Chapter

13 Increasing efficiency and

productivity

● increasing capacity utilisation to spread fixed costs

Introduction ● choosing the optimal mix of resources
In Chapter 12 we analysed operational data including ● increasing labour productivity
labour productivity and unit costs. In this chapter ● introducing lean production
we will examine the ways in which managers might ● using technology.
improve the productivity and efficiency of the business.
Each of these methods will be examined in this chapter,
What it is important to know by the end of this chapter: along with the difficulties involved in using them.
● the meaning and significance of efficiency
● the importance of capacity
Key terms
● how to utilise capacity efficiently Labour productivity measures the output per employee
● the meaning and significance of productivity in a given time period.
● how to improve productivity and efficiency Efficiency measures how well inputs are used to
● the benefits and difficulties of lean production generate output. If a process becomes more efficient it
● the meaning and significance of ‘Just in Time’ uses fewer inputs to produce a given output and the unit
cost should fall.
● the meaning and significance of labour and capital
intensive production
● how to analyse difficulties increasing efficiency and Improving efficiency: using capacity
productivity efficiently
● what is meant by the optimal mix of resources The capacity of a business is determined by the
● how to use technology to improve efficiency. resources it has at any given moment, that is the
amount and quality of its employees, capital and land.
This determines the maximum that can be produced
Efficiency at the time by the business itself. This is important
Operations managers may want to make their because if this capacity is not used fully it means that
operations process more efficient. Increasing resources are being wasted. This is likely to increase the
efficiency involves getting more output from a given unit cost because the fixed costs are not being spread
level of inputs. Alternatively, it can be seen as using over as many units as they would be if the business was
less resources to achieve a given level of output and at 100 per cent capacity. It is the role of marketing to
quality. A more efficient process will have lower unit generate more sales and achieve higher levels of capacity
costs because it is using its resources more effectively. utilisation. It is inefficient if resources are not utilised
fully. On the other hand, if the capacity is being fully
The importance of efficiency utilised the business is unable to accept new orders
Businesses are constantly trying to improve their and produce them itself. This might lead to customers
efficiency because if they can drive down unit costs finding alternative providers and moving to them.
they can bring the price down or make higher profits It is important, therefore, for a business to have the
with the same price. In a highly competitive business right level of capacity to meet demand and to be looking
world, greater efficiency is important to be able to at ahead to what demand might be in the future; it can
least match what others are doing. Ways of improving then prepare accordingly by increasing or decreasing its
efficiency include: scale over time, or making alternative arrangements.

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 Chapter 13 Increasing efficiency and productivity 165

What do you think?

If capacity utilisation is 10 per cent, what does this
? Labour productivity is measured by:

Labour productivity =
total output
mean? What might be the cause? number of employees
If a business can achieve more output from a given
number of employees, then assuming the wages and
If capacity utilisation is low this is inefficient and so a
salaries stay the same, the cost per unit falls. For
business might:
example:
● try to improve its marketing to boost sales. For
100 employees produce 200 units with a labour cost of
example, it might reduce price of the product, spend
£2,000:
more on the promotional mix, widen distribution or
change the product. ● Labour productivity = 200 / 100 = 2 units per
● reduce its capacity. This is known as rationalising employee.
or downsizing. This may take time to do (for ● Unit cost of labour = £2,000 / 200 = £10 per unit.
example, to close and sell off stores) and may not
If 100 employees produce 400 units with a labour cost
be possible (for example, it may not be possible to
of £2,000:
close part of a production line or part of a chemical
factory without shutting the production down). This ● Labour productivity = 400 / 100 = 4 units per
may be a major strategic decision that is difficult to employee; productivity has increased
reverse and therefore will be taken with care. ● Unit cost of labour = £2,000/400 = £5 per unit; the
labour cost per unit has fallen as productivity has
If demand is too high for the existing capacity a
increased.
business might:
● outsource to other producers. This may take time
to negotiate and is likely to be more expensive than
doing the task in house. Also the business that is
Higher Lower
outsourcing may be concerned about the quality labour = labour costs
of the work: if it is poor this will reflect on the productivity per unit
business that has overall responsibility for the order.
Businesses that have a strong brand or way of doing
things (for example, a management consultancy or
firm of architects) may be wary of outsourcing a Figure 13.1 Higher labour productivity results in lower
service task to an alternative provider that may do unit costs.
things differently.
● find a way to reduce demand in the short term. 1+b
Handling data =3
This might be through pushing the price up. c
Dynamic pricing occurs when businesses such as
Labour Wage
airlines change the prices regularly in response Wage productivity cost per
to demand conditions. When demand is getting Employees costs £ Units (number of units) unit £
higher they can raise prices to match supply more 1 100 10
closely. Alternatively, a business might start a 2 200 30
waiting list and provide the service or good when it 3 300 60
does have capacity. 4 400 100
5 500 200
Increasing efficiency: increasing labour
productivity Table 13.1

