This Document Contains Chapters 14 to 15 Chapter 14 Basic Elements of control The final section of the book, Part V, “Controlling,” covers the fourth basic managerial function, the controlling process. It consists of two chapters. Chapter 14 introduces the controlling process, while Chapter 15 focuses on three specific topics in controlling: operations, quality, and productivity. CHAPTER SUMMARY Chapter 14 introduces and covers the basic elements of control in organizations. It first characterizes the nature of control. Subsequent sections discuss operations, financial, structural, and strategic control. The chapter concludes with a description of how the control process can be more effectively managed. LEARNING OUTCOMES After studying this chapter, students should be able to: 1. Explain the purpose of control, identify different types of control, and describe the steps in the control process. 2. Identify and explain the three forms of operations control. 3. Describe budgets and other tools for financial control. 4. Identify and distinguish between two opposing forms of structural control. 5. Discuss the relationship between strategy and control. 6. Identify characteristics of effective control, why people resist control, and how managers can overcome this resistance. Sergio Marchionne was the architect of a remarkable turnaround at the Italian carmaker, Fiat, which essentially took over Chrysler as part of the latter’s U.S. government bailout. The case details how Marchionne achieved this via cost cutting and having an effective control system. Management Update: Chrysler’s website http://www.chryslergroupllc.com/investor/pages/overview.aspx gives current details of the company and its financial position. LECTURE OUTLINE I. The Nature of Control Control is the regulation of organizational activities in such a way as to facilitate goal attainment. Without control, organizations have no indication of how well or poorly they are performing. Control indicates the need for intervention if some targeted element of performance falls outside of acceptable limits. Teaching Tip: A good analogy to use to describe control is that of a space flight to Mars. After a rocket is launched, NASA scientists continually monitor its progress toward its target, or goal. During the flight, they may have to make periodic corrections to nudge it back on course. Some corrections may be large, others small; some will be in one direction, others in a different direction; and there will be some periods when no corrections are needed. This process of monitoring progress toward the goal and then making required corrections is control. A. The Purpose of Control Teaching Tip: Note Figure 14.1 and its depiction of the four basic purposes of control. Control has a number of functions in organizations. Four functions in particular are important. 1. A properly designed control system can help managers anticipate, monitor, and respond to a changing environment. Discussion Starter: Ask students to discuss whether a control system can completely deal with environmental change or whether, at best, it can provide only partial assistance. 2. Over time, small mistakes may accumulate and become serious. An adequate control system will help to limit the accumulation of error. Extra Example: Another example of error accumulation would be a manufacturer with a small error in its production system that gets carried through hundreds or thousands of products before it is discovered. 3. As organizations expand and create a variety of products, control helps them to cope with organizational complexity. Teaching Tip: Though control is important to any organization, it is especially important in large, complex organizations. Problems and weaknesses in these kinds of settings can go undetected and become ever more serious if control systems do not identify them on a timely basis. Global Connection: To carry the preceding idea further, international firms have even more complex control requirements. This point is covered later in the chapter. 4. Control can help to minimize costs, reduce waste, and improve productivity. B. Types of Control Teaching Tip: The common room thermostat is also a control device. When the temperature reaches a certain level, a climate control system is activated. When the temperature changes to the targeted level, the system shuts down. 1. Areas of control Control is concerned with efficiently and effectively combining an organization’s physical, human, information, and financial resources into appropriate outputs. Extra Example: Effective control is credited with Walmart’s success. While its primary competitor, Kmart, was concentrating on marketing and advertising, Walmart managers were focusing on cutting costs, improving efficiency, enhancing operations, and so forth. 2. Levels of control Control can also be classified by level, such as operations, financial, structural, or strategic control. 3. Responsibilities for control Responsibilities for control fall to managers, one or more specialized management positions called controller, and, more and more often, to employees as well. C. Steps in the Control Process 1. The first step is establishing standards. a) A control standard is a target against which subsequent performance will be compared. b) Standards should be expressed in measurable terms and consistent with the organization’s goals. Teaching Tip: Note the performance standards that you have set for this class regarding attendance, participation, and exam expectations. c) Managers must identify performance indicators, measures of performance that provide information that is directly relevant to what is being controlled. 