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basis for improvement efforts.
15. Speed is usually measured in clock time, whereas variability is measured by quantifying the
variances around average performance or targets.
16. Queue time is a fancy term for service time variance.
17. Design flexibility is the ability to respond quickly to changes in the volume and type of
demand.
18. Productivity is the ratio of the input of a process to the output.
19. As output decreases for a constant level of input, productivity also decreases.
20. With interlinking models, managers can objectively make internal decisions that impact
external outcomes.
21. The value of a loyal customer quantifies the total revenue or profit each target market
customer generates over the buyer’s life cycle.
22. Goods-producing and service-providing organizations both benefit from understanding the
value of a loyal customer performance relationship.
23. The customer defection rate is expressed as 1/customer retention rate.
24. The Malcolm Baldrige National Quality Award Program was created to help stimulate
American organizations to improve quality, productivity, and overall competitiveness.
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25. The primary purpose of the Malcolm Baldrige National Quality Award Program is to provide
a framework for performance excellence through self-assessment to understand an
organization’s strengths and weaknesses, thereby setting priorities for improvement.
26. The leadership category of the Baldrige Performance Excellence criteria includes how an
organization addresses its public and community responsibilities.
27. In the Baldrige Award criteria, the strategic planning category focuses on how an
organization selects, gathers, analyzes, manages, and improves its data, information, and
knowledge assets.
28. The theory of Baldrige Award states that leadership drives the system that creates results.
29. The balanced scorecard model uses the same categories as the Baldrige Award.
30. The balanced scorecard is designed to be linked to an organization’s strategy.
31. The value chain model is probably the dominant model for operations managers.
32. The value chain model of organizational performance is based on a set of cause-and-effect
linkages among performance measures.
Case Study Questions (To reward students who attend class, listen and learn, and take good
class notes on the case discussion and/or student team presentation.)
1. Which one of the following statements is TRUE with regard to the case study BankUSA: Credit
Card Division?
a.
Service upsets represented 17 percent of total transactions.
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b.
Current performance reports indicate that the credit card division is meeting 99.2
percent of its service requirements.
c.
The relationship between customer satisfaction and operating costs is negatively
correlated.
d.
The ultimate (real) service level for this organization is internal performance metrics.
Problems for Manual Grading, Take-Home Exams and Partial Credit (Also, review the OM
Instructor’s Manual for end–of-chapter questions/problems)
1. Why is measurement important?
2. What are the major categories of organizational performance measures? Provide two
example measures for each category at an organizational level.
3. Explain the difference between goods and service quality, and how they are measured.
4. Describe the five key dimensions of assessing service quality.
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5. Explain the difference between design flexibility and volume flexibility.
6. Using the information provided in the table below, determine the percentage change in
productivity from 2009 to 2010.
2009
2010
OUTPUTS
Units
110,000
150,000
INPUTS
Direct Labor Costs
$250,000
$310,000
Energy Cost
$ 6,000
$ 5,800
Raw Material Cost
$ 40,000
$ 42,000
7. Using the information below, determine the productivity (measured as output per dollar input)
for each quarter and calculate the percentage change in productivity.
Second Quarter
Total Units Sold
11,500
Labor Hours
9,500
Labor Cost/Hour
$8.00
Material Usage (lbs.)
5,500
Material Cost/lb.
$11.50
Other Costs
$23,000
ANS:
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8. Jeff Camm, the president of Biometrics, Inc. has received the following data from his
accountant:
Year 1
Year 2
Year 3
Year 4
Sales
$26,000
$15,000
$17,000
$20,000
Material
$ 8,000
$ 5,000
$ 6,000
$ 6,000
Labor
$10,000
$ 7,500
$ 8,000
$ 8,000
Overhead
$ 4,000
$ 2,000
$ 2,500
$ 4,000
How is the productivity changing in Jeff’s firm?
9. Consider the following information.
First Quarter
Second Quarter
Unit Selling Price
$15.00
$17.00
Total Units Sold
12,000
11,500
Labor Hours
10,000
9,500
Labor Cost/Hour
$9.00
$10.00
Material Usage (lbs.)
5,000
7,500
Material Cost/lb.
$12.00
$10.50
Other Costs
$25,000
$30,000
a.
Which quarter, first or second, had the higher labor productivity (output quantity per
labor dollar input)?
b.
Which quarter, first or second, had the higher material productivity (output quantity per
material dollar input)?
c.
Which quarter, first or second, had the higher total productivity (dollar output per total
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dollar input)?
Labor productivity, First Quarter: 12,000 / $90,000 = 0.133 units/labor dollar
Labor productivity, Second Quarter: 11,500 / $95,000 = 0.12 units/labor dollar
First Quarter was just slightly higher.
Material productivity, First Quarter: 12,000 / $60, 000 = 0.2 units/material dollar
Material productivity, Second Quarter: 11,500 / $78,750 = 0.14 units/material dollar
First Quarter was higher.
Total productivity, First Quarter: $180,000 / ($90,000 + $60,000 + 25,000) = 1.028
Total productivity, Second Quarter: $195,500 / ($95,000 + $78,750 + 30,000) = 0.95
First Quarter was significantly higher.
10. A manufacturer of paint has two factories located in France and Spain and due to economic
conditions must close one of them. The factory productivity data is as follows:
Gallons of Paint
Resource Cost
Produced (in