Another way of increasing efficiency is to improve the 1 Complete the Table 13.1
output per employee. The output per employee is called 2 Explain the relationship between labour productivity
labour productivity. and wages cost per unit.

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 166 Unit 4 Decision making to improve operational performance

suffer. Imagine setting productivity targets in the health

service: this might mean more patients are treated but
Training
the quality of treatment may suffer. Higher productivity
targets for a call centre may mean more calls are taken
but less time is taken with each customer, so sales and
customer satisfaction may fall. Managers need to be
New New reward aware of ‘unintended consequences’ whereby setting
technology systems one target leads to undesirable behaviour and effects in
INCREASING other areas.
LABOUR
PRODUCTIVITY Also, while introducing ways of achieving higher levels
of labour productivity is desirable for the business
(because output per employee is higher), this may be
resisted by employees. This is because if the demand
for a product does not increase but productivity does,
New ways Better fewer employees will be required to produce the
of working management
output required. If demand is 100 units and output
per employee is 5 units this means 20 employees are
Figure 13.2 Ways of increasing labour productivity required. If productivity is 25 units only 4 employees
are required to produce the same total output. This
To increase labour productivity a manager may: means higher levels of productivity may be associated
● invest in technology so employees have access to with staff being moved to jobs elsewhere in the
more equipment to help them complete their tasks organisation or being made redundant. As a result
more effectively employees may resist attempts to increase productivity
● improve training of employees so staff have more because they want to retain jobs.
skills to do their jobs Alternatively, employees may demand higher pay in
● change the way the work is organised and the design return for higher productivity on the basis that they
of jobs to improve the flow of work and reduce time deserve more. This is because higher productivity means
waiting to complete tasks more output can be produced with the same number of
● change the way employees are rewarded to provide employees, which can lead to more sales and revenue. It
more incentive. is not unusual therefore for employees and managers to

What do you think?

Why do you think simply measuring the quantity an
? negotiate pay deals linked to increases in productivity.
However if the pay increase is too high it may offset
any efficiency gains from the higher productivity and
employee produces may have undesirable effects on quality? therefore the business will not have benefited.
Why do you think measuring productivity might be
difficult in some businesses such as healthcare, teaching Increasing efficiency: choosing the
and financial advice? What do you think should be
measured in these cases to assess employee performance? optimal mix of resources
The resources available to a business include land,
labour and capital. The combination of resources
Difficulties in increasing labour used by a business will depend very much on the
productivity nature of the operations process. Running a logistics
Although increasing productivity is in itself a desirable business like UPS that delivers parcels across the
target for managers this must be achieved without a world is different from running an online retailer,
negative impact elsewhere. Imagine you are rushing to which is different from running a bottling plant. Each
get coursework done more quickly: this might increase process brings with it its own challenges and different
your productivity on a given day but the quality may combinations of resources.

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 Chapter 13 Increasing efficiency and productivity 167

Some processes are quite capital intensive: this equipment because it would use it relatively little,
means they involve a relatively high level of capital as its scale is small. It therefore may have to rent
equipment (such as machinery). Airlines and oil the equipment for short periods of time, which
refineries and chemical plants are capital intensive. is relatively expensive (although cheaper than
By comparison, website design, nail parlours and buying it and having it sit idle for most of the
hairdressers are relatively labour intensive. The time). A large farm may have the scale required
best (or optimal) combination of resources will to justify such equipment as the initial costs can
depend!on: be spread over high volumes and therefore be
● the process itself, for example, what kinds of more!efficient.
processes are involved. High-volume repetitive Getting the optimal mix of resources will affect the
tasks may be able to be undertaken by machinery, quality of the work done but also the efficiency.
whereas very creative, ideas-type work may not. A!business that is operating without the latest
● what is affordable and achievable. It may be that technology because it cannot afford it may be
the funds or space are not available to justify inefficient, for example. A business that meets extra
investment in new equipment. It may be that the demand by simply bringing in staff because there is
scale of operations does not merit it. A small farm not time to invest in capital equipment may also be
may not be able to afford some of the farming inefficient.

