COURSE LEARNING MODULE

OMGT 1013 (Operations Management and Total Quality Management)

AY 2023-2024

Lesson 5 and 6: Productivity and Differences of Goods and Services

Topic: Productivity
Comparisons between Goods and Services

Learning Outcomes: After reading this module, you are expected to:

1. Solve problems about productivity;

2. Determine the measures of productivity;
3. Understand the importance of productivity in the workplace;
4. Identify similarities and differences between goods and services.

LEARNING CONTENT

Introduction:

PRODUCTIVITY
One of the primary responsibilities of a manager is to achieve productive use of an organization’s
resources. The term productivity is used to describe this. Productivity is an index that measures output (goods
and services) relative to the input (labor, materials, energy, and other resources) used to produce it. It is
usually expressed as the ratio of output to input.

Although productivity is important for all business organizations, it is particularly important for
organizations that use a strategy of low cost because the higher the productivity, the lower the cost of the
output.

Lesson Proper:

A productivity ratio can be computed for a single operation, a department, an organization, or an entire
country. In business organizations, productivity ratios are used for planning workforce requirements,
scheduling equipment, financial analysis, and other important tasks.

Productivity has important implications for business organizations and for entire nations. For non-profit
organizations, higher productivity means lower costs; for profit-based organizations, productivity is an
important factor in determining how competitive a company is. For a nation, the rate of productivity growth is of
great importance. Productivity growth is the increase in productivity from one period to the next relative to the
productivity in the preceding period.

Productivity is a measure of the effective use of resources, usually expressed as the ratio of output to
input. It is a common measure of how well a country, industry, or business unit is using its resources (factors of
productions). Moreover, it is an index that measures output (g/s) relative to input (labor, materials, energy and
other resources) used to produce them.

OMGT 1013-Operations Management and TQM | 1

Note: It is a relative measure - it needs to be compared with something else.

The operations manager’s job is to enhance (improve) the ratio of outputs to inputs.
Improving productivity means improving efficiency.

2 ways to achieve improvement:

1. Reduction in inputs while outputs remain constant
2. Increase in output while input remains constant.

Importance of Productivity

1. Product measures can be used to track performance overtime w/c allows managers to judge performance
and to decide where improvements are needed.
2. Product measure can also be used to judge the performance of an entire industry or the national product of
a country as a whole.
3. Serve as scorecard of the effective use of resources because business leaders are concerned with
productivity as it relates to productivity

Some measurement problems:

1. Quality- may change while quality of inputs or outputs remains constant.
Eg. Radio

2. External elements- may cause an increase or decrease in product for w/c the system under study
may not be directly responsible.
Eg. Improvements of firms products bought by more reliable electric power service rather than
managerial decision made w/in the firm.

3. Precise units of measure may be lacking

Eg. Not all automobiles require the same units.

2 ways to make productivity comparisons:

1. A company can compare itself with similar operations w/in its industry or it can use industry data
when such data is available.
2. To measure productivity in overtime w/in the same operation.

Computing Productivity
Types of Productivity Measures:
Partial Measures Output/ Labor Output/ Machine Output/ Capital Output/Energy
Multifactor Measures Output/ Labor + Machine Output/ Labor + Capital + Energy
Total Measures Goods or Services Produced/ All inputs used to produce them

OMGT 1013-Operations Management and TQM | 2

Examples of Partial Productivity Measures
Labor Productivity Units of output per labor hour
Units of output per shift
Value-added per labor hour
Peso value of output per labor hour

Machine Productivity Units of output per machine hour

Peso value of output per machine hour

Capital Productivity Units of output per dollar input

Peso value of output per dollar input

Energy Productivity Units of output per kilowatt-hour

Peso value of output per kilowatt-hour

Types of Productivity Measurement

1. Single- Factor Productivity (Partial Productivity Measure)
- Indicate the ratio of one resource (input) to the g/s produce (output)
- Ratio of output to a single input
2. Multifactor Productivity
- Indicates the ratio of many or all resources (input) to the g/s produced.
- Index of the output provided by more than one of the resources used in production.
- Ratio of output to a group of inputs (but not all)
3. Total Factor Measure of Product
- Ratio of all outputs to inputs
- Describe the productivity of an entire organization or even a nation

Examples:
1. Determine the productivity for these cases:
a. Four workers installed 720 square yards of carpeting in 8 hours.
b. A machine produced 68 usable pieces in 2 hours.
Solution:
a. Productivity = Yards of carpet installed/ Labor hours worked

OMGT 1013-Operations Management and TQM | 3

 = 720 square yards/ 4 workers x 8 hrs. / worker
= 720 yards/ 32 hrs.
= 22.5 yards/ hour
b. Productivity = Usable Pieces/ Product time
= 68 pieces/ 2 hours
= 34 pieces/ hour

2. A company that processes fruits and vegetables is able to produce 400 cases of canned peaches in
one half hour with four workers. What is the labor productivity?

