60 PAR T 1 | I N TR O DUCT I ON TO O P ERAT I ON S M ANA GE ME NT

CURRENT SYSTEM SYSTEM WITH PROFESSIONAL BUYER

Labor: 300 hrs. @10 = 3,000 308 hrs. @10 = $3,080
Material: 100 logs/day 1,000 1,000
Capital: 350 350
Energy: 150 150
Total Cost: $4,500 $4,580

Multifactor productivity of current system: Multifactor productivity of proposed system:

= 240 crates>$4,500 = .0533 crates/dollar = 260 crates>$4,580 = .0568 crates/dollar

Using current productivity (.0533) as a base, the increase will be .066. That is, .0568>.0533 = 1.066, or a 6.6% increase.

Problems Note: P means the problem may be solved with POM for Windows and/or Excel OM.

Problems 1.1 to 1.17 relate to The Productivity Challenge b) Lori thinks that by redesigning the package, she can increase
Home Work
• 1.1 Chuck Sox makes wooden boxes in which to ship her total productivity to 133 care packages per day. What will
motorcycles. Chuck and his three employees invest a total of be her new productivity?
40 hours per day making the 120 boxes. c) What will be the percentage increase in productivity if Lori
a) What is their productivity? makes the change? P
b) Chuck and his employees have discussed redesigning the pro- • • 1.5 George Kyparisis makes bowling balls in his Miami
cess to improve efficiency. If they can increase the rate to 125 plant. With recent increases in his costs, he has a newfound
per day, what will be their new productivity? interest in efficiency. George is interested in determining the
c) What will be their unit increase in productivity per hour? productivity of his organization. He would like to know if his
d) What will be their percentage change in productivity? P organization is maintaining the manufacturing average of 3%
• 1.2 Carbondale Casting produces cast bronze valves on increase in productivity per year? He has the following data
a 10-person assembly line. On a recent day, 160 valves were pro- representing a month from last year and an equivalent month
duced during an 8-hour shift. this year:
a) Calculate the labor productivity of the line.
b) John Goodale, the manager at Carbondale, changed the layout LAST YEAR NOW
and was able to increase production to 180 units per 8-hour
Units produced 1,000 1,000
shift. What is the new labor productivity per labor-hour?
c) What is the percentage of productivity increase? P Labor (hours) 300 275
Resin (pounds) 50 45
• • 1.3 A small electronic manufacturing company which
makes communication devices has determined its costs as follows Capital invested ($) 10,000 11,000
(all value data are expressed in millions Euro): Energy (BTU) 3,000 2,850

2013 2014
Show the productivity percentage change for each category and
Output: 2 3
then determine the improvement for labor-hours, the typical
Inputs: standard for comparison. P
Labour 1 1.8
• • 1.6 George Kyparisis (using data from Problem 1.5)
Material and supplies 0.6 0.8 determines his costs to be as follows:
Capital equipment depreciation 0.07 0.12
◆ Labor: $10 per hour
Calculate and compare all single-factor and multifactor productivity for ◆ Resin: $5 per pound
2013 and 2014.
◆ Capital expense: 1% per month of investment
What conclusions do you draw? ◆ Energy: $0.50 per BTU
• 1.4 Lori Cook produces “Final Exam Care Packages” for
resale by her sorority. She is currently working a total of 5 hours Show the percent change in productivity for one month last year
per day to produce 100 care packages. versus one month this year, on a multifactor basis with dollars as
a) What is Lori’s productivity? the common denominator. P
 C H A PT ER 1 | O PE RATI ON S A ND PRO DU CTI VI T Y 61