Business in focus: BMW Mini

1 Bodyshell production: this is where metal is mainly

welded together to form the body of the MINI.
This is!a very capital intensive process using 230
robots!and!with a quality standard of 0.05 mm
standard.
2 Paintshop: The body shell is painted with several coats,
including the optional contrast roof (black or white).
This is very capital intensive.
3 Assembly: All 2,415 different inner and outer parts of
the Mini that come from 200 suppliers are mounted
to the painted bodyshell. This involves relatively high
levels of labour as it is quite skilled.
Figure 13.3 The Mini assembly line About half of the £100 million investment at Plant
Oxford has gone into modernising and increasing the
The same standards for quality, safety and careful use of capacity of the paint shop. The paintshop took one
resources apply at all production sites within the BMW million man-hours to build, and is held together by
Group’s international production network. Innovative over 250,000 bolts. Its construction in 1996/97 was the
production technologies and employees’ high level of second-largest building project in Great Britain in that
expertise guarantee that more than 20,000 individual year (after the Millennium Dome).
parts can be turned into premium vehicles ‘made by
BMW’. The flexible and innovative production at BMW There are 372 different interior trim and 319 different
Group plants is geared towards customer benefit, exterior options for the new Mini.
making it possible to meet individual customer wishes on
schedule, swiftly and flexibly. The required processes are
Practice questions
very complex and can only be run within highly flexible 1 Analyse how BMW might measure the success of its
structures – both issues the BMW Group masters well. operations at BMW Mini. (9 marks)
2 To what extent do you think effective
At BMW in Oxford more than 4,700 associates work!three
operations!management is important to the sales
shifts, seven days a week, to produce as many!as 700
of!Minis? (16 marks)
Minis per day. The production process involves:

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 168 Unit 4 Decision making to improve operational performance

Increasing efficiency: adopting lean Key term

production Lean production occurs when managers reduce waste
With greater pressure to keep prices low due to greater and therefore operations become more efficient.
competition, lean production has been adopted by
more businesses seeking to remain competitive in
recent years. Lean production aims to reduce waste
throughout the organisation. It seeks to reduce time
What do you think?
Why do you think suppliers and employees are crucial to
?
wasted, material wastage and final products that are the success of lean production?
wasted due to defects.
Being lean aims to reduce waste by: To become leaner a business may adopt a number of
processes such as:
● improving quality and so reducing the number of
● Kaizen: this is an approach which emphasises the value
items that need to be reworked, thrown away or
of continuous improvement. Major changes over time
fixed.
can occur as a result of relatively small changes made
● reducing the amount of inventory held as this
regularly. Employees are encouraged to work in kaizen
reduces costs of protecting and storing it; it also
groups to focus on their area of work and come up with
reduces the risk of the inventory going out of date
ideas on how processes can be improved and made
or not being sold. Some businesses aim to order
leaner. The idea is that those doing the work are more
in supplies only when they are needed. This is
likely to know how to do the work more efficiently.
known as ‘Just in Time’ production and involves
● Andon: On a production line an andon cord is
holding as close to zero stock as possible. Lean
present above the process. If there is a problem the
production requires good communication with
andon cord is pulled and production stops. Flashing
suppliers and the ability of suppliers to produce
lights highlight where the problem has occurred
and deliver quickly. It also assumes good relations
and everyone goes to this point to understand
with employees and a reliable operations process
what happened. The andon approach involves
because if anything goes wrong (for example, a
transparency and ensuring that when a problem
dispute with employees) there are no inventories as
happens everyone in the organisation learns from it
a back-up.
and becomes more efficient as a result.
● reducing the time items are waiting for something to
happen to them; this is because if items are idle they ● Changes to the layout of a store or factory and changes
are not being sold and generating profits. This may to the process used to make it more efficiently.
be done by changing the layout or the way a process Figure 13.4 shows how changes to a system in a fast-
is carried out. food business can make a process leaner and more
● reducing the time when items are moving from one efficient. It shows in number order the stages and
stage of process to another; again this represents a movements in fulfilling an order, both before and after
waste of resources. changes that were made to improve efficiency.

