have top management support and commitment in order for it to succeed.

Real World Scenarios: Ritz-Carlton: Quality-Infused

The recent experiences of one person who stayed at the Ritz-Carlton in Georgia demonstrate the value of infusing quality into the organiza�on. One night, the guest wanted a
newspaper, but the gi� shop was closed. During her late dinner (the hotel employees insisted on keeping the kitchen open past its closing �me to serve her), she asked if any
customers had le� a newspaper behind. The waiter returned in three minutes with copies of the Atlanta Cons�tu�on, USA Today, New York Times, and Wall Street Journal. Of
course, the guest was not charged for the papers.

This a�en�on to mee�ng the needs of the customer and also to deligh�ng the customer is directly ordered from the head of Ritz-Carlton Hotels. Because of its top-level
commitment to customer care, Ritz-Carlton has won the Malcolm Baldrige Award, a na�onal quality award. Quality, however, extends to every ac�vity at the hotel.

When this guest stayed at the same Ritz-Carlton on another occasion, the hotel’s concierge had located a special store for her. When no taxis were available, a doorman was
summoned to drive her in a hotel car. Along the way, the doorman explained that he had just completed three days of training before being allowed to open the door for
customers. Of course, once again, the guest was not charged for the car service to and from the store. As may be expected, the customer was delighted by this service.

Team Problem Solving

Problems are o�en encountered when a�emp�ng to meet or exceed customers’ needs and expecta�ons. For example, a hospital may find that emergency room pa�ents with
problems that are not life-threatening complain they have to wait too long for service, or an automobile manufacturer may find that its customers want an increasing number of
product op�ons but want prices to remain low. Problems like these can be solved be�er by a team than by one individual. Team efforts to problem solve allows for different
viewpoints and also enables the team members to split the workload and to brainstorm possible solu�ons with one another. When an organiza�on faces a complex problem, a team
approach to decision making may be more effec�ve than relying on one individual to make the necessary decisions. One person may not have access to all the informa�on, nor
have the broad range of knowledge needed to understand the problem, design alterna�ve solu�ons, and select the best approach. Group decision making is also very useful when
building commitment to the selected alterna�ve. When top management makes decisions, commitment to make alterna�ve solu�ons work may be low, thereby making
implementa�on very difficult. Convincing people to use a new approach is easier when each person is involved in the decision-making process. When a group is involved, each
member will find ways to make the new approach work, rather than find excuses for why it will not.

Employee Training

Deming emphasized the importance of training employees to use the tools of sta�s�cal process control. As organiza�ons have adopted a team approach to problem solving, it has
also been determined that employees need training to work effec�vely in groups, and to use group problem-solving tools. Pareto charts that iden�fy the most frequent causes of
quality problems, cause and effect diagrams that illustrate the root cause for a problem, and quality control charts that assess quality conformance are just three of many
techniques.

Fact-Based Management

Companies that use TQM must determine what their customers’ needs and expecta�ons really are, not what
the company thinks they are. This philosophy of basing decisions on facts, data, and analysis—instead of
intui�on or inference—extends to other areas of the TQM company. Companies today are beginning to operate
with a new saying: “What gets measured gets a�en�on.” This has always been true as employees concentrated
on the criteria they knew would be used to judge them. Now companies are realizing that those criteria must
�e into the company’s compe��ve strategy. As a result, some of the most important measurements today are
those related to quality. These measurements of quality include not only internal measures, such as the number
of customer complaints received or the percent of products reworked, but also external measures, such as
customer sa�sfac�on. In many cases, firms are taking quality to the next level. They are seeking to know more
about their suppliers’ sa�sfac�on at working with them, as well as the suppliers’ capabili�es. If the firms know
something about the suppliers’ capabili�es, they may be able to use those capabili�es in new ways. Product
quality and sa�sfac�on of the final customer are determined by all of the par�cipants in the supply chain, so
knowing something about suppliers is important to quality improvement. For example, the equipment supplier

for a medical test such as a CAT scan, or the supplier of hardware for a furniture manufacturer impact the
quality of the service or good purchased by the customer.