• 1.7 Hokey Min’s Kleen Karpet cleaned 65 rugs in a) Calculate the company’s productivity before the change in
October, consuming the following resources: work rules and after the change.
b) What is the percentage increase in productivity?
Labor: 520 hours at $13 per hour
c) If production is increased to 700 boxes per day, what is the
new productivity? P
Solvent: 100 gallons at $5 per gallon
• • • 1.12 The State department of motor vehicle, attempts to
Machine rental: 20 days at $50 per day
perform an analysis of the driver’s licence renewal operations. In
the past each renewal process followed six steps to be performed
a) What is the labor productivity per dollar? and took one hour to finish. Calculate the daily productivity,
b) What is the multifactor productivity? P assuming that the working time is eight hours per day.
Home Work
•• 1.8 Lillian Fok is president of Lakefront Manufacturing, In an effort to improve performance, State department reengi-
a producer of bicycle tires. Fok makes 1,000 tires per day with the neered the whole process, i.e. eliminated some steps, merged some
following resources: others, etc. As a result the renewal time of each process dropped
to half-hour. However, from time to time during the day, there
Labor: 400 hours per day @ $12.50 per hour
are some unexpected failures, which result in delays up to an hour
Raw material: 20,000 pounds per day @ $1 per pound per day. Has the modified process impact productivity?
Energy: $5,000 per day • • 1.13 Mr Store who runs his photocopy business working 8
Capital costs: $10,000 per day hours per day process 100 scripts. He estimates his labour cost to
be € 9 per hour. Also he has estimated that the total material cost
a) What is the labor productivity per labor-hour for these tires at for each script is approximately € 2; while the daily expenses are
Lakefront Manufacturing? €28. Calculate the multifactor productivity.
b) What is the multifactor productivity for these tires at In an effort to increase the rate of the photocopy process to 150
Lakefront Manufacturing? scripts, he decides to change the quality of ink thus raising the mate-
c) What is the percent change in multifactor productivity if Fok rial cost to € 2.5 per day. Is the new productivity better than before?
can reduce the energy bill by $1,000 per day without cutting
production or changing any other inputs? P If Mr Store would like to increase the photocopy process to 150
scripts without sacrificing the initial multifactor productivity, by
• • • 1.9 Brown’s, a local bakery, is worried about increased what amount has the material costs to be increased?
costs—particularly energy. Last year’s records can provide a
fairly good estimate of the parameters for this year. Wende • • • 1.14 A production operation is making 150 pieces of a
Brown, the owner, does not believe things have changed much, product by engaging 5 workers for 300 hours. However, 40 per-
but she did invest an additional $3,000 for modifications to the cent of the products appear to have various quality problems and
bakery’s ovens to make them more energy efficient. The modifi- the company decides to sell them as seconds at a price of €50 each
cations were supposed to make the ovens at least 15% more effi- when the normal product is sold €150 each. What is the produc-
cient. Brown has asked you to check the energy savings of the tivity of the company? Home Work
new ovens and also to look over other measures of the bakery’s In an effort to improve the situation, a number of initiatives were
productivity to see if the modifications were beneficial. You have proposed including a scheme where for every improvement 50 per-
the following data to work with: cent will be given to workers and the other 50 percent will be held
by the company. This resulted in a significant drop in defects, as
LAST YEAR NOW
now only 10 products were faulty out of an output of 130 pieces.
Production (dozen) 1,500 1,500 What is the new productivity of the company, and what will be
Labor (hours) 350 325 the earnings per hour of the workers under the bonus scheme, if
Capital investment ($) 15,000 18,000 the cost per piece is €70 both before and after the scheme?
Energy (BTU) 3,000 2,750 • • 1.15 A furniture manufacturing company working on a 40
P hour per week basis makes 100 chairs. The sales price is €70 each,
• • 1.10 Munson Performance Auto, Inc., modifies 375 autos and the company has the following costs:
per year. The manager, Adam Munson, is interested in obtain- ◆ Direct materials €700
ing a measure of overall performance. He has asked you to pro- ◆ Direct labor €300
vide him with a multifactor measure of last year’s performance ◆ Overhead €500
as a benchmark for future comparison. You have assembled the a) Calculate the productivity of the company.
following data. Resource inputs were labor, 10,000 hours; 500 b) What will be the new productivity if the company decides to
suspension and engine modification kits; and energy, 100,000 make 135 chairs per week?
kilowatt-hours. Average labor cost last year was $20 per hour, c) If the company decides to improve productivity through
kits cost $1,000 each, and energy costs were $3 per kilowatt-hour. materials costs reduction only, how much these costs must be
What do you tell Mr. Munson? P reduced in order to achieve a 10 percent increase in total pro-
• • 1.11 Lake Charles Seafood makes 500 wooden packing ductivity?
boxes for fresh seafood per day, working in two 10-hour shifts. d) If the company repeats the same exercise as in (c) above, but
Due to increased demand, plant managers have decided to oper- through labour costs reduction, how much these costs must
ate three 8-hour shifts instead. The plant is now able to produce be reduced in order to achieve a 10 percent increase in total
650 boxes per day. productivity?
62 PAR T 1 | I N TR O DUCT I ON TO O P ERAT I ON S M ANA GE ME NT