Before lean improvements After lean improvements

Phone/ Soup Bread Toaster Warm prep/ Oven Proofer Phone/ Soup Toaster Oven Proofer
fax food station (thaws food) fax (thaws food)
Trash 3 4 9 10 5 12 7 8 Trash 2 4
Sink Sink
1 2 13 11 6 1 3 5

Samples Register Pastries Prep station Coffee station Samples 'Cockpit' prep station Self-service case Coffee station

Preparation time for each lunch time sandwich reduced by 1 minute, 8 seconds

Figure 13.4 Developing a leaner approach to making sandwiches in a shop

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 Chapter 13 Increasing efficiency and productivity 169

Business in focus: Amazon

Kaizen is a powerful tool for improvement that is used The first time there is a problem, suppliers are reminded of
at Amazon. The founder Jeff Bezos requires all senior the packing rules, the second time anything happens they get
managers to work in customer service at least one day a a warning, and the third time they are dropped as suppliers.
year. This allows managers to experience what it is like
The ideal kaizen teams for Amazon include frontline
on the front line, to understand the problems that occur
workers, engineers, and a few managers who are going to
and to find solutions.
question and look for ways of improvement.
Each improvement from kaizen may be small but they
Source: Adapted from McKinsey & Company website
add up to major change overall. For example, on one
day when Bezos was on the front line he discovered that
some suppliers were sending boxes that were incorrectly Practice questions
labelled or badly packed. In one instance bottles were 1 Analyse how kaizen might help Amazon be more
broken, which was dangerous for employees and if they competitive. (9 marks)
ever got to the customer would obviously be returned. 2 To what extent do you think introducing kaizen at a
Bezos introduced a ‘three strikes’ policy. business would be welcomed by employees? (16 marks)

Business in focus: Lean operations at Airbus

Turnaround time between flights
Average Best
practice Potential reduction Lean techniques

Unload passenger Stricter controls on carry-on bags, fewer

6:14 4:38 1:36
passengers moving back in aisle to find bag

Wait for cleaning crew to board 0:24 0:18 0:06 Cleaning crew in position ahead of time
aircraft
Clean aircraft 11:48 9:40 2:08 Standardise work flow, timing and methods,
such as cleaning supplies in prearranged kits

Wait for transmission to gate of 4:11 0 4.11 Visual signal from cabin crew to agent when plane
cabin crew's approval to board is ready to board, e.g. light flash at top of ramp

Wait for first passenger to board 4:06 0 4:06

Load passengers 19:32 16:00 3:32 Active management of overhead storage bins by
flight attendants

Wait for passenger-information 1:58 0:13 1:45 Passenger-information list delivered by

list agent following last passenger to board

Close aircraft door 0:57 0:09 0:48 Agent ready at aircraft to close door

Detach boarding ramp 1:39 0:43 0:56

Total time (including 52:18 33:11 19:07

initial steps)
Figure 13.5 Minutes and seconds per step for Airbus A320 single-aisle, medium-range airliner
Source: Ewan Duncan and Ron Ritter, ‘Next frontiers for lean’, McKinsey Quarterly 2014 © 1996–2019 McKinsey & Company
Figure 13.5 shows how an airline reduced the turn- Practice questions
around time, i.e. how long it takes to get the plane
1 Analyse how the improvements shown above would
ready for take-off again once it has landed, for an Airbus
benefit an airline. (9 marks)
through a series of small improvements.
2 To what extent do you think introducing lean
production would improve the competitiveness
of a business? (16 marks)

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 170 Unit 4 Decision making to improve operational performance

Lean organisational structure changes, preferring to keep their jobs as they are and not
Being lean can affect every aspect of the business want to train or take on extra responsibility.
including its structure. Peter Drucker, a management Lean production also requires excellent links with
writer, once wrote that ‘much of what we call suppliers so they know exactly what is needed and
management consists of making it difficult for people to when. This may require investment in communications
work!’ What he means is that management can create so and technology.

