CHAPTER ONE

NATURE OF OPERATIONS MANAGEMENT

1.1 Introduction
Operations (production): is that part of a business organization that is responsible for
producing goods and/ or services. Goods are physical items that include raw materials, parts,
and subassemblies. Operations is those activities concerned with the acquisition of raw
materials their conversation into finished product, and the supply of that finished product to
the customer.
Services are activities that provide some combination of time, location, form, or psychological
value. Operation is what the company does. Examples: goods and services are found all around
you. Every book you read, every video you watch, every e-mail you send, every telephone
conversation you have, and every medical treatment you receive involves the operations function
of one or more organizations. So does everything you wear, eat, travel in, sit on, and access the
Internet with. The operations function in business can also be viewed from a more far-reaching
perspective.

Operations management: is the set of activities that creates value in the form of goods and
services by transforming inputs into outputs. In manufacturing firms, the production activities
that create goods are usually quite obvious. In them, we can see the creation of a tangible product
such as Sony TV or a Harley-Davidson motorcycle. In an organization that does not create a
tangible good or product, the production function may be less obvious. We often call these
activities services.

Operation Management: is the management of systems or processes that create goods and/or
provide services. Or Operation Management- is the design, operation, and improvement of
those systems that create and deliver the firms primary products and services, like marketing and
finance. Operation Management is functional field of business with clear line management
responsibility. The business function responsible for planning, coordinating, and controlling the
resources needed to produce a company’s products and services. Every organization has OM
function Service or Manufacturing, For profit or Not for profit.

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Operation Management Adds Value which means the difference between the costs of inputs
and the value of prices of outputs.
Value added

Inputs
Outputs
Land
Transformation/ Goods
Labor Conversion process
Services
Capital

Feedback
Feedback
Feedback
Control

Organizing to produce goods and services

To create goods and services, all organizations perform three basic functions. These functions are the
necessary ingredients not only for production but also for an organization’s survival. They are:
 Marketing: which generates the demand, or at least takes the order for a product or service
(nothing happens until there is sale).
 Production/operation: which create product
 Finance/accounting: tracks how well the organization is doing, pays the bills and collects
the money.

Manufacturing
Organization

Operation/Production Marketing
Facilities: Construction; maintenance
Production and inventory control Sales Finance /accounting
Scheduling; materials control
Quality assurance and control Supply chain promotion Disbursements/ credits
management Receivables
Advertising
Manufacturing: Tooling; fabrication; Payables
assembly Sales General ledger
Design: Product development and design Capital requirements
Detailed product specifications Market
Industrial engineering: Efficient use of Stock issue
machines, space, and personnel research Bond issue and recall
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Why study OM?
We study OM for the following reasons:

 OM is one of the three major functions (marketing, finance, and operations) of any
organization, and it is integrally related to all the other business functions. All organization
market (sell), finance (accounting), and produce (operation), and it is important to know how
the OM activity functions. Therefore, we study how people organize themselves for
productive enterprise.
 We want (and need) to know how goods and services are produced.
 We want to understand what operations managers do. By understanding what these managers do, you
can develop the skills necessary to become such a manager. Operation managers have basic
management function (planning, organizing, staffing, directing, and controlling This will help you
explore the numerous and lucrative career opportunities in OM. These career opportunities are:
 Operations manager  Time study analyst
 Production analyst  Inventory manager
 Production manager  Quality analyst
 Industrial engineer
 Quality manager
 OM is such a costly part of an organization
Example: Fisher technologies is a small firm that must double its dollar contribution to fixed cost
and profit in order to be profitable enough to purchase the next generation of production
equipment. Management has determined that if the firm fails to increase contribution, its bank
will not make the loan and the equipment cannot be purchased. If the firm cannot purchase the
equipment, the limitations of the old equipment will force fisher to go out of business and, in
doing so, put its employees out of work and discontinue producing goods and services for its
customers. Three strategic option (marketing, finance/accounting, and operations) proposed for
the firm.
 The first option is a marketing option, where good marketing management may increase sales
by 50%.
 The second option is a finance/ accounting option, where finance costs are cut in half through
good financial management.
 The third option is an OM option, where management reduces production costs by 20%.
Which one is the best option that yield the greatest improvement in contribution?