• • 1.16 An air-conditioner factory makes three different year. Determine the multifactor productivity with dollars as the
types of air-conditioners: the ceiling type, the cassette type and common denominator for:
the wall-mounted type. Weekly sales of each type are 2, 4 and a) Last year.
6 pieces, at a price of € 350, € 450, and € 500 each, respectively. b) This year.
The ceiling type can be assembled in 1.5 hours, the cassette type c) Then determine the percent change in productivity for the
in 1 hour and the wall-mounted type in 45 minutes. Labour monthly average last year versus the monthly average this year
cost is € 40 per hour and the current factory’s multi factor on a multifactor basis.
productivity is 2.2.
a) Calculate the average cost per air-conditioner based on cur- ◆ Labor: $8 per hour
rent multifactor productivity ◆ Capital: 0.83% per month of investment
b) Calculate labor productivity (in euro per hour) for each type ◆ Energy: $0.60 per BTU
of air-condition
c) Where the company should focus its efforts, based (i) on the
labor productivity, and (ii) on average cost? LAST YEAR THIS YEAR

• • • 1.17 As part of a study for the Department of Labor Production (dozen) 1,500 1,500
Statistics, you are assigned the task of evaluating the improve- Labor (hours) 350 325
ment in productivity of small businesses. Data for one of the Capital investment ($) 15,000 18,000
small businesses you are to evaluate are shown at right. The data
Energy (BTU) 3,000 2,700
are the monthly average of last year and the monthly average this

CASE STUDIES
Uber Technologies, Inc.

The $41 billion dollar firm Uber Technology, Inc., is unsettling Uber, as there are real overhead costs. Uber’s costs, depending
the traditional taxi business. In over 40 countries and 240 mar- on the locale, may include insurance, background checks for
kets around the world, Uber and similar companies are chal- drivers, vetting of vehicles, software development and mainte-
lenging the existing taxi business model. Uber and its growing nance, and centralized billing. How these overhead costs com-
list of competitors, Lyft, Sidecar, and Flywheel in America, and pare to traditional taxi costs is yet to be determined. Therefore,
fledging rivals in Europe, Asia, and India, think their smart improved efficiency may not be immediately obvious, and
phone apps can provide a new and improved way to call a taxi. contract provisions are significant (see www.uber.com/legal/
This disruptive business model uses an app to arrange rides usa/terms).
between riders and cars, theoretically a nearby car, which is In addition to growing regulations, a complicating factor in
tracked by the app. The Uber system also provides a history of the model is finding volunteer drivers at inopportune times. A
rides, routes, and fees as well as automatic billing. In addition, sober driver and a clean car at 1:00 a.m. New Year’s Eve does
driver and rider are also allowed to evaluate each other. The cost more. Consequently, Uber has introduced “surge” pricing.
services are increasingly popular, worrying established taxi ser- Surge pricing means a higher price, sometimes much higher, than
vices in cities from New York to Berlin, and from Rio de Janeiro normal. Surge pricing has proven necessary to ensure that cars
to Bangkok. In many markets, Uber has proven to be the best, and drivers are available at unusual times. These higher surge
fastest, and most reliable way to find a ride. Consumers world- prices can be a shock to riders, making the “surge price” a conten-
wide are endorsing the system as a replacement for the usual tious issue.
taxi ride. As the most established competitor in the field, Uber
is putting more cars on the road, meaning faster pickup times,
which should attract even more riders, which in turn attracts Discussion Questions
even more drivers, and so on. This growth cycle may speed the
demise of the existing taxi businesses as well as provide sub- 1. The market has decided that Uber and its immediate competi-
stantial competition for firms with a technology-oriented model tors are adding efficiency to our society. How is Uber providing
similar to Uber’s. that added efficiency?
The Uber business model initially attempts to bypass a 2. Do you think the Uber model will work in the trucking
number of regulations and at the same time offer better service industry?
and lower fees than traditional taxis. However, the traditional 3. In what other areas/industries might the Uber model be used?
taxi industry is fighting back, and regulations are mounting.
The regulations vary by country and city, but increasingly spe-
cial licensing, testing, and inspections are being imposed. Part Sources: Wall Street Journal (January 2, 2015), B3, and (Dec. 18, 2014), D1;
of the fee charged to riders does not go to the driver, but to and www.bloombergview.com/articles/2014-12-11/can-uber-rule-the-world.