?
many forms, so many rules, have so many meetings and
have so many procedures that making decisions, getting What do you think?
things done and actually getting on with work can be
difficult. Lean organisations, therefore, try to ensure that What do you think are the advantages and disadvantages
of using one supplier rather than many for any given input?
the systems and rules in place are the essential ones, that
meetings are productive and do not take up too much
time and that there is not so much communication that Using technology to improve operational
people spend most of their time responding to emails.
efficiency
What do you think?
How would you ensure that management meetings are
? Technological developments improve not just what
is produced but how it is produced. Think of how
you do your coursework and compare it to how your
productive? grandparents did theirs: not only are the nature
of the tasks likely to be different but there will be
radical differences in how you do your work. You
The difficulties of adopting lean production research online, word process, produce presentations
Although lean production can provide greater efficiency on a computer and share ideas online with friends.
it can also mean a business is more vulnerable because Your grandparents didn’t do any of these. And
there is no inventory if there is ever a disruption to what about the way you are taught: with interactive
production. If employees strike, for example, or if whiteboards, video clips, websites, virtual learning
suppliers fail to deliver, the business will have to environments, email, blogs and social media. Your
halt operations. This means that working closely in parents are emailed reports and updates from the
partnership with stakeholders is essential to keep school and may be able to log in to see what you are
operations going. Even then the business is vulnerable doing, how you are doing, what your attendance is
to unpredictable events. For example, a major like and so on. This is a very different world from
earthquake and tsunami in Japan in 2011 disrupted when your grandparents were at school! Many of the
the!production of many lean producers that relied products and processes we take for granted: booking
on!the production from there; they simply did not have cinema tickets or ordering food deliveries via an app,
the inventory they needed. This made companies such downloading music, using sites that recommend
as Honda review their ‘one supplier’ policy because other products we might like or enable us to compare
although it helped build up a strong partnership with prices from different businesses and click and
that supplier it left the business very vulnerable to any collect, simply did not exist 20 years ago because the
disruption in supply. technology was not there.
Introducing lean production can also be difficult. Technology continues to move forward businesses
Employees are expected to take a more active role in and their operations, improving the quality and
checking their own work to ensure that any problems improving their efficiency. Whether it is information
are discovered early and that mistakes are not repeated. technology, robots, computer-aided manufacturing or
Employees need to be engaged, have the skills and transportation developments, technology is reducing
training to improve the quality of their own work and be unit costs as well as helping organisations become
willing to send work back to others in the organisation if more flexible and more competitive. Technological
it is not good enough. Some employees will resist these developments enable businesses to:

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 Chapter 13 Increasing efficiency and productivity 171

● be more flexible to customer needs: with technology However, managers have to:
they can track customer behaviour more effectively,
● have the finance to invest; new technology may
target specific groups more easily and provide more
be needed just at the moment when the business
personalised products.
is struggling and lacking finance to buy new
● reduce costs by having more efficient processes
equipment.
with less errors; for example, online booking and
● have the training to use it effectively.
ordering means you enter your own details, saving
● understand and manage the impact on other
the business time and money and meaning there
functions; for example, technology may change
is less to change if the wrong details are put in.
people’s jobs and managers have to ensure staff
Technology enables processes such as computer-
understand why this is happening, have the
aided design, which enables prototypes and models
necessary skills to adapt and do not resist this
to be developed and tested on screen rather than
change if it is needed.
actually built.
● be able to judge which technology will be useful in
● be innovative; for example, enabling you to stream
the long term rather than trying to adopt every new
films as and when you like: this should increase
development that comes along.
customer satisfaction.