2. The second step is measuring performance. a) Using the performance indicators chosen in the previous step, managers monitor performance on an ongoing basis. b) Performance measures differ across level and function. Valid performance measures are difficult to develop and difficult to monitor for some activities. Teaching Tip: Note that the grades you assign on papers and tests represent a measure of performance. 3. The third step is comparing actual performance against the standards. a) Comparing performance against standards will result in performance that is higher, lower, or equal to the standards. b) Extenuating circumstances must also be considered. c) The timetable for conducting comparisons will vary depending on what is being controlled. Teaching Tip: Stress the fact that comparing performance against a control standard is not always a cut-and-dried process. 4. The fourth step is considering corrective action. Once the comparison between performance and standards has been made, an action must be taken. Three choices exist: do nothing, take corrective action, or change the standard. Teaching Tip: As you look over final grades, you may go with a strict 90-80-70-60 percent cutoff for grades (maintaining the status quo). Alternatively, you may apply a curve if grades are too far out of line (changing the standard). II. Operations Control Operations control focuses on the processes used to transform resources into products or services. Most firms use multiple control systems. A. Preliminary Control Preliminary control attempts to monitor the quality of financial, physical, human, and information resources before they actually become part of the system. Thus, preliminary control concentrates on inputs to the system early in the overall process. Extra Example: Ford Motor Company used preliminary control when it raised the product quality standards that must be met by its suppliers, for example, and pressured them to lower their costs so that Ford can lower its own costs. Teaching Tip: Preliminary control is also called steering control or feedforward control. B. Screening Control Screening control takes place during the transformation process. As the outputs are produced, they are screened at checkpoints to make sure they meet the standards. Screening control relies heavily on feedback processes. Teaching Tip: Screening control is also called yes/no control or concurrent control. C. Postaction Control Postaction control monitors the output or results of the organization after the transformation process is complete. Thus, postaction control focuses on determining if the outputs of the organization meet the established standards. Extra Example: Levi Strauss relies heavily on postaction control. The firm requires that every pair of jeans it makes be inspected before it leaves the factory. Teaching Tip: Stress the fact that, as noted in the text, most firms use more than one form of operations control. For example, even though Ford is forcing its suppliers to improve the quality of the parts they ship to the automaker, Ford still pays attention to screening and postaction control as well. III. Financial Control Financial control is the control of financial resources as they flow into the organization, are held by the organization, and flow out of the organization. Interesting Quote: “The environment was ripe for abuse. Nobody at corporate was asking the right questions. It was completely hands-off management. A situation like that requires tight controls. Instead, it was a runaway train.” (A former Enron manager, quoted in Business Week, “At Enron, ‘The Environment Was Ripe for Abuse,’” February 25, 2002) Teaching Tip: Interestingly, even though managers consider human resources to be the most critical resource for organizations, financial resources are probably a more important resource to be controlled. A. Budgetary Control A budget is a plan expressed in numerical terms. Discussion Starter: Ask students if they use budgets. If they do, discuss with them how they use budgets, what kinds of budgets they use, how formal they are, and so forth. 1. Most organizations use three types of budgets. a) Financial budgets indicate where the organization expects to get its cash for the coming time period and how it plans to use it. Examples include balance sheet budgets and cash budgets. b) Operating budgets are concerned with planned operations within the organization. Examples include sales budgets and expense budgets. c) Nonmonetary budgets are expressed in nonfinancial terms, such as units of output or hours of direct labor. Examples include production budgets and space budgets. Extra Example: Some students use nonmonetary budgets based on time to plan their studying—a certain number of hours on this day to study for one course, a different number of hours on that day for another course, and so forth. 2. Budgets were traditionally developed through a top-down process. Many organizations today, however, are beginning to allow more participation by all managers in the budget development process. Teaching Tip: As noted in the text, many organizations today are allowing more people at lower levels of the organization to participate in the budgeting process. This process is consistent with the topics of participation, empowerment, decentralization, and work teams, discussed in various other chapters. 