Solution:

Labor productivity = Quality Produced / Labors Hours

= 400 cases (4 workers x 1/2 hours / workers)
= 200 cases per labor hour

3. Mance Fraily, the Production Manager at Ralts Mills, can currently expect his operation to produce
1000 square yards of fabric for each ton of raw cotton. Each ton of raw cotton requires 5 labor hours to
process. He believes that he can buy a better quality raw cotton, which will enable him to produce 1200
square yards per ton of raw cotton with the same labor hours.
What will be the impact on productivity (measured in square yards per labor-hour) if he purchases the
higher quality raw cotton?

Solution:

Labor Productivity = Units Produced (output)

Labor hours used

Output = 1000 sq yards

Labor = 5 hours

Current quality of raw cotton (A):

Labor Productivity = 1000 = 200 sq yards/hr
5

New/better quality of raw cotton (B):

Labor Productivity = 1200 = 240 sq yards/hr
5

OMGT 1013-Operations Management and TQM | 4

Note: The purchase of the better quality of raw cotton yielded a greater productivity compared with the
current quality of raw cotton, that is 240 sq yards per hour versus 200 sq yards per hour respectively.
To compute for the percentage change in productivity, we have:

% Change = B - A A = 200 sq yards/hr

A B = 240 sq yards/hr

Note: Productivity change (improvement) = ( 240 - 200 ) / 200 = 0.2 or 20% improvement in productivity

Factors That Affect Productivity

General Factors: Methods, Capital, Quality, Technology, and Management
Other Factors: Standardizing processes and procedures
Quality Differences
Use of the Internet
Computer viruses
Searching for lost or misplaced items
Scrap Rates
New Workers
Safety
A shortage of information technology workers and other technical workers
Layoffs
Labor Turnover
Design of Workspace
Incentive plans that reward productivity increases
Equipment Breakdowns
Shortages of Parts and Materials
Inadequate training of employees

Ways of Improving Productivity:

1. Develop productivity measures for all operations.
2. Look at the system as a whole in deciding which operations are most critical; it is overall productivity
that is important.
3. Develop methods for achieving productivity improvements and reexamining the way work is done.
4. Establish reasonable goals for improvement.
5. Make it clear that management supports and encourages productivity improvement.

OMGT 1013-Operations Management and TQM | 5

 6. Measure improvements and publicize them.

DIFFERENCES BETWEEN GOODS & SERVICES

Services = those economic activities that typically produce an intangible product, e.g. education,
entertainment, lodging, government, financial services & health services, repair & maintenance, food,
transportation, insurance, trade, real estate, legal & entertainment.

Attributes of Goods Attributes of Services

(Tangible product) (Intangible product)

-tangible -intangible

-stored inventory -often produced& consumed

simultaneously e.g. beauty salon produces
a haircut that is “consumed”
simultaneously

-not often unique -often unique

-do not have high customer interaction -have high customer interaction
(often difficult to standardize, automate &
make as efficient as we would like because
customer interaction on demands
uniqueness

-have consistent product definition -have inconsistent product definition, e.g.

auto insurance policy (policy holders
change cars & nature)

-automated -often knowledge-based, e.g. educational,

medical & legal services

-not dispersed -frequently dispersed (dispersion occurs

because services are frequently brought to
the client/customer via a local office, a
retail/outlet)

-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 -service provider, not product, is often

transportable

OMGT 1013-Operations Management and TQM | 6

 -site of facility is important for cost -site of facility is important for customer
contact

-often easy to automate -often difficult to automate

-revenue is generated from the tangible -revenue is generated primarily from the
product intangible services

CHARACTERISTICS OF MANUFACTURING & SERVICES

OPERATIONS
More like a manufacturing organization More like a service organization

1. physical, durable product •intangible, perishable product

2. output can be inventoried •output cannot be inventoried
3. low customer contact •high customer contact
4. long response time •short response time
5. regional, national, or international •local markets
markets
6. large facilities •small facilities
7. capital intensive •labor intensive
8. quality easily measured •quality not easily measured

1) Manufactured goods– are outputs that can be produced, stored & transported in anticipation of future
demand creating inventories allows to cope with fluctuations in demand by smoothing output levels

Services– can’t be reproduced; don’t have the luxury of using finished goods inventories as a cushion against
erratic customer demand