Benchmarking

Benchmarking is a process by which a company compares its performance to the performance of other
companies. Those other companies need not be compe�tors, nor be within the same industry. Instead, the
purpose of benchmarking is to set a standard based upon the company that is recognized as the best at a
certain ac�vity. As an example, many companies use L.L. Bean as a benchmark for online ordering and order
fulfillment. To be effec�ve at benchmarking, firms must understand that a benchmark does not define the best
possible outcome; it only iden�fies what a company has achieved. Choosing the wrong companies to
benchmark can lead to se�ng standards that are too low. As a result, a benchmark is only one piece of
informa�on that companies should use to set performance goals for quality or any other important outcome.

Broader Measures of Performance

Companies have tradi�onally measured their performance using the accoun�ng standards of cost and profit.
Today, those standards alone are insufficient. Quality is an important performance measure that must be used,
especially by companies using TQM. Customers’ needs may include other factors such as delivery speed,
flexibility, or innova�on, therefore, the performance measurement system must also include these factors.

Philosophy of Continuous Improvement

The philosophies of Deming, Juran, and Crosby all include the concept of con�nuous improvement. No ma�er how good a company is, it must always work to do be�er. This
philosophy of con�nuous improvement is an extremely important part of TQM. Companies adop�ng con�nuous improvement as an organiza�onal philosophy have found that the
following key components are necessary:

Standardize and document procedures.
Assign teams to iden�fy areas for improvement.
Use methods analysis and problem-solving tools.
Use the Plan-Do-Check-Act cycle (see Figure 4.4).
Document improved procedures.

Standardizing and Documen�ng Procedures

Standardiza�on and documenta�on form the basis of con�nuous improvement as shown in the preceding list, which begins and ends with documenta�on. Standardiza�on involves
developing a preset procedure for performing an ac�vity or job. Documenta�on is the act of pu�ng that procedure into wri�ng. Standardiza�on and documenta�on are necessary
for con�nuous improvement so the organiza�on knows exactly how something is being completed now (the “as is” condi�on). A�er the process has been improved, the firm should
document the new procedure (the “should be” condi�on) so that it becomes the new standard procedure. Documenta�on and standardiza�on are especially important for
companies that want to become registered under ISO 9000:2000, which is a widely-used interna�onal quality standard. It should be noted, however, that the purposes of
documenta�on and standardiza�on are not to prevent change in the process, but to ensure that within a given process, each person performs a task the same way every �me. As
be�er ways are found, the documenta�on and standardiza�on are changed to promote con�nuous improvement. For example, service organiza�ons rely extensively on
documenta�on and standardiza�on to ensure consistent service. Fast-food restaurants have established procedures for everything—from cooking hamburgers to taking orders. Airline
pilots follow a prescribed checklist each �me they land or take off. This procedure ensures a high level of customer safety and consistent service.

Iden�fy Areas for Improvement

Teams of employees from different departments work together as cross-func�onal teams to understand the current condi�ons and prepare a method to improve the performance of
an organiza�onal ac�vity. If a firm needs to improve its product development process so it is faster, lower-cost, and higher-quality, it is important to have various experts examine
and improve the process. These experts should understand the roles of marke�ng, produc�on, and informa�on technology. They should also understand the accoun�ng and financial
aspects of this complicated process.

Methods Analysis and Problem-Solving Tools

Con�nuous improvement efforts require a set of methods or problem-solving tools. The type and applica�on of these tools depends upon the outcome measures that need to be
enhanced. For example, to improve the quality of an assembly, root-cause analysis and poka-yoke may be the tools. It allows the team to understand the problem and create a
solu�on that should be error proof. To reduce the number of processing errors and the cost of evalua�ng life insurance applica�ons, it would be useful to determine the process
flow, iden�fy essen�al tasks, and note tasks that can be reduced in length or eliminated completely. It would also be useful to iden�fy which quality problems are the most common
and to overlay those on the process flow to see how cost and quality interact.