Business in focus: Technology and airlines

One of the key considerations when designing an aircraft
is the weight. The heavier the plane the more fuel it will
use, thereby increasing fuel costs. Attempts to increase
fuel efficiency and improve the aerodynamic design of
new aircraft have led designers to stop using aluminium.
The most modern planes, for example, Airbus’s A350, use
lightweight carbon fibre; this is a very strong and very
light composite material. The use of composite materials
can reduce the weight of an aircraft by 20 per cent. Each
kilogram reduction in the weight of an aircraft can save
the airline flying it around $1m (£603,000) in costs over
the lifetime of the aircraft.
Using these composite materials is also creating other
possible savings. For example, an A380 super-jumbo
has about six million parts – but in future this could Figure 13.6 The Airbus A350
be reduced considerably as some of the parts can be
moulded together to form one part and be manufactured
at the same time. With fewer components, Practice questions
manufacturing time will be reduced, therefore saving 1 Analyse the benefits to airlines of this new
more money. technology!of carbon fibre. (9 marks)
Designers are also looking at improving the shape of 2 To what extent do you think high levels of
the aircraft to improve its aerodynamics. One recent investment!in technology are essential for
development has been the trailing edges of the wing of airline!manufacturers? (16 marks)
Airbus’s latest plane, the A350 shown in Figure 13.6.

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 172 Unit 4 Decision making to improve operational performance

ASSESSMENT ACTIVITIES
(a) Knowledge check questions
1 An operations process that has little waste is 6 In ‘Just in Time’ production, businesses hold high
known as ………. production. levels of inventory. True or false? Explain your
2 What is the difference between total output and answer.
productivity? 7 State two ways a business might try to improve
3 You employ 20 employees who produce a labour productivity.
total of 700 units per week. What is the labour 8 State one reason why employees may resist
productivity? attempts to increase productivity.
4 Explain one reason why managers may be eager to 9 State two possible benefits of higher efficiency.
increase labour productivity. 10 State one reason why labour productivity might
5 Explain what is meant by kaizen. fall.

(b) Short answers

1 Explain two benefits a food retailer might get 4 A business employs 20 people with a
from!a leaner approach to operations might productivity!of 500 units per person. The wage
benefit!a food retailer. (6 marks) rate is £2,000 per person. Calculate the labour
2 Explain one way in which a car manufacturer cost!per unit. (3 marks)
might improve productivity. (5 marks) 5 If productivity rises by 20 per cent at the
3 Explain one possible way in which increasing business in Question 4, calculate the labour
efficiency might help the growth of a restaurant cost per unit. (3 marks)
business. (5 marks) 6 Explain one reason why managers in a car factory
may face resistance from employees when
trying to increase productivity. (5 marks)

(c) Data response questions

Working hours and productivity
Research increasingly seems to suggest that working And of course, it is better for morale, which is
fewer hours a week can actually increase labour good for both employees and employers, who
productivity. Although managers often assume that will have to deal with less labour turnover and
working more hours leads to more output there seems a more motivated workforce. This is important
to be little correlation between hours worked and for businesses that are seeking to maintain their
productivity. A recent study showed that employees in competitiveness. Companies such as Google and
Germany work almost 45 per cent fewer annual hours Facebook are always looking to ensure they keep
than Greece, but are 70 per cent more productive, their staff engaged to keep productivity high.
while annual German salaries are higher. It may be However, companies generally seem reluctant to
that improving the work–life balance actually improves take the decision to move to a four-day working
performance at work and output. This may be week. They are worried about not having staff there
particularly true these days in a service-based economy when others do.
where new ideas and innovation are critical for success.
Richard Branson at Virgin Group recently
Environmentalists are also in favour of a shorter announced that staff at the Head Office could
working week because of its impact on traffic decide how long to take on holidays and when to
congestion and pollution. Less time is wasted on take them, without permission from their bosses.
commuting and less time in spent sitting at your Some think this may actually lead to higher
desk, which is bad for your health. productivity.

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 Chapter 13 Increasing efficiency and productivity 173

Of course, productivity is not just down to working 2 Analyse how working fewer hours might increase
patterns and whatever managers do with working productivity. (9 marks)
hours: they need to ensure that other factors such as
3 To what extent do you think a shorter working
training and investment are not neglected.
week is a good idea in all businesses? (16 marks)
1 Explain one way that online businesses such
as!Google and Facebook might measure
productivity. (5 marks)

(d) Essays
1 To what extent do you think that adopting lean 2 Some of the most successful businesses these days
production is guaranteed to lead to higher profits? are online, for example, Amazon and Google. To
Justify your answer. (25 marks) what extent do you think productivity is a useful
operations measure for online businesses? Justify
your answer. (25 marks)

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