2) Manufactured goods– have little or no contact with the production system

–primary customer contact is left to distributors and retailers

Services–customers themselves are inputs & active participants in the process

e.g. college-student studies, attends lectures, take exams & receives diploma
hospitals, jails & entertainment
Note: Some service operations have low customer contact at one level of the organization & high customer
contact at other levels
e.g.- branch offices of parcel delivery, banking & insurance organizations deal with customers daily, but
their central offices have little direct customer contact
-back room operations of a jewelry store require little customer contact whereas sales counter
operations involve a high degree of contact

3) Manufacturer– generally have days or weeks to meet customers demand

Services–within must be offered minutes of customer arrival
e.g. grocery store customer may grow impatient after waiting five minutes in a checkout line
–Customer usually arrive at times of their choosing––have difficulty matching capacity with demand;
arrival patterns may fluctuate daily or even hourly, creating even more short-term demand uncertainly

4) Manufacturing –facilities often serve regional, national, or even international market & generally require
larger facilities, more automation & greater capital investment than for service
OMGT 1013-Operations Management and TQM | 7
Service– generally can’t be shipped to distant locations
–require direct customer contact & must locate relatively near their customers

5) Manufacturing– relatively easy to measure because have tangible products customer contact

Services–hard to measure; objective measurement is difficult because individual preferences affect

assessments of service quality
e.g. one customer might value a friendly chat with the sales clerk during a purchase whereas another
might assess quality by the speed & efficiency of a transaction

SIMILARITIES BETWEEN MANUFACTURING & SERVICES

1) both normally provide a package of g/s

e.g. customers expect both good service & good food at a restaurant & both good service & quality
goods from a retailer
2) Despite that service provides can’t inventory their outputs, they must inventory the inputs for their
products. These inputs must undergo further transformations during provision of the service
e.g. hospitals– must maintain on adequate supply of medications. Manufacturing firms that make
customized products or limited shelf-life products can’t inventory their outputs

3) Everyone in an organization has some customers––outside or inside––whether in services or in

manufacturing

Note ‫ ٭‬Manufacturing & service are often similar in terms of what is done but different in terms of how it is
done, i.e. both involve design & operating decisions
e.g. manufacturing- decide what size factory is needed
service(hospitals)- decide what size building is needed
--both must decide on:
location control operating
schedule allocate scarce resources

DIFFERENCES

1) Customer Contact
Service- by nature; involves a much higher degree of customer contact; performance of service
typically occurs at the pt. of consumption e.g. surgery requires the presence of surgeon and patient;
cant build up inventories of time and are much more sensitive to demand viability (bank, supermarket
alternate between lines and customer waiting for service and idle sellers or cashiers waiting for
customers.

Mftg-allows a separation between production and consumption so that mftg may occur away from the
consumer; this permits a fair degree of latitude in selecting work methods, assigning jobs, scheduling
work and exercising control over operations.
- can build inventories of finished goods ( cars, nags) enabling them to absorbs some of the
stocks caused by varying demand.
2) Service –subject to greater variability of inputs; each patient, each lawn, and each lawn and each auto
repair presents a specific problem that often must be diagnosed before it can be remedied.

Mftg- often have the ability to carefully control the amount of variability of inputs and achieve low variability
in outputs; consequently; job regents for mftg are generally more uniform than those for services.

OMGT 1013-Operations Management and TQM | 8

 3) Services- require a higher labor content because of the on the consumption of services & high degree
of variation of inputs
Mftg- with exceptions, can be more capital-intensive

4) Services- sometimes appear to be slow & awkward & output is more variable
Mftg- tends to be smooth & efficient because of high mechanization & such would generate low
variability

5) Service- variations in demand intensity & in requirements from job to job make productivity
measurement considerably more difficulties e.g. compare productivity of two doctors-one may have
large number of routine cases while the other does not—their productivity appears to differ unless a
very careful analysis is made.
Mftg- measurement of productivity is more straight forward due to high degree of uniformity of most
manufactured items

6) Quality at the point of creation is typically more important for services than for manufacturing, where
errors can be corrected before the customer receives the output

Characteristics Manufacturing Service

Output Tangible Intangible

Customer contact Low High

Uniformity of input High Low

Labor content Low High

Uniformity of output High Low

Measurement of Easy Difficult

productivity

Opportunity to correct High Low

quality problem before
delivery to customer
*** END of LESSON***

REFERENCES

Textbooks

Collier, David Alan, et.al.(2020). Operations Management and Total Quality Management. Cengage Learning
Asia Pte. Ltd.

Stevenson, William J. (2018). Operations management thirteenth edition. McGraw Hill Education, 2 Penn
Plaza, New York, NY 10121.

WARNING: No part of this E-module/LMS Content can be reproduced, or transported or shared to others without
permission from the University. Unauthorized use of the materials, other than personal learning use, will be penalized.
Please be guided accordingly.

OMGT 1013-Operations Management and TQM | 9