Managing productivity and quality

1. Managing  Productivity

Productivity is significant because it influences the well-being of the entire  society as well as of individual  companies. The only way to increase the output of goods and services to society is to increase organizational  productivity.


Many of the concepts we have discussed, including just-in-time inventory and an emphasis on quality, are central to the philosophy of lean manufacturing.  Today’s organizations are trying to become more efficient, and implementing  the lean manufacturing philosophy is one popular approach to doing so. Lean manufacturing, sometimes called lean produc- tion, uses highly trained employees at every stage of the production  process who take  a painstaking approach to details and problem solving to cut waste and improve quality and productivity.  Lean manufacturing  was pioneered by Toyota, and the concept  has spread around the world to both manufacturing and service organizations.

The heart of lean manufacturing  is not machines or technology but employee involve- ment. Employees are trained  to “think lean,” and empowered to make changes to attack waste and strive for continuous improvement in all areas.24 The system combines techniques such as just-in-time inventory, continuous-flow production, quick changeover of assembly lines, continuous improvement,  and preventive maintenance with a management  system that encourages employee involvement  and problem solving. Any employee can stop the production line at any time to solve a problem.  In addition,  equipment is often designed to stop automatically  so that a defect can be fixed.25


One important question when considering productivity improvements is: What is produc- tivity, and how do managers measure it? In simple terms, productivity is the organiza- tion’s output of goods and services divided  by its inputs. This means that productivity can be improved by either increasing the amount of output  using the same level of inputs or re- ducing the number of inputs required to produce the output.  Sometimes a company can even do both. Ruggieri & Sons, for example, invested in mapping software to help it plan deliveries of heating fuel. The software plans the most efficient  routes based on the loca- tions of customers and fuel reloading terminals, as well  as the amount of fuel each customer needs. When Ruggieri switched from planning routes by hand to using the software, its drivers began driving fewer miles but making 7 percent more stops each day—in  others words, burning less fuel to sell more fuel.26

The accurate measure of productivity  can be complex. Two approaches for measuring productivity  are total factor productivity and partial productivity. Total factor produc- tivity is the ratio of total outputs to the inputs from labor, capital, materials, and energy:

Total factor productivity represents the best measure of how the organization is doing. Often, however, man- agers need  to know about productivity with respect to certain inputs. Partial productivity is the ratio of total outputs to a major category of inputs. For example, many organizations  are interested in labor productivity, which is measured as follows:

Calculating this formula for labor, capital, or materials provides information  on whether improvements in each element are occurring. However,  managers often are crit- icized for relying too heavily on partial productivity mea- sures,  especially  direct labor.27 Measuring direct labor misses the valuable improvements in materials, work pro- cesses, and quality. Labor productivity is easily measured but may show an increase as a result of capital improve- ments. Thus, managers will misinterpret the reason for productivity  increases.

2. Total Quality Management (TQM)

One popular  approach based on a decentralized control philosophy is total quality man- agement (TQM), an organization-wide effort to infuse quality into every activity in a company through continuous improvement. Managing quality is a concern for every orga- nization. The Yugo was the lowest-priced car on the market when it was introduced  in the United  States in 1985, yet four years later, the division went bankrupt, largely as a result  of quality problems in both products and services.28 In contrast, Toyota has steadily gained market  share over the past several decades and will likely soon overtake General Motors  as the world’s top-selling auto maker.29  The difference comes down to quality. Toyota is a model of what happens when a company makes a strong commitment to TQM.

TQM became attractive to U.S. managers in the 1980s because it had been successfully implemented by Japanese companies, such as Toyota, Canon, and Honda, which were gain- ing market share and an international reputation for high quality. The Japanese system was based  on the work of such U.S. researchers  and consultants   as Deming, Juran,  and Feigenbaum,  whose ideas attracted U.S. executives after the methods were tested overseas.30

The TQM  philosophy  focuses on using teamwork,  increasing customer satisfaction, and lowering  costs. Organizations implement TQM by encouraging managers and employees to collaborate  across functions  and departments,   as well as  with customers and suppliers, to identify areas for improvement, no matter how small. Each quality improvement is a step toward perfection and meeting a goal of zero defects. Quality control becomes part of the day- to-day business of every employee, rather than being assigned to specialized departments.

