Productivity and Quality

In order to better understand the connection between productivity, quality and overall organizational profitability, let’s first find out what each term means.

Productivity is the relationship between the amount of outputs and amount of inputs needed to produce a product. In other words, management measures productivity by comparing the amount of a product produced to the amount of raw materials and manpower needed to produce a product. If less raw materials and manpower are used to produce more of a product, then productivity is considered high.

Let’s take a look at the Chicken Valley Poultry Company, a large producer of chicken products. Chicken Valley Poultry Company produces chicken nuggets in its manufacturing plant. In order for management to determine whether the plant has high productivity rates, management will look at a few things:

• The amount of raw materials, like chicken, eggs, bread crumbs and food additives, used to make the nuggets
• The amount of time and labor involved in running the machinery and production lines to process and package the nuggets
• The amount of chicken nuggets produced in a standard timeframe, like every hour

Quality is the measure of a product’s flawlessness and excellence. In other words, when compared to a similar product, it possesses characteristics that separate it apart based on things like inherent traits.

Chicken Valley uses only organic chicken in its nugget recipe. The company also uses artisan breadcrumbs and free-range eggs. Similar chicken nuggets are made with ordinary chicken, eggs and crumbs. Chicken Valley Nuggets are considered by most people to be a quality product.

How Do Productivity and Quality Affect Profitability?

Profitability is the revenue left over after all expenses and taxes have been paid. A company is profitable by simply producing more finished product and paying less for raw materials and labor.

Productivity and quality affect profitability when:

• Production is lower than projected
• Cost of raw materials is higher than the budgeted cost
• Cost of labor is higher than expected
• Quality is lower than the quality standard

Factors that affect profitability can be both external and internal to the organization. A severe drought is an external factor that may cause wheat crops to die. As a result, the cost of breadcrumbs may rise. The breadcrumbs are a raw material used to make the nuggets. The rise in cost for one raw material will lower the profitability of the final product.

The Managers

Internal factors that affect profitability can often be attributed to management decisions. There are three management levels that make decisions in an organization. Each level of management plays a different role in the decisions about productivity and quality.

Top-level managers are responsible for the overall strategic vision for the organization and rank highest in the organizational hierarchy. These managers are responsible for the entire organization. Decisions made by top-level managers affect all areas of the organization.

Decisions top-level management make at Chicken Valley Poultry may include:

• Policies and procedures
• Resource allocation (like suppliers)
• Quality standards
• Budgeting

These decisions significantly affect profitability. When Chicken Valley’s top management made a change in suppliers, it meant a change in the quality of chicken used to make the nuggets. Customers did not like the change. Mid-level managers must now make important decisions because production changed based on the lower demand for the nuggets.

Mid-level managers carry out the plans made by top-level managers in areas like planning and coordinating the work activities of lower-level managers. These managers make decisions that involve production and quality.

Chicken Valley Poultry allows mid-level managers to make decisions about:

• Tactical plans (or action plans)
• Short-term goal attainment
• Marketing

These decisions also affect profitability. Tactical plans are the action steps needed to achieve the strategic goals set by top-level management. When Chicken Valley Poultry management decided to change the quality of the chicken for the nuggets, low demand decreased production. Mid-level management may decide to market the product differently to increase demand and in turn, production. A change in the way a product is marketed means spending money on marketing campaigns. This rise in input costs lowers profitability until demand for the nuggets increases.

Lower-level managers are responsible for day -to-day supervision of workers and take their directives from mid-level managers. Their decisions are limited to assigning tasks to employees.

In this supervisory role, lower-level managers make decisions about:

• Daily production
• Scheduling

Although lower-level management decisions do not impact profitability in a significant way, a simple issue, like a work stoppage due to faulty production equipment, can affect profitability.

When top-level managers decided to change the chicken, mid-level managers decided to change the production schedule. This meant that lower-level managers must change the scheduling by laying off workers. Production was left to fewer people who worked more hours, and machines ran for a longer period of time. This meant more was being spent to do less work. This increased the input but resulted in less output. The change lowered profitability because even though nuggets were being produced, having fewer workers actually increased the cost to produce the same amount of nuggets.

Lesson Summary

In summary, top-, mid- and low-level managers play a significant role in how productivity and quality affects profitability in an organization. Each level of management makes different decisions about productivity and quality that impact an organization’s ability to make a profit.

Profitability is simply the money an organization has left over after paying expenses and taxes.

Productivity is the relationship between the amount of outputs and amount of inputs needed to produce a product. Lower productivity can lead to lower profits because there will be fewer units available to sell. Higher productivity can also lead to higher profitability if the ratio between inputs (or the cost of raw materials and labor) and outputs (products or units) is right.

The more it costs to make a product, the less profitable it will be regardless of the amount of units produced.

Quality is the measure of how flawless a product is. A change in the quality of raw materials or labor may decrease the overall quality of the product. This may lead to a lower demand and less production.

Managers on every level make decisions that affect profitability in the areas of production and quality.

Top-level managers make decisions about the overall strategic vision of the organization. Their decisions affect the entire organization. Changes in production or quality on this management level include changes in suppliers, policies and procedures, and budgeting.

Mid-level managers make decisions about directing action plans and short-term goal achievement. The decisions these managers make may involve marketing. New marketing campaigns are costly. A new marketing campaign is an input. Additional money put into the production of a product means less profitability regardless of the demand.

Lower-level managers make decisions about day-to-day operations and direct workers to complete tasks. Decisions these managers make affect profitability as well. When productivity is down, these managers may reduce staff. Reducing staff lowers productivity even more. It may take more people to produce the same amount of product.

Learning Outcomes

After watching this lesson, you should be able to:

• Define productivity, quality and profitability
• Describe the different kinds of decisions top-, mid- and lower-level managers make