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 Given: Current financial contribution

Sales $100,000
Cost of Goods – 80,000
Gross Margin 20,00
0
Finance Costs – 6,000
Subtotal 14,000
Taxes at 25% –
3,
5
0
0
Contribution $
10,
50
0
Solution:
Options for Increasing Contribution
Marketing option Financial/ OM Option
Accounting
Option
Current Increase Sales Reduce Finance Reduce Production
Revenue 50% Costs 50% Costs 20%
Sales $100,000 $150,000 $100,000 $100,000
Cost of Goods – 80,000 – 120,000 – 80,000 – 64,000
Gross Margin 20,000 30,000 20,000 36,000
Finance Costs – 6,000 – 6,000 – 3,000 – 6,000
Subtotal 14,000 24,000 17,000 30,000
Taxes at 25% – 3,500 – 6,000 – 4,250 –7,500
Contribution 10,500 $ 18,000 $ 12,750 $ 22,500

The Activities of Operations Management

Operations managers have some responsibility for all the activities in the organization which
contribute to the effective production of goods and services. And while the exact nature of the
operations function’s responsibilities will, to some extent, depend on the way the organization
has chosen to define the boundaries of the function, there are some general classes of activities
that apply to all types of operation.
 Understanding the operation’s strategic objectives. The first responsibility of any
operations management team is to understand what it is trying to achieve. This means

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 developing a clear vision of how the operation should help the organization achieve its long-
term goals. It also means translating the organization’s goals into their implications for the
operation’s performance objectives, quality, speed, dependability, flexibility and cost.
 Developing an operations strategy for the organization. Operations management involves
hundreds of minute-by-minute decisions, so it is vital that operations managers have a set of
general principles which can guide decision making towards the organization’s longer-term
goals. This is an operations strategy.
 Designing the operation’s products, services and processes. Design is the activity of
determining the physical form, shape and composition of products, services and processes.
Although direct responsibility for the design of products and services might not be part of the
operations function in some organizations, it is crucial to the operation’s other activities.
 Planning and controlling the operation. Planning and control is the activity of deciding
what the operations resources should be doing, then making sure that they really are doing it.
 Improving the performance of the operation. The continuing responsibility of all
operations managers is to improve the performance of their operation.

Operation Management Critical Decisions

 Design of goods and services: What good or service should we offer? How should we
design these products and services?
 Managing quality: How do we define quality? Who is responsible for quality?
 Process and capacity design: What process and what capacity will these products require?
What equipment and technology is necessary for these processes?
 Location strategy: Where should we put the facility? On what criteria should we base the
location decision?
 Layout strategy: How should we arrange the facility? How large must the facility be to meet
our plan?
 Human resources and job design: How do we provide a reasonable work environment?
How much can we expect our employees to produce?
 Supply chain management: Should we make or buy this component? Who are our suppliers
and who can integrate into our e-commerce program?

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 Inventory, material requirements planning, and JIT: How much inventory of each item
should we have? When do we re-order?
 Intermediate and short–term scheduling: Are we better off keeping people on the payroll
during slowdowns? Which jobs do we perform next?
 Maintenance: Who is responsible for maintenance? When do we do maintenance?
1.2 Historical Development of operation Management
The field of OM is relatively young, but it history is rich and interesting. Our lives and the OM
discipline have been enhanced by the innovations and contributions of numerous individuals.

Eli Whitney (1800) is credited for the early popularization of interchangeable parts, which was
achieved through standardization and quality control. Through a contract he signed with the U.S.
government for 10,000 muskets, he was able to command a premium price because of their
interchangeable parts.

Frederick W. Taylor (1881), known as the father of scientific management, contributed to

personnel selection, planning and scheduling, motion study, and the now popular field of
ergonomics. One of his major contributions was his belief that management should be much be
more resourceful and aggressive in the improvement of work methods. Taylor and his
colleagues, Henry L. Gantt and Frank Lillian Gilbreth, were among the first to systematically
seek the best way to produce.

Another of Taylor’s contributions was the belief that management should assume more
responsibility for:
Matching employees to the right job.
Providing the proper training.
Providing proper work methods and tools
Establishing legitimate incentives for work to be accomplished.

By 1913, Henry Ford and Charles Sorensen combined what they knew about standardized parts
with the quasi – assembly lines of the meatpacking and mail – order industries and added the
revolutionary concept of the assembly line, where men stood still and material moved.

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Quality control is another historically significant contribution to the field of OM. Walter
Shewhart (1924) combined his knowledge of statistics with the need for quality control and
provided the foundations or statistical sampling in quality control.