3. The budgeting process has several strengths, including facilitation of effective control, better ability to monitor operations, ease in identifying problem areas, improved coordination and communication, assistance in planning, and recording of organizational performance. Weaknesses of budgeting include the relative lack of flexibility, the time it takes to prepare the budget, and the possible limiting effect on change. Discussion Starter: If your students use budgets for their personal affairs, ask them to discuss positive and negative experiences with budgets. You can then relate these experiences to the strengths and weaknesses of budgets as noted here in the text. Extra Example: Tenneco and Texas Instruments are other firms that have cut back on the budgets they use. However, managers at both firms stress the fact that budgets cannot be eliminated altogether and that the budgets they have retained play a vital role in their respective organizations. B. Other Tools of Financial Control 1. A financial statement is a profile of some aspect of an organization’s finances. a) A common financial statement is the balance sheet, which lists the assets and liabilities of an organization at a specific point in time. b) Another common financial statement is the income statement, which summarizes financial performance over a period of time. Teaching Tip: Obtain copies of an income statement and a balance sheet from one or more corporate annual reports. Use them here to illustrate their “look” and the basic information they contain. 2. Ratio analysis is the calculation of one or more financial ratios from the information in a firm’s financial statements. Liquidity, debt, return, coverage, and operating ratios are usually assessed. Group Exercise: If you obtain financial statements from annual reports, give a copy to small groups of students and have them calculate some of the basic financial ratios listed above. Compare and contrast different ratios, especially across different organizations. Point out that an acceptable ratio in one industry may be considered exceptionally high, or low, in another industry. 3. A financial audit is an independent appraisal of the firm’s accounting, financial and operational systems. a) All publicly traded firms are required to undergo periodic audits and to release the results to the public. Teaching Tip: Note that many recent corporate scandals, including Enron, WorldCom, Tyco, Global Crossings, and others, were the result of financial misdeeds that were not uncovered or reported by auditors. Cross-Reference: Chapter 2 mentions the Sarbanes-Oxley Act of 2002, which established higher standards for audits, along with stiffer penalties if standards are not upheld. b) Financial audits can be external (performed by independent external auditors) or internal (performed by employees of the organization). Extra Example: Whether or not they have an internal auditing staff, publicly traded corporations must have their financial statements audited by an external firm. If you obtained corporate annual reports in response to one of the previous Teaching Tips, note that the reports include a statement from the firm’s auditors. Teaching Tip: Note that auditing is a specialization within the accounting profession. Discuss whether or not your school offers this specialization. IV. Structural Control Structural control deals with the effectiveness of the firm’s organization design. A. Bureaucratic control is characterized by formal and mechanistic structural arrangements designed to extract employee compliance. Extra Example: General Motors is an example of a firm that relies on bureaucratic control. Myriad rules, regulations, and standard operating procedures dictate what people and operating units can and cannot do. B. Decentralized control is based on informal and organic structural arrangements, such as group norms and organizational culture, to obtain self-controlled behavior in employees. Extra Example: Apple Computer uses decentralized control. Its employees generally support the organization and work well together. Consequently, they need fewer rules and regulations. Extra Example: Decentralized control is also referred to as decentralized control. V. Strategic Control Strategic control is aimed at ensuring that the organization is maintaining an effective alignment with its environment and moving toward achieving its strategic goals. A. Integrating Strategy and Control Effective strategic control focuses on structure, leadership, technology, human resources, and information and operational control systems. B. International Strategic Control 1. Strategic control is especially important for international businesses due to their large size, complexity, and geographic diversity. 2. Some international businesses use a centralized control system, whereas others favor decentralization. Global Connection: Some German firms today are struggling because of inadequate strategic control. They have continued to focus so much attention on quality without balancing that quality against cost that today their sales are slipping. Their products are known to be of high quality, but they cost so much more than competing products that people have more trouble buying them. Extra Example: Daimler-Benz, the manufacturer of Mercedes automobiles, is a good example of a firm experiencing the kinds of troubles noted above. Indeed, the aforementioned costs were a major factor in the firm’s decisions to construct an assembly plant in the United States and to merge with Chrysler. VI. Managing Control in Organizations A. Characteristics of Effective Control 1. Control must be integrated with planning. The more explicit and precise the linkages between planning and control are, the more effective the control system will be. To achieve this, one must account for the control system as the plans are developed. Teaching Tip: In some ways, planning and control are the two most integrated management functions. Planning helps determine what the organization wants to do and control keeps the organization on track toward doing it. 2. The control system itself must be flexible enough to accommodate changes. 