The Plan-Do-Check-Act Cycle

The Plan-Do-Check-Act cycle, shown in Figure 4.4, is also referred to as the Deming Wheel or Shewhart cycle. The shape of a wheel embodies the philosophy of con�nuous
improvement; the cycle is repeated over and over without end. Each part of the cycle is explained as follows:

Plan—Before making any changes, be sure everything is documented and standardized. Use appropriate tools to iden�fy problems or opportuni�es for improvement. Develop a
plan to make changes.
Do—Implement the plan and document any changes made.
Check—Analyze the revised process to determine if goals have been achieved.
Act—If the goals have been achieved, then standardize and document the changes. Communicate the results to others that could benefit from similar changes. If the goals have
not been achieved, determine why not, and proceed accordingly.

Phil Condit:
Improvement and
Benchmarking
From Title:

Boeing Reinvents the Airplane
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wID=100753&xtid=4553)

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Figure 4.4: The Plan-Do-Check-Act cycle

Document Improved Procedures

The process for con�nuous improvement ends in the same place it begins with a documented process, so that future review for the purpose of process improvement commences
again here. Documents are also valuable for training new employees. Finally, documenta�on is essen�al to achieve quality cer�fica�on.

Chapter Summary

Quality has many defini�ons, both internal and external. Today, most companies define quality as consistently mee�ng or exceeding the customer’s needs and expecta�ons.
The characteris�cs of service quality include reliability, responsiveness, assurance, empathy, and tangibles.
The characteris�cs of quality for goods include performance, features, reliability, conformance, durability, serviceability, aesthe�cs, and perceived quality.
It is vital to understand what customers want, but this involves more than just asking the customer. Customers o�en have unspoken wants that will not be apparent without
probing. Customers operate in a known environment and are o�en unaware of new ideas or technologies that create new products they would find very useful.
Individuals who have had a significant impact on the field of quality include W. Edwards Deming, Joseph Juran, Philip Crosby, and Genichi Taguchi.
Design for manufacture and assembly (DFMA) and design for opera�ons (DFO) are ways to focus on quality and cost during the design of goods and services. Product quality is a
func�on of product design, process design, and employee execu�on. The be�er a firm is at these func�ons, the be�er it will be at building high-quality products. Inspec�on does
not enhance quality; it provides feedback about the level of quality achieved and the poten�al source of quality problems.
Every employee is responsible for quality. It should be an organiza�on-wide effort.
Quality func�on deployment is used to translate the voice of the customer into product and process design characteris�cs.
The components of TQM include a focus on the customer, quality func�on deployment, responsibility for quality, team problem solving, employee training, fact-based
management, and a philosophy of con�nuous improvement.

Case Studies

Memorial Hospital

Memorial Hospital is a privately owned 600-bed facility. The hospital provides a broad range of health care services, including complete laboratory and X-ray facili�es, an emergency
room, an intensive care unit, a cardiac care unit, and a psychiatric ward. Most of these services are provided by several other hospitals in the metropolitan area. Memorial has
purposely avoided ge�ng involved in any specialized fields of medicine or obtaining very specialized diagnos�c equipment because it was felt that such services would not be cost-
effec�ve. The General Hospital, located only a few miles from Memorial, is affiliated with the local School of Medicine and offers up-to-date services in those specialized areas.
Instead of trying to compete with General Hospital to provide special services, Memorial Hospital has concentrated on offering high-quality general health care at an affordable
price. Compared with the much larger General Hospital, Memorial stresses close personal a�en�on to each pa�ent from a nursing staff that cares about its work. In fact, the
hospital has begun to place ads in newspapers and on television, stressing its pa�ent-oriented care.