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 Era Events/Concepts Dates Originator
Industrial Steam engine 1769 James Watt
Revolution Division of labor 1776 Adam Smith
Interchangeable parts 1790 Eli Whitney
Principles of scientific management 1911 Frederick W. Taylor
Scientific Time and motion studies 1911 Frank and Lillian Gilbreth
Management Activity scheduling chart 1912 Henry Gantt
Moving assembly line 1913 Henry Ford
Hawthorne studies 1930 Elton Mayo
Human Motivation theories 1940s Abraham Maslow
Relations 1950s Frederic Herzberg
1960s Douglas McGregor
Operations Linear programming 1947 George Dantzig
Research Digital computer 1951 Remington Rand
Simulation, waiting line theory, 1950s Operations research groups
decision theory, PERT/CPM
JIT (just-in-time) 1970s Taiichi Ohno (Toyota)
TQM (total quality management) 1980s W. Edward Deming, Joseph
Quality Juran
Revolution Strategy and operations 1980s Wickham Skinner, Robert
Hayes
Business process reengineering 1990s Michael Hammer, James
Champ
Six Sigma 1990s GE, Motorola

1.3 Manufacturing Operations and Service Operations

Production of Goods Versus Delivery of Services
o Goods are physical items that include raw materials, parts, subassemblies, and final
products. E.g. Automobile, Computer, Oven, Shampoo
o Services are activities that provide some combination of time, location, form or

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 psychological value. E.g. Air travel, Education, Haircut, Legal counsel
o Production of goods –tangible output
o Delivery of services –an act
o Service job categories-Government, Wholesale/retail, Financial services, Healthcare,
Personal services, Business services, Education.
Characteristics of Goods

Tangible product Can be inventoried

Consistent product definition Low customer interaction
Production usually separates from
consumption
Characteristics of Service

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 Intangible product: services are usually intangible (for example, your purchase of a ride in
an empty airline seat between two cities) as opposed to a tangible good.
Produced and consumed at same time: there is no stored inventory. For instance, the
beauty salon produces haircut that is “consumed” simultaneously, or the doctor produces an
operation that is “consumed” as it is produced. We have not yet figured out how to inventory
haircuts or appendectomies.
Often unique: your mix of financial coverage, such as investments and insurance policies
may not be the same as anyone else’s just as the medical procedure or a haircut produced for
you is not exactly like anyone else’s.
High customer interaction: services are often difficult to standardize, automate, and make
as efficient as we would like because customer interaction demands uniqueness.
Often knowledge-based: as in the case of educational, medical, and legal services, and
therefore hard to automate.
Frequently dispersed: Dispersion occurs because services are frequently brought to the
client/customer via local office, a retail outlet, or even a house call.

Having made the distinction between goods and services, we should point out that in many cases,
the distinctions is not clear – cut. In reality, almost all services and almost all goods are a mixture
of a service and a tangible product. Even services such as consulting may require a tangible
report. Similarly, the sale of most goods includes a service. For instance, many products have the
service components of financing and delivery (e.g., automobile sales). Many also require after –
sale training and maintenance (e.g., office copiers and machinery). “service” activities may also
be an integral part of production. Human resource activities, logistics, accounting, training, field
service, and repair are all service activities, but they take place within a manufacturing
organization.

When a tangible product is not included in the service, we may call it a pure service. Although
there are not very many pure services, in some instances counselling may be an example.

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 Goods Services

Automobile
computer
Installed carpeting
Fast food meal
Restaurant meal/auto repair
Hospital care
Advertising agency/investment management
Consulting services/teaching
Counseling

100% 75 50 25 0 25 50 75 100%

Percent of product that is good Percent of product that is service

Figure 1.2 most goods contain a service, and Most services contain a Good
Attributes of goods and services

Attributes of Goods Attributes of Services

(tangible product) (intangible product)
Product can be resold Reselling a service is unusual.
Product can be inventoried. Many services cannot be inventoried
Some aspects of quality are measurable Many aspects of quality are difficult to
measure.
Selling is distinct from production Selling is often a part of the service
Product is transportable Provider, not product, is often
transportable

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 Site of facility is important for cost Site of facility is important for customer
contact
Often easy to automate Service is often difficult to automate.
Revenue is generated primarily from Revenue is generated primarily from the
the tangible product Service

Table 1.2 attributes of Goods and

service

1.4 Operation Decision Making

Thousands of business decisions are made every day. Not all the decisions will make or break
the organization. But each one adds a measure of success or failure to the operations. Hence
decision- making essentially involves choosing a particular course of action, after considering
the possible alternatives.