3. Control systems must be accurate to be effective. Extra Example: Waterford Crystal suffered some performance problems because of flaws in its control system. One source of difficulty for the firm was that its accounting system was inadvertently camouflaging higher-than-projected production costs. 4. Information must be presented from the control system at the time when it will do the most good. 5. The information provided by the control system must be as objective as possible. Extra Example: Another control problem at Waterford resulted from the fact that important information was being subjectively interpreted by inadequately trained employees before managers ever saw it. B. Resistance to Control 1. Overcontrol occurs when an organization attempts to control too many things. Employees tend to resist if too many controls are placed on them. Global Connection: Managers in India are especially prone to resist control. They view the presence of control measures and systems as indicators that their organization lacks confidence in their abilities. 2. If the control system focuses too much on quantitative variables or if the focus is too narrow, problems can occur. 3. Control systems must not reward inefficiency. Cutting departments’ budgets the following year if not all of their resources are spent is an example of rewarding inefficiency (or punishing efficiency). 4. Accountability for one’s work is increased when control systems are in place and this may promote resistance. C. Overcoming Resistance to Control Resistance can be partially overcome if the control systems are integrated into the planning system and are flexible, accurate, timely, and objective. In addition, people should not be overcontrolled or rewarded for inefficiency. 1. Encouraging employee participation is another way to overcome resistance to control. If employees are involved in developing the control systems, there is also generally less resistance. Teaching Tip: Reliance on work teams and empowered employees needs to be accompanied by an increase in self-control if employees are to feel that they really have a voice in their own work. 2. Another way to overcome resistance to control is to develop verification procedures. Managers can use checks and balances to ensure that the control systems are providing the data needed to compare performance against standards and use multiple systems to cross-check the usefulness of the control system reports. Teaching Tip: One of the biggest challenges facing managers is finding the appropriate balance of control. They need to have sufficient control to avoid problems, but they also need to avoid overcontrol. Chapter 15 Managing operations, quality, and productivity CHAPTER SUMMARY Chapter 15 addresses the management of operations, quality, and productivity. Operations management is the first topic, followed by a discussion of the design of operations systems. Then organizational technologies and supply chain management are described. Total quality is the next topic considered. The chapter’s concluding section focuses on productivity. LEARNING OUTCOMES After studying this chapter, students should be able to: 1. Describe and explain the nature of operations management. 2. Identify and discuss the components involved in designing effective operations systems. 3. Discuss organizational technologies and their role in operations management. 4. Identify and discuss the components involved in implementing operations systems through supply chain management. 5. Explain the meaning and importance of managing quality and total quality management. 6. Explain the meaning and importance of managing productivity, productivity trends, and ways to improve productivity. The Orpheus Chamber Orchestra is unique in that its symphonies are played without a conductor. Orpheus believes that its product (i.e., the music) is of the highest quality when its workers (the musicians) are highly satisfied with their jobs. Orpheus, thus, has a new approach to motivation and quality. Discussion Starter: Orpheus Chamber Orchestra’s website is www.orpheusnyc.com. Students should be encouraged to look at this website and click the “Musicians” tab to find out more about the musicians who are part of this orchestra. Can what Orpheus does work in other settings? LECTURE OUTLINE I. The Nature of Operations Management Operations management is the total set of managerial activities used by an organization to transform resource inputs into products, services, or both. A. The Importance of Operations 1. Competitiveness, overall firm performance, quality, and productivity can all be enhanced through various elements of operations. 2. In a manufacturing environment, operations management provides form utility by combining many dissimilar inputs to create an output. In a service organization, operations management creates value by providing time and place utility. B. Manufacturing and Production Operations Manufacturing is a form of business that combines and transforms resource inputs into tangible outcomes. Extra Example: Other examples of large manufacturing firms include Merck (health care products), Cummins Engine Company (diesel engines), Herman Miller (office furniture), and Mattel (toys). 1. Manufacturing in the United States began a long period of decline in the 1970s when foreign competitors came onto the scene with new equipment and higher levels of efficiency. 2. Throughout the 1980s and 1990s, American firms responded to foreign competition by upgrading facilities, reducing their workforce, and transforming into leaner and more efficient organizations. 3. Today, U.S. firms have regained their competitive positions in some manufacturing industries, although foreign firms continue to dominate in many industrial or low-cost consumer items, including textiles, shoes, and steel. C. Service Operations A service organization is one that transforms resources into services. 