However, the hospital’s administrator, Janice Fry, is concerned about whether the hospital can really deliver on its promises, and worries that failure to provide the level of health
care pa�ents expect could drive pa�ents away. Janice met recently with the hospital’s managerial personnel to discuss her concerns. The mee�ng raised some ques�ons about how
the hospital’s quality of health care could be assured. Jessica Tu, director of nursing, raised the ques�on, “How do we measure the quality of health care? Do we give pa�ents a
ques�onnaire when they leave, asking if they were happy here? That does not seem to answer the ques�on because we could make a pa�ent happy, but give them lousy health
care.” Several other ques�ons were asked concerning the hospital’s efforts to keep costs down. Some people were concerned that an emphasis on costs would be detrimental to
quality. They argued that when a person’s life is at stake, costs should not be of concern.

A�er the mee�ng, Janice began thinking about these ques�ons. She remembered reading recently that some companies were using total quality management (TQM) to improve
their quality. She liked the idea—if it could be used in a hospital.

1. Discuss some ways that a hospital might measure quality.
2. What are the poten�al costs of quality for Memorial Hospital? How could the value of a human life be included?
3. Are there any ideas or techniques from TQM that Janice could use to help Memorial focus on providing quality health care?
4. What measures could Memorial use to assess the quality of health care it is providing?

Discussion Ques�ons

Click on each ques�on to reveal the answer.

1. What are the similari�es between internally and externally oriented defini�ons of quality?
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In both the internally oriented and externally oriented defini�ons of quality, we are comparing the characteris�cs of a product against some goal or objec�ve that can be
difficult to measure. The internally oriented defini�ons focus on aspects of the product that the company controls directly such as strength, length, or processing �me, which
can be rela�vely easy to measure and for which the goal is o�en set by the company itself. Externally oriented defini�ons are much vaguer and broader, emphasizing goals set
by the customer.

2. Describe the approach that a company should use in order to understand customers’ expecta�ons.
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Firms should ask the following ques�ons when they want to understand customers’ expecta�ons. What does the customer want, but this is only the first step in the process. It
is important to ask customers specific ques�ons about a�ributes of the product that are not men�oned by the customer. This probing helps to iden�fy unspoken expecta�ons.
Ask the customer how they use the product. Knowing how the customer func�ons and how they use the product can lead to a be�er understanding of what and how new
ideas and technologies could help them. Also, ask customers how their customers use the products: Knowing the needs of the customers’ customers can help the organiza�on
be�er understand the impact of its product on the value crea�on chain and therefore meet the needs of the final customer in this chain.

3. List the characteris�cs for service quality and those for manufacturing quality. What are the commonali�es and differences?
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Dimensions of service quality: reliability, responsiveness, assurance, empathy, and tangibles.

Dimensions of quality for manufacturing: performance, features, reliability, conformance, durability, serviceability, aesthe�cs, and perceived quality.

Both include the dimensions of reliability, although they are defined somewhat differently. The “tangibles” dimension for service quality could conceivably include such

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dimensions of manufacturing quality as features and aesthe�cs. Further, the “serviceability” dimension in manufacturing could relate to responsiveness, assurance, and empathy
for services. Overall, however, the dimensions of service quality tend to focus more on percep�ons while dimensions of manufacturing quality include characteris�cs that can
usually be measured objec�vely.

4. What assump�ons about the rela�onship between the company standards and those of the customer are made by internally-oriented defini�ons of quality?
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The internally oriented defini�ons of quality assume that when we (or a company) set a goal or target value for some characteris�c of the product that this also will be what
the customer wants. Unfortunately that may not always be true, which explains why some use tools such as quality func�on deployment (QFD) to be�er understand customer
needs.

5. What are the differences and similari�es among the philosophies of Deming, Juran, Crosby, and Taguchi?
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Deming and Juran probably are the closest in philosophies as both emphasize management’s responsibility for quality. However, Deming o�en tends to focus on internal quality
while Juran takes more of an external focus. Taguchi combines both the internal and external viewpoints as he emphasizes internal ways of minimizing the costs to society.
Taguchi’s approach tends to be an engineering one that does not emphasize management. Crosby probably is farthest away from the others, even placing a strong emphasis on
slogans, such as “zero defects” or “do it right the first �me,” which Deming abhors. Crosby, like Taguchi, emphasizes costs, although he adopts a much narrower focus by
considering only costs to the company.