The implementation of TQM is similar to that of other decentralized control methods. Feedforward controls include training employees to think in terms of prevention, not de- tection, of problems and giving them the responsibility and power to correct errors, expose problems, and contribute to solutions. Concurrent controls include an organizational cul- ture and employee commitment that favor total quality and employee participation. Feed- back controls include targets for employee involvement and for zero defects.


The implementation of TQM involves the use of many techniques, including quality circles, benchmarking, Six Sigma principles, reduced cycle time, and continuous improvement.

Quality Circles. One technique for implementing the decentralized  approach of TQM is to use quality circles. A quality circle is a group of 6 to 12 volunteer employees who meet regularly to discuss and solve problems affecting the quality of their work.31  At a set time during the workweek, the members of the quality circle meet, identify problems, and try to find solutions. Circle members are free to collect data and take surveys. Many companies train people in team building, problem solving, and statistical quality control. The reason for using quality circles is to push decision making to an organization level at which recommen- dations can be made by the people who do the job and know it better than anyone else.

Benchmarking. Introduced by Xerox in 1979, benchmarking is now a major TQM component. Benchmarking is defined as “the continuous process of measuring products, services, and practices against the toughest competitors or those companies recognized  as industry  leaders to identify areas for improvement.”32 The key to successful benchmarking lies in analysis. Starting with its own mission statement, a company should honestly ana- lyze its current procedures and determine areas for improvement. As a second step, a com- pany carefully selects competitors worthy of copying. For example, Xerox studied the order fulfillment techniques of L.L.Bean, the Freeport, Maine, mail-order firm, and learned ways to reduce warehouse costs by 10 percent. Companies can emulate internal  processes and procedures of competitors but must take care to select companies whose methods are disciplined and relentless pursuit of higher quality and lower costs. The discipline is based on a five-step methodology referred to as DMAIC (Define, Measure, Analyze, Improve, and Control, pronounced “de-May-ick” for short), which provides a structured way for organi- zations to approach and solve problems.34   GE bought a Hollywood  studio and is trying to implement  a form of Six Sigma,  as shown  in the Benchmarking box.

Effectively implementing Six Sigma requires a major commitment  from top manage- ment because Six Sigma involves widespread change throughout  the organization. Hun- dreds of organizations have adopted some form of Six Sigma program in recent years. Highly committed  companies, including  ITT Industries, Motorola, General Electric, Allied Signal, ABB Ltd., and DuPont & Co., send managers to weeks of training to become qualified as Six Sigma “black belts.” These black belts lead projects aimed at improving  targeted areas of the business.35  Although originally applied to manufacturing, Six Sigma  has evolved to a process used in all industries  and affecting  every aspect of company operations, from human resources to customer service. Exhibit 15.6 lists some statistics that illustrate why Six Sigma is important for both manufacturing and service organizations. Cox Communications, Inc., based in Atlanta,  Georgia, used Six Sigma to improve the “time to answer” metric for the company’s help desk. According  to Tom Guthrie,  vice president of operations, the process enabled Cox to reduce staffing by 20 percent, saving big bucks, while also cutting  the aban- don rate (the number of calls abandoned before being answered) by 40 percent.36

Reduced Cycle Time. Cycle time has become  a critical quality  issue in today’s fast-paced world. Cycle time refers to the steps taken to complete a company process, such as teaching  a class, publishing a textbook, or designing a new car. The simplification of work cycles, including  dropping barriers between work steps and among departments  and remov- ing worthless steps in the process, enables a TQM program to succeed. Even if an organiza- tion decides not to use quality  circles or other techniques, substantial improvement is possi- ble by focusing on improved responsiveness and acceleration of activities into a shorter time. Reduction in cycle time improves overall company performance as well  as quality.37