1. The service sector produced less than half of the U.S. gross national product in 1947, but over 80 percent in 2012. It also accounted for almost 90 percent of all new jobs created in the United States since the 1990s. 2. Many of the tools, techniques, and methods traditionally used in manufacturing are equally applicable to service organizations. Teaching Tip: Note that many organizations today are beginning to operate in both manufacturing and service businesses. Berkshire Hathaway, for example, makes chocolates and owns an insurance business. Extra Example: Other large service organizations include American Airlines (transportation), Morgan Stanley (financial services), Equitable (insurance), Marriott (lodging), and Nationsbank (banking services). Discussion Starter: Is it possible for an economic system such as the United States to move totally away from manufacturing and become a pure service economy? What would cause this to happen, and what would some of the effects be? D. The Role of Operations in Organizational Strategy Operations management affects strategy and strategy affects operations. II. Designing Operations Systems A. Determining Product-Service Mix The design of operations systems begins with determining the product-service mix, or how many and what kinds of products and services (or both) to offer. B. Capacity Decisions Next, managers must choose the appropriate capacity, the amount of products, services, or both that can be produced by an organization. This will involve determining for the organization the conversion capacity that is appropriate for the demand. If demand is overestimated, the resources required to build the facility may never be recouped, and if underestimated, market opportunities may be lost. Extra Example: Some firms can manipulate their capacity by extending or compressing their operating hours. For example, when Disney’s popular Animal Kingdom theme park opened in mid-1998, the company started opening the park at 7:00 a.m. and staying open until late in the evening. This helped spread the huge crowds out over a longer period of each day, thus essentially increasing the park’s capacity. Extra Example: In some college towns, some retail merchants close early during the summer because of reduced customer traffic. C. Facilities Decisions Facilities are the physical locations where products or services are created, stored, and distributed. 1. An organization’s location is its physical position or the geographic site of facilities. Location is determined by what amenities (railroads, airports, etc.) or customers (mall shoppers, downtown shoppers) it must be near, as well as by its organizational strategy. 2. Layout is the choice of the physical configuration of the facilities, the arrangement of equipment within the facilities, or both. a) A product layout is arranged around the product and is appropriate when large quantities of a single product are needed. b) A process layout is used when a variety of products are created and the work moves through various workstations. c) A fixed-position layout is arranged around a single work area. It is used when the organization is creating a few very large and complex products, such as aircraft. d) A cellular layout is a relatively new approach that is used when families of products can follow similar flow paths. Group Exercise: Have students work together and identify different examples to illustrate each of the four layouts noted in the text. Teaching Tip: Note the interrelationships between layout and technology, discussed next. III. Organizational Technologies Technology is the set of processes and systems used by organizations to convert resources into products or services. A. Manufacturing Technology Cross-Reference: Note that we also discuss technology in Chapter 12. 1. Automation is the process of designing work so that it can be completely or almost completely performed by machines. a) Automation relies on feedback, information, sensors, and a control mechanism. b) The impact of automation on workers is complex. In the short term, workers may lose their jobs. In the long run, more jobs are created than are lost. However, individual workers may have difficulty in adjusting to the new jobs, because of differences in skills or geographic location. Discussion Starter: Ask students to discuss the pros and cons of automation. Can any production process ever be completely automated? 2. Computer-assisted manufacturing is technology that relies on computers to design or manufacture products. a) Computer-aided design (CAD) involves using computers to design parts, complete products, and simulate performance so that prototypes need not be constructed. b) Computer-aided manufacturing (CAM) is a use of computers that ensures that design moves smoothly into production and is usually used in combination with CAD. c) Computer-integrated manufacturing (CIM) allows for coordination among all manufacturing activities, linking CAD and CAM systems. d) Computer-controlled movement of materials from one part of the system to another is usually included in flexible manufacturing systems (FMS), which rely on robots as well as computers. Extra Example: Most computers today are designed with computer-aided design techniques and then manufactured with computer-aided manufacturing techniques. Extra Example: In 1998 Chrysler touted the fact that it used computer-aided design as an advertising “hook” for its new products. Today it is so commonplace among automakers that companies don’t even bother to advertise it. 3. Robotics refers to the science and technology of the construction, maintenance, and use of robots. A robot is any artificial device that is able to perform functions ordinarily thought to be