Operations decision range from simple judgments to complex analyses, which also involves
judgment. Judgment typically incorporates basic knowledge, experience, and common sense.
They enable to blend objectives and sub-objective data to arrive at a choice.

Framework for Decision-Making

An analytical and scientific framework for decision implies the following systematic steps:
 Defining the problem enables to identify the relevant variables and the cause of the
problem. Careful definition of the problem is crucial. Finding the root cause of a problem
needs some questioning and detective work. If a problem defined is too narrow, relevant
variable may be omitted. If it is broader, many tangible aspects may be included which leads
to the complex relationships.
 Establish the decision criteria are important because the criterion reflects the goals and
purpose of the work efforts. For many years’ profits served as a convenient and accepted goal
for many organizations based on economic theory. Nowadays organization will have multiple
goals such as employee welfare, high productivity, stability, market share, growth, industrial
leadership and other social objectives.
 Formulation of a model lies at the heart of the scientific decision-making process. Model
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 describes the essence of a problem or relationship by abstracting relevant variables from the
real-world situation. Models are used to simplify or approximate reality, so the relationships
can be expressed in tangible form and studied in isolation. Modeling a decision situation
usually requires both formulating a model and collecting the relevant data to use in the
model. Mathematical and statistical models are most useful models for understanding the
complex business of the problem. Mathematical models can incorporate factor that cannot
readily be visualized. With the aid of computers and simulation techniques, these quantitative
models flexible.
 Generating alternatives-Alternatives are generated by varying the values of the parameters.
Mathematical and statistical models are particularly suitable for generating alternatives
because they can be easily modified. The model builder can experiment with a model by
substituting different values for controllable and uncontrollable variable.
 Evaluation of the alternatives is relatively objective in an analytical decision process
because the criteria for evaluating the alternatives have been precisely defined. The best
alternative is the one that most closely satisfies the criteria. Some models like LPP model
automatically seek out a maximizing or minimizing solution. In problems various heuristic
and statically techniques can be used to suggest the best course of action.
 Implementation and monitoring are essential for completing the managerial action. The
best course of action or the solution to a problem determined through a model is
implemented in the business world. Other managers have to be convinced of the merit of the
solution. Then the follow-up procedures are required to ensure about appropriate action
taken. This includes an analysis and evaluation of the solution along with the
recommendations for changes or adjustments.

Decision Methodology
The kind and amount of information available helps to determine which analytical methods are
most appropriate for modeling a given decision. The degree of certainty is classified as complete
certainty, risk, and uncertainty.

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• Decision making under certainty: Under complete certainty conditions, all relevant
information about the decision variables and outcomes is known or assumed to be known.
State of nature is known. Some of methods which used to decision making under certainty
are: Algebra, Calculus, Mathematical programming.
• Decision making under risk: information about the decision variables or the outcomes is
probabilistic. Several states of nature may occur and Each has a probability of occurring.
Some approaches which used to decision making under risk are: Statistical analysis, queuing
theory, simulation, Network analysis technique.
• Decision making under uncertainty: Under extreme uncertainty, no information is
available to assess the likelihood of alternative outcomes. Four possible decision criteria are
Maximin, Maximax, Laplace, and Minimax regret. These approaches can be defined as
follows:
• Maximin: Determine the worst possible pay-off for each alternative, and choose the
alternative that has the “best worst.” The Maximin approach is essentially a pessimistic one
because it takes into account only the worst possible outcome for each alternative. The actual
outcome may not be as bad as that, but this approach establishes a “guaranteed minimum.”
• Maximax: Determine the best possible pay-off, and choose the alternative with that pay-off.
The Maximax approach is an optimistic, “go for it” strategy; it does not take into account any
pay-off other than the best.
• Laplace: Determine the average pay-off for each alternative, and choose the alternative with
the best average. The Laplace approach treats the states of nature as equally likely.
• Minimax regret: Determine the worst regret for each alternative, and choose the alternative
with the “best worst.” This approach seeks to minimize the difference between the pay-off
that is realized and the best pay-off for each state of nature.
Example 1: Referring to the pay-off table, determine which alternative would be chosen under
each of these strategies: (a) Maximin, (b) Maximax, and (c) Laplace.
Possible future demand in Rs.
Alternatives Low Moderate High
Small facility 10 10 10
Medium facility 7 12 12
Large facility (4) 2 16