L.L.Bean  is a recognized leader in cycle time control.  Workers  used flowcharts to track their movements, pinpoint wasted motions, and completely redesign the order-fulfillment process. Today,  a computerized system breaks down an order based on the geographic  area of the warehouse in which  items are stored. Items are placed on conveyor belts, where elec- tronic sensors re-sort  the items for individual orders. After orders are packed, they are sent to a FedEx facility  on site. Improvements such as these have enabled L.L.Bean to process most orders within two hours after the order is received.38

Continuous Improvement. In North America,  crash programs and designs have traditionally been the preferred method of innovation. Managers measure the expected bene- fits of a change and favor the ideas with the biggest payoffs. In contrast, Japanese companies   have   realized extraordinary success  from making a  series  of mostly small improvements. This approach, called continuous improvement, or kaizen, is the implementation of a large number  of small, incremental  improvements  in all areas of the organization on an ongoing basis. In a successful TQM program, all employees learn that they are expected to contribute by initiating changes in their own job activities. The basic philosophy is that improving  things a little bit at a time, all the time, has the highest probability of success. Innovations can start simple, and employees  can build on their success  in this unending process.


Despite its  promise, TQM   does  not always work. A  few firms  have   had disappointing  results. In particular, Six Sigma principles might not be appropri- ate for all organizational  problems, and some companies have expended tremen- dous energy and  resources   for  little payoff.39  Many contingency factors (listed in Exhibit 15.7) can influence  the success of a TQM program. For example, quality  circles are most beneficial when employees have chal- lenging jobs; participation in a quality circle can contribute  to productivity because it enables employees to pool their knowledge and solve interesting  problems. TQM  also tends to be most successful when it enriches jobs and improves employee motivation.  In addition, when participating in the quality program improves workers’ problem-solving skills, productivity is likely to increase. Finally,  a quality  program has the greatest chance of success in a corporate culture that values quality  and stresses continuous improvement as a way of life.

3. Trends in Quality Control

Many  companies are responding to changing economic realities and global competition by reassessing organizational  management  and processes—including control mechanisms. Some of the major trends in quality and financial control include international quality standards and economic value-added and market value-added systems.


One impetus for TQM  in the United States is the increasing significance of the global economy. Many countries have adopted a universal benchmark for quality  assurance, ISO certification, which is based on a set of international standards for quality established by the International  Standards Organization  in Geneva, Switzerland.40   Hundreds of thou- sands of organizations in 150 countries, including  the United  States, have been certified to demonstrate their commitment to quality. Europe continues to lead in the total number of certifications, but the greatest number of new certifications in recent years has been in the United States. One of the more interesting organizations to recently become ISO certified was  the Phoenix, Arizona, Police Department’s  Records and Information Bureau. In today’s environment, where the credibility  of law enforcement  agencies has been called into question, the Bureau wanted to make a clear statement  about its commitment to quality and accuracy of information provided to law enforcement  personnel and the public.41

ISO certification has become the recognized standard for evaluating and comparing com-panies on a global basis, and more U.S. companies are feeling the pressure to participate to remain competitive in international markets. In addition,  many countries and companies require ISO certification before they will do business with an organization.

Economic Value-Added (EVA). Hundreds of companies, including  AT&T, Quaker Oats, the Coca-Cola Company, and Philips Petroleum  Company,  have set up economic value-added (EVA) measurement  systems as a new way to gauge financial performance. EVA can be defined as a company’s net (after-tax) operating profit minus the cost of capital invested in the company’s tangible  assets.42 Measuring performance in terms of EVA is intended to capture all the things a company can do to add value from its activi- ties, such as run the business more efficiently,  satisfy customers, and reward shareholders. Each job, department,  process, or project in the organization is measured by the value added. EVA can also help managers make more cost-effective  decisions. At Boise Cascade, the vice president of IT used EVA to measure the cost of replacing the company’s existing storage devices against keeping the existing  storage assets that had higher maintenance costs. Using EVA demonstrated that buying new storage devices would lower annual maintenance costs significantly  and easily make up for the capital expenditure.43

3. Innovative Control Systems for  Turbulent  Times

As we have discussed throughout this text, globalization, increased competition, rapid change, and uncertainty  have resulted in new organizational  structures and management methods that emphasize information sharing, employee participation,  learning, and teamwork. These shifts have, in turn, led to some new approaches to control. Two additional aspects of control in today’s organizations are open-book  management and use of the balanced scorecard.