appropriate for human beings. Discussion Starter: Note that robots were originally envisioned to look like human beings. In reality, however, most industrial robots today bear little resemblance to humans. Discussion Starter: Robots have played a big role in many science fiction movies such as Star Wars, AI, and others. Ask students to identify other movies featuring robots. Discuss the realism (or lack of same) in these movies. B. Service Technology Examples of automation in the service industry include automatic teller machines used by banks, patient information systems used by hospitals to track patients, and computerized reservation systems used by hotels. Discussion Starter: Solicit student suggestions for other illustrations of service technology. IV. Implementing Operations Systems Through Supply Chain Management Supply chain management is the process of managing operations control, resource acquisition and purchasing, and inventory to improve overall efficiency and effectiveness. A. Operations Management as Control Operations management as control can be obtained by coordinating it with other functions. Depending on the strategic role of operations, operations managers are accountable for different kinds of results. Teaching Tip: Stress the fundamental role of operations management as control in organizations. Operations management is often called upon to coordinate the activities of other units, so control is a very important consideration. B. Purchasing Management Purchasing management, or procurement, is concerned with buying the materials and resources needed to produce products and services. Teaching Tip: Some business programs offer specialized courses in purchasing management. Indicate whether your school offers such a course. C. Inventory Management Inventory control manages the organization’s raw materials, work in process, finished goods, and products in transit. 1. Each type of inventory is managed by different methods for different purposes and has a different source of control. Group Exercise: Have student groups identify five different kinds of organizations, and then identify potential examples of each type of inventory. Extra Example: Sometimes managers use the concept of inventory in creative ways. For example, the Equal Employment Opportunity Commission (EEOC) currently has a backlog of several thousand discrimination cases it simply does not have the staff to handle. But the agency refuses to use the term backlog, instead calling the cases inventory. 2. A fairly new inventory method is the just-in-time (JIT) method that has necessary materials arriving as soon as they are needed (just in time) so that the production process is not interrupted. In addition to smoothing the production schedule, just-in-time methods reduce the organization’s investment in storage. V. Managing Total Quality A. The Meaning of Quality Quality is the totality of features and characteristics of a product or service that bear on its ability to satisfy stated or implied needs. Teaching Tip: Point out to students that the exact specifications of quality depend upon the product or service under consideration. For example, a quality automobile is safe and defect-free, while a quality home mortgage loan is one that the borrowers will be able to repay without undue financial stress. Teaching Tip: Point out to students that quality is relative, not absolute, and depends on the needs and perceptions of the consumer. B. The Importance of Quality In recognition of the importance of quality in business competitiveness and overall performance, the federal government created the Malcolm Baldrige Award, a prestigious award given to U.S. firms that achieve major quality improvements. Quality is important for a number of reasons. Group Exercise: Have students research the most recent firms to win a Baldrige award. Discussion Starter: Ask students if they have had any personal experiences with recent Baldrige Award–winning firms and, if so, if they agree with the merits of the award for that particular firm. 1. Quality has become one of the most competitive points in business today. 2. Productivity and quality are related, but not as much as they were in the past. It is not true that if you increase output, quality will decrease. It is possible for both to go up. Teaching Tip: A major point to stress is that it is possible for a firm to stress quality so much that it loses sight of other aspects of effective management. 3. Improved quality can lower costs with fewer returns, less maintenance, and fewer customer complaints. Extra Example: A major component underlying Ford’s commitment to total quality management is its potential for keeping costs in check. C. Total Quality Management Total quality management (TQM) is a strategic commitment by top management to change its whole approach to business in order to make quality a guiding factor in everything the organization does. There are five basic dimensions of TQM. 1. A strategic commitment from top management is the starting point. Managers can influence the organization culture and provide resources that will be needed for the TQM effort. 2. Employee involvement is also important. The person responsible for doing the job should also be responsible for making sure that it is done right. Work teams are a popular approach to increasing employee involvement in TQM. 3. New forms of technology, such as robotics and automation, can improve quality. 4. Improving the quality of the materials used to produce products is a powerful tool for improving total quality. Extra Example: Note that improving materials is not always a straightforward decision. In the early days of notebook computers, manufacturers used metal for cases. More recent models, however, use lighter-weight plastic. The new computers are much lighter than the earlier models, but not as sturdy. 