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Solution
a) Using Maximin, the worst pay-offs for the alternatives are:
Small facility: Rs.10 million
Medium facility: 7 million
Large facility: –4 million

Hence, since Rs.10 million is the best, choose to build the small facility using the
maximum strategy.
b) Using Maximax, the best pay-offs are:
Small facility: Rs.10 million
Medium facility: 12 million
Large facility: 16 million
The best overall pay-off is the Rs.16 million in the third row. Hence, the Maximax
criterion leads to building a large facility.
c) For the Laplace criterion, first find the row totals, and then divide each of those
amounts by the number of states of nature (three in this case). Thus, we have:
Alternatives Raw total (Rs. Raw average
Million) (Rs. Million)
Small facility 30 10
Medium facility 31 10.33
Large facility 14 4.67

Because the medium facility has the highest average, it would be chosen under the Laplace
criterion.

1.5 Productivity Measurement

Productivity is defined in terms of utilization of resources, like material and labor. In simple
terms, productivity is the ratio of output to input. For example, productivity of labor can be
measured as units produced per labor hour worked. Productivity is closely linked with quality,
technology and profitability. Hence, there is a strong stress on productivity improvement in
competitive business environment. Productivity can be improved by (a) controlling inputs, (b)

15
improving process so that the same input yields higher output, and (c) by improvement of
technology. Productivity and production are not the same thing. Productivity takes into account
output in relation to input, whereas in production we consider only the output and not the input.
Productivity can be measured at firm level, at industry level, at national level and at international
level. Productivity ratios are used for:
• Planning workforce requirements
• Scheduling equipment
• Financial analysis
• Tracking an operating unit’s performance over time
• Judging the performance of an entire industry or country

The measurement of productivity can be quite direct. Such is the case when productivity is
measured by labor – hours per ton of a specific type of steel. Although labor – hours is a
common measure of input, other measures such a capital (dollars invested), materials (tons of
ore), or energy (kilo watts of electricity) can be used. Productivity is the relationship between
the outputs generated from a system and the inputs that are used to create those outputs. An
example of this can be summarized in the following equation:

𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦=units produced

Inputs used
 Single – factor productivity (Partial Measure): is use just one resource input to measure
productivity. Partial measure= output/machine, output/labor, output/capital.
 Multifactor Productivity (multifactor measure): includes all inputs (e.g., capital, labor,
material, energy). Multifactor productivity is also known as total factor productivity.
Multifactor productivity is calculated by combining the input units as shown here:
𝑀𝑢𝑙𝑡𝑖𝑓𝑎𝑐𝑡𝑜𝑟 𝑚𝑒𝑎𝑠𝑢𝑟𝑒𝑠= output output
labor+machine labor+Capital+Energy

Total measures = Goods or Services Produced

All inputs used to produce them

For example, if units produced = 1,000 and labor – hours used is 250, then: labor
productivity=1,000/250=4units per labor-hour one resource input Single factor productivity.
Example 2, if 7040 Units Produced and sold for $1.10/unit and cost of labor:$1,000; cost of

16
materials:$520; and cost of overhead:$2,000. What is the total factor or multi factor productivity

17
Solution:
TFP= output =(7040 units)*(1.10)= 2.20
Labor+material+overhead $1000+$520+$2000
Multiple resource inputs multi-factor productivity
Example 3, Collins title wants to evaluate its labor and multifactor productivity with a new
computerized title- search system. The company has a staff of four, each working 8 hours per
day (for a payroll cost of $640/day) and overhead expenses of $400 per day. Collins processes
and closes on 8 title each day. The new computerized title-search system will allow the
processing of 14 title per day. Although the staff, their work hours, and pay are the same, the
overhead expenses are now $800 per day. Determine labor and multifactor productivity for both
the old and new system.
Solution:
1. Labor productivity of old and new system
Old System: New System:

Staff of 4 works 8 hrs/day 8 titles/day Staff of 4 works 8 hrs/day 14 titles/day

Payroll cost = $640/day Payroll cost = $640/day
Overhead = $400/day
8𝑡𝑖𝑡𝑙𝑒𝑠/𝑑𝑎𝑦
Overhead = $800/day