In an organizational environment that promotes information  sharing, teamwork, and the role of managers as facilitators, executives cannot hoard information  and financial data. They admit employees throughout the organization into the loop of financial control and responsibility to encourage active participation and commitment to goals. A growing num- ber of managers are opting for full disclosure in the form of open-book management. Open-book  management allows  employees to see  for themselves—through  charts, computer printouts,  meetings, and so forth—the financial condition of the company. Sec- ond, open-book management shows the individual  employee how his or her job fits into the big picture and affects the financial future of the organization. Finally, open-book management ties employee rewards to the company’s overall success. With training in in- terpreting the financial  data, employees can see the interdependence and importance of each function.  If they are rewarded according to performance, they become motivated to take responsibility for their entire team or function, rather than merely their individual jobs.44 Cross-functional communication and cooperation are also enhanced.

The goal of open-book management is to get every employee thinking and acting like a business owner. To get employees to think like owners, management provides them with the same information owners have: what money is coming in and where it is going. Open- book management helps employees appreciate why efficiency is important to the organiza- tion’s  success as well as their own. Open-book management turns traditional  control on its head. Development  Counsellors International,  a New York City public relations firm, found an innovative way to involve employees in the financial aspects of the organization.

Managers in some countries have more trouble running  an open-book company because prevailing  attitudes and standards encourage confidentiality  and even  secrecy concerning financial  results. Many  businesspeople in countries such as China, Russia, and Indonesia, for example, are not accustomed to publicly disclosing financial details, which can present prob- lems for multinational companies operating there.47   Exhibit 15.8 lists a portion of a recent Opacity Index, which offers some indication of the degree to which  various countries are open regarding economic matters. The higher the rating, the more opaque, or hidden, the economy of that country. In the partial index in Exhibit 15.8, Indonesia has the highest opacity rating at 59, and Finland the lowest at 13. The United States has an opacity rating of 21, which is fairly low on the index of countries. In countries with higher ratings, financial figures are typically  closely guarded and managers may be discouraged from sharing information  with employees and the public. Globalization is beginning to have an impact on economic opacity in various countries by encouraging a convergence toward  global accounting  standards that support more accurate collection, recording, and reporting  of financial information.


Another recent innovation is to integrate the various dimensions of control, combining internal financial  measurements and statistical reports with a concern  for markets and customers as well  as employees.48 Whereas many managers once focused primarily on mea- suring and controlling  financial performance, they are increasingly recognizing  the need to measure other, intangible  aspects of performance to assess the value-creating activities of the contemporary organization.49   Many of today’s companies compete primarily on the basis of ideas and relationships,  which  requires that managers find ways to measure intan- gible  as well  as tangible  assets.

One fresh approach is the balanced scorecard. The balanced scorecard is a comprehensive management  control  system that balances traditional financial measures with operational mea- sures relating to a company’s critical success factors.50 A balanced scorecard contains four major perspectives, as illustrated  in Exhibit 15.9: financial  performance, customer service, internal business processes, and the organization’s capacity for learning and growth.51 Within these four areas, managers identify key performance metrics that the organization will track. The financial performance perspective  reflects a concern that the organization’s activities contribute to improv- ing short- and long-term  financial performance. It includes traditional  measures such as net income and return on investment. Customer  service indicators  measure such things as how customers view the organization, as well  as customer retention and satisfaction. Business process indicators focus on production and operating statistics, such as order fulfillment or cost per order. The final component looks at the organization’s potential for learning and growth, focusing on how well resources and human capital are being managed for the company’s future. Metrics  may include such things  as employee retention and the introduction of new products. The compo- nents of the scorecard are designed in an integrative manner, as illustrated in Exhibit 15.9.