6. What important organiza�onal ac�vi�es enable a firm to build quality into its products? Explain each of these.
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A cri�cal factor is to design the product and processes so the quality is built in. Product Design is how the product, either a good or a service, func�ons. It determines the
features, func�ons, aesthe�cs, and performance of a product, which are essen�al parts of the product’s quality.

Process design is how the product, either a good or a service, is produced. Process design includes the methods that the firm uses to transform the product ideas created in
the product design into the good or service that the customer is purchasing. In manufacturing, process design includes selec�ng the materials, facili�es, and equipment used to
make the product as well as determining the labor skills needed to execute the process plan.

Work execu�on is the performance of the plan created in the product and process design. If the product design and the process design represent the football game plan, then
playing the game is the work execu�on. The success of this depends on how well the plan is communicated to the workforce, whether the workforce has been selected so it
has the basic skills to execute the plan, and how well the workforce has been trained to do the work.

Inspec�on is an assessment of the quality of the good or service. If the first three steps are properly performed, then inspec�on is theore�cally unnecessary. Inspec�on
provides feedback on how well the product is designed and built. Its primary benefit is to iden�fy quality problems and trace them back to the sources.

7. Is it possible for a company to implement TQM if top management delegates responsibility to middle managers? Why or why not?
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Everyone in a company must be responsible for quality. If top management delegates responsibility to middle management and then does not itself support the quality
philosophy TQM is des�ned to fail. Top management must accept responsibility for quality, but also make sure everyone else in the organiza�on also accepts that responsibility.

8. List the components of quality management, and briefly describe a few of the ideas, concepts, or techniques that are included in each.
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If we focus on Total Quality Management (TQM), we have the following:

Focus on the Customer: This means iden�fying the customer’s needs and expecta�ons, which is o�en referred to as the voice of the customer. Quality func�on deployment
(QFD) is one way of transla�ng those needs and expecta�ons into design characteris�cs.

Everyone responsible for quality: Ritz-Carlton hotels provide a good example of this component as the CEO personally assumes responsibility for training new employees. That
training ins�lls an emphasis on quality in everyone down to doormen and waiters.

Team Problem-Solving: Employees working in groups can develop much be�er problem solu�ons than individuals. Many companies use teams extensively, even holding annual
compe��on that judges team presenta�ons based on teamwork, project selec�on, analysis techniques, remedies, results, ins�tu�onaliza�on, and presenta�on.

Employee Training: TQM involves new concepts and new techniques. Employees must be trained to adopt the TQM philosophy, to use the new techniques, and to work
effec�vely in groups. Because con�nuous improvement is also a component of TQM this training is a never-ending cycle.

Fact-Based Management: Decisions should be made based on facts, not guesses. This o�en means collec�ng extensive data from within the company as well as outside it. One
approach to collec�ng outside data, known as benchmarking, uses informa�on from compe�tors or world-recognized leaders to set performance goals.

Philosophy of Con�nuous Improvement: Organiza�ons must constantly seek to improve their performance. The Japanese term for this is “kaizen.” One approach to con�nuous
improvement is based on the plan-do-check-act cycle or Deming cycle.

9. List some customer needs associated with home theater equipment, and group these together by category. Suggest some possible engineering characteris�cs that could measure
achievement of these a�ributes.
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Quality of the picture
1. Accurate color reproduc�on.
2. Sharp picture.
3. No distor�on.
Quality of the sound system
1. Realis�c sound.
2. Loud base.
3. Ability to duplicate high pitches.
4. “Brilliance” of sound produced.
Quality of the system
1. Easy to operate.
2. Easy to set up.
3. Reliable.

Some engineering characteris�cs could involve number of pixels on the screen, decibel measurements of sound produced, frequency measurements, range of frequency
produced, ability to withstand shocks, number of cycles before failure.