𝑙𝑎𝑏𝑜𝑟 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 = 14𝑡𝑖𝑡𝑙𝑒𝑠/

32 labor − 𝑑𝑎𝑦
𝑙𝑎𝑏𝑜𝑟 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 =
hours 32 labor −
= 0.25 𝑡𝑖𝑡𝑙𝑒𝑠/𝑙𝑎𝑏𝑜𝑟 = 0 .4375 𝑡𝑖𝑡𝑙𝑒𝑠/𝑙𝑎𝑏𝑜𝑟
− ℎ𝑟 − ℎ𝑟

2. Multifactor Productivity
Old system: New system :

Staff of 4 works 8 hrs/day 8 titles/day Staff of 4 works 8 hrs/day 14 titles/day

Payroll cost = $640/day Payroll cost = $640/day

8𝑡𝑖𝑡𝑙𝑒𝑠/ 14𝑡𝑖𝑡𝑙𝑒𝑠/
Overhead = $400/day Overhead = $800/day
𝑚𝑢𝑙𝑡𝑖𝑓𝑎𝑐𝑡𝑜𝑟 𝑑𝑎𝑦 𝑚𝑢𝑙𝑡𝑖𝑓𝑎𝑐𝑡𝑜𝑟 𝑑𝑎𝑦
𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 = 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 =
$640 + $640 +
= .0077 = .0097
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𝑡𝑖𝑡𝑙𝑒𝑠/𝑑𝑜𝑙𝑙𝑎𝑟 𝑡𝑖𝑡𝑙𝑒𝑠/𝑑𝑜𝑙𝑙𝑎𝑟
If labor productivity growth is entirely the result of capital spending, measuring just labor
distorts the results. Multifactor productivity is usually better, but more complicated. Labor
productivity is the more popular measure. The multifactor productivity measures provide better
information about the trade – offs among factors, but substantial measurement problems remain.
Some of these measurement problems are listed here:
 Quality: may change while the quantity of inputs and outputs remains constant.
 External elements: may cause an increase or decrease in productivity.
 Precise units of measure: may be lacking
Productivity Variables
Productivity increases are dependent on the three productivity variables:
o Labor: which contributes about 10% of the annual increase.
o Capital: which contributes about 38% of the annual increase.
o Management: which contributes about 52% of the annual increase.
These three factors are critical to improve productivity. They represent the broad areas in which
managers can take action to improve productivity.

Labor: improvement in the contribution of labor to productivity is the result of a healthier better
– educated, and better – nourished labor force. Some increase may also be attributed to a shorter
workweek. Historically, about 10% of the annual improvement in productivity is attributed to
improvement in the quality of labor. Three key variables for improved labor productivity are:
 Basic education appropriate for an effective labor force.
 Diet of the labor force
 Social overhead that makes labor available, such as transportation and sanitation.

Illiteracy and poor diets are a major impediment to productivity, costing countries up to 20% of
their productivity. Infrastructure that yields clean drinking water and sanitation is also an
opportunity for improved productivity, as well as an opportunity for better health, in much of the
world.

Capital: Human beings are tool – using animals. Capital investment provides those tools. Inflation
and taxes increase the cost of capital, making capital investment increasingly expensive. When

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the capital invested per employee drops, we can expect a drop in productivity. Using labor rather
than capital may reduce unemployment in the short run, but also makes economies less
productive and therefore lowers wages in the long run. Capital investment is often a necessary,
but seldom a sufficient ingredient in the battle for increased productivity.

Management: management is a factor of production and an economic resource. Management is

responsible for ensuring that labor and capital are effectively used to increase productivity.
Management accounts for over half of the annual increase in productivity. This increase includes
improvements made through the use of knowledge and the application of technology.
Service productivity
The service sector provides a special challenge to the accurate measurement of productivity and
productivity improvement. The traditional analytical framework of economic theory is based
primary goods – producing activities. Productivity of the service sector has proven difficult to
improve because service – sector work is:
- Typically, labor – intensive (for example, counselling, teaching).
- Frequently focused on unique individual attributes or desires (for example, investment
advice).
- Often an intellectual task performed by professionals (for example, medical diagnosis)
- Often difficult to mechanize and automate (for example a haircut).

The more intellectual and personal the task, the more difficult it is to achieve increases in
productivity. Low – productivity improvement in the service sector is also attributable to the
growth of low – productivity activities in the service sector. These include activities not
previously a part of the measured economy, such as child care, food preparation, house cleaning,
and laundry service. These activities have moved out of the home and into the measured
economy as more and more women have joined the workforce.

However, in spite of the difficulty of improving productivity in the service sector, improvements
are being made and this text presents a multitude of ways to make these improvements.

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