5. Improving the methods and operating systems used by the organization during the actual transformation process can also have a strong impact on quality. D. TQM Tools and Techniques 1. Value-added analysis is the comprehensive evaluation of all work activities, materials flows, and paperwork to determine the value that they add for customers. The analysis can reveal wasteful or unnecessary activities that can safely be eliminated. 2. Benchmarking is the process of learning how other firms do exceptionally high-quality things. Firms can replicate methods that have been proven successful. Teaching Tip: One recent study found that 31 percent of U.S. firms benchmark regularly, while only 7 percent never benchmark at all. Extra Example: IBM conducts around 100 benchmarking studies a year. AT&T conducts around 40 to 50 studies a year. 3. Outsourcing involves subcontracting services and operations to other firms that can perform them cheaper and/or better. Extra Example: Many colleges and universities today have begun to outsource. Popular areas for outsourcing include food services, equipment and supplies, housing services, and health services. 4. Reducing cycle time is a way of getting activities performed more quickly. Cycle time refers to the time needed by the organization to accomplish activities such as developing, making, and distributing products or services. Speed of operations can provide a competitive advantage and reduce costs. 5. ISO 9000:2000 and ISO 14000 are quality standards created by the International Organization for Standardization. The ISO 9000:2000 standard focuses on quality issues, while ISO 14000 focuses on environmental performance. By meeting ISO standards or by requiring its suppliers to meet the standards, a firm can improve quality. Teaching Tip: The correct pronunciation of ISO 9000 is not “I-S-O 9000,” but instead is “ICE-o 9000.” Interesting Quote: “There is absolutely no negotiation. If you want to work with us, you have to get it.” (John Yates, general manager of global sourcing for General Electric’s plastics business, indicating that all its suppliers must meet ISO 9000 standards; quoted in Fortune, June 28, 1993, p. 116) 6. Statistical quality control includes several statistical techniques that can enhance quality in organizations. Especially useful are acceptance sampling and in-process sampling. a) Acceptance sampling is the sampling of finished goods to ensure that quality standards have been met. b) In-process sampling involves evaluating products during production so that needed changes can be made. 7. Six Sigma refers to the goal of having only 3.4 defects per million units; it involves making corrections until errors virtually disappear. VI. Managing Productivity A. The Meaning of Productivity Productivity is an economic measure of efficiency that summarizes what is produced relative to resources used to produce it. 1. There are several levels of productivity that focus on different levels of analysis to calculate or define productivity. a) Aggregate productivity is the total level of productivity achieved by a country. b) Industry productivity is the total productivity achieved by all the firms in a particular industry. c) Company productivity is an individual company’s productivity. d) Unit productivity is the achievement of a unit or department within an organization. e) Individual productivity is the productivity level attained by a single person. 2. Total factor productivity is a ratio of outputs to inputs (resources). It serves as an overall indicator of how well an organization uses all of its resources to create its products and services. Partial productivity ratios use only one category of input (e.g., labor) instead of all of them. B. The Importance of Productivity Productivity is important because it determines the organization’s ability to survive and also because it determines people’s standard of living in different countries. C. Productivity Trends The United States remains the most productive country in the world. Though other countries gained ground during the 1980s, productivity growth in the United States picked up steam in the 1990s and in the current decade is generally keeping pace with growth in most other industrial countries. Extra Example: In the first quarter of 2014, U.S. manufacturing productivity increased by 1.7 percent, the lowest in a decade. The U.S. productivity rate increase was below that of Japan and Germany. Developing nations such as China and India showed significantly higher productivity rates. D. Improving Productivity 1. One way to improve productivity is by improving operations. This may involve spending more on research and development; it can also involve revamping or refining transformation facilities, such as plants and equipment. 2. The other major thrust in productivity enhancement is by increasing employee involvement and participation. Making the organization’s workforce more flexible includes training workers to do a number of different jobs. However, it is important that rewards be provided for employee involvement to make participation really work. Extra Example: Since 1965, U.S. government expenditures on research and development as a percent of GDP have declined steadily. Over that same time, private-sector expenditures on research and development in the United States have risen steadily. Today, industry provides about two-thirds of all R&D spending; the federal government provides 28 percent; and the rest is provided by nonprofits, universities, and other institutions. Instructor Manual for Fundamentals of Management Ricky W. Griffin 9781285849041, 9780357039168
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