10. One quality myth is that increased quality means increased costs. Use your own personal knowledge or experiences to describe how this may not be true.
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Southwest Airlines is a good example. The company consistently rates at the top of sa�sfac�on surveys, yet offers low �cket prices—and con�nues to be profitable as other
airlines are losing money.

11. List the three categories of quality costs, and briefly define each.
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Costs of preven�ng defects: This category includes the costs of employee training, quality control procedures, and product design.

Costs of appraising quality include the tes�ng and inspec�on of parts and materials and the costs of determining customer sa�sfac�on.

Costs associated with failures include internal and external costs. Internal costs are those costs associated with defects that are found before being shipped to the customer.
External costs are associated with defects that are found a�er delivery to the customer.

12. Explain how the idea of quality func�on deployment may be applied to a service organiza�on that is not providing a tangible good as its product.
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Even if a tangible good is not being supplied, the customer will be able to describe a�ributes or characteris�cs that are desirable in the service. These might be speed,
friendliness of personnel, pleasant surroundings, ease of obtaining the service, and so forth. A�er collec�ng the a�ributes, some may be converted into engineering
characteris�cs. For example, speed may be converted into an actual �me measure. However, other a�ributes may not convert into engineering characteris�cs, but may be
converted into other measures. For example friendliness may be measured in terms of the number of customer complaints received or the number of �mes the customer
smiles. Further, the process for delivering the appropriate a�ributes and for ensuring that quality is measured can be developed based on the measures being used.

Key Terms

Click on each key term to see the defini�on.

appraisal costs
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The costs incurred to measure quality, assess customer sa�sfac�on, and inspect and test products.

benchmarking
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A process by which a company compares its performance and methods for a certain ac�vity against that of a recognized leader or an outstanding compe�tor.

con�nuous improvement
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The concept that no ma�er how good a company is, it must always work to do be�er.

design for manufacture and assembly (DFMA)
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Designing products so they are easy to manufacture or assemble, resul�ng in high quality and low cost.

design for opera�ons (DFO)
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Designing services so that opera�ons func�on can provide high quality and low cost.

external failure costs
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Costs of quality incurred a�er a product has reached the customer.

fishbone chart
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A diagram that is used in problem solving to list all the possible causes of a problem, usually divided into materials, equipment, methods, and personnel.

house of

quality
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A diagram used to convert customer a�ributes desired in a product to engineering characteris�cs, parts characteris�cs, and process details.

internal failure costs
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Costs of quality associated with defects found before the product reaches the customer.

Plan-Do-Check-Act cycle
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A problem solving process used for con�nuous improvement; also called Deming Wheel or Shewhart cycle.

poka-yoke
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An approach adopted by many companies to prevent defects. The term is a rough approxima�on of Japanese words that mean “mistake proofing.”

preven�on costs
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Quality costs that result from ac�vi�es to prevent defects from occurring, such as employee training, quality control procedures, special efforts in designing products, or
administra�ve systems to prevent defects.

May have defini�ons that are either internal or external to a company, but defined most o�en as consistently mee�ng or exceeding customers’ needs and expecta�ons.

quality func�on deployment (QFD)
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A procedure for spreading the voice of the customer throughout a company when determining how products should be designed and processes operated.

robust design
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Product design that guarantees high quality regardless of varia�ons that may occur during the processes that make the product and provide it to the customer.

Six Sigma
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A measure of process performance that means only 3.4 defects will occur in every 1 million units produced, or 99.99966% error free. The term Six Sigma refers to a broad range of
defect preven�on strategies.

sta�s�cal process control (SPC)
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The use of sta�s�cal methods to determine when a process that produces a good or service is ge�ng close to producing an unacceptable level of defects.

total quality management (TQM)
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An organiza�onal commitment to con�nuously improve on mee�ng or exceeding customers’ needs and expecta�ons.

value proposi�on
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A measure of what the buyer gives up compared to what the buyer receives. When the value proposi�on is high, the benefits are significantly greater than the costs.

voice of the customer
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A concept in product design to determine what the customer wants, likes, and doesn’t like in the product.

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