Managers record, analyze, and discuss these various metrics to determine how well the organization is achieving its strategic goals. The balanced scorecard is an effective tool for managing and improving performance only if it is clearly linked to a well-defined organiza- tional strategy and goals.52 At its best, use of the scorecard  cascades down from the top levels of the organization,  so that everyone becomes involved  in thinking about and discussing strategy.53   The scorecard has become the core management control  system for many organi- zations,  including well-known organizations  such as  Bell Emergis  (a division of Bell Canada), ExxonMobil, Cigna Insurance, British Airways, Hilton Hotels Corp., and even some units of the U.S. federal government.54  British Airways clearly ties its use of the bal- anced scorecard to the feedback control model we discussed early in this chapter. Scorecards are used as the agenda for monthly  management meetings. Managers focus on the various elements of the scorecard to set targets, evaluate performance,  and guide discussion about what further actions need to be taken.55    As with all management  systems, the balanced scorecard is not right for every organization  in every situation. The simplicity of the system causes some managers  to underestimate the time and commitment  that is needed for the approach to become  a truly useful management control  system. If managers implement the balanced  scorecard  using  a performance measurement orientation rather than a performance management approach that links targets and measurements to corporate strategy, use of the scorecard can actually hinder or even decrease organizational performance.56

In addition, the scorecard has evolved from  a system that places equal emphasis on the four categories of performance management illustrated in Exhibit 15.9 into a cause-effect  relation- ship that calls attention to how organizations  achieve higher performance. This adapted approach to the scorecard, illustrated  in Exhibit 15.10, indicates that financial  results are the final outcome of other  processes within the company. The foundation of high financial perfor- mance is learning and growth, which reflects that it is an organization’s people and culture that cause excellent  business processes. Excellent business processes in turn cause customers  to be satisfied. And happy customers lead to financial success. Thus, the components of the scorecard can be organized into a pyramid, indicating  that each level shown in Exhibit 15.10 reinforces the level above it. Thus, high financial performance is an outgrowth  of success in other areas, starting with a firm commitment to developing human capital and internal business processes.


Managers in today’s organizations  face some difficult control issues. The matter of control has come to the forefront in light of the failure of top executives and corporate directors to provide  adequate oversight  and control at companies  such  as Enron, HealthSouth, Adelphia, and WorldCom. Thus, many organizations are moving toward increased con- trol, particularly in terms of corporate governance, which refers to the system of govern- ing an organization  so that the interests of corporate owners are protected. The financial reporting systems and the roles of boards of directors are being scrutinized  in organizations around the world. At the same time, top leaders are also keeping a closer eye on the activi- ties of lower-level  managers and employees.

In a fast-moving  environment,  undercontrol can be a problem  because managers can’t keep personal tabs on everything in a large, global organization.  Consider,  for example, that many of the CEOs who have been indicted  in connection with financial misdeeds have claimed that they were unaware that the misconduct  was going on. In some  cases, these claims might be true, but they reflect a significant  breakdown in control. In response, the U.S. government enacted the Sarbanes-Oxley Act of 2002, often referred to as SOX, which  requires several types of reforms, including better internal monitoring to reduce the risk of fraud, certification of financial reports by top leaders; improved  measures for exter- nal auditing;  and enhanced public financial disclosure. SOX has been unpopular with many business leaders, largely  because of the expense of complying with the act. In addition, some critics argue that SOX is creating a culture of overcontrol that is stifling innovation and growth.  Even among those who agree that government regulation is needed, calls for a more balanced regulatory  scheme that requires transparency and objectivity  without re- straining innovation  are growing.57

Overcontrol of employees can be damaging to an organization as well. Managers might feel justified in monitoring e-mail and Internet use, as described  earlier  in the Spotlight feature, for example, to ensure that employees are directing  their behavior toward work rather than personal outcomes, and to alleviate concerns about potential  racial or sexual harassment. Yet employees often resent and feel demeaned by close monitoring that limits their personal freedom and makes them feel as if they are constantly being watched. Exces- sive control  of employees can lead to demotivation, low morale, lack of trust, and even hos- tility among workers. Managers have to find an appropriate balance, as well  as develop  and communicate clear policies regarding workplace monitoring. Although  oversight and con- trol are important,  good organizations  also depend on mutual trust and respect among managers and employees.

Source: Daft Richard L., Marcic Dorothy (2009), Understanding Management, South-Western College Pub; 8th edition.

1 thoughts on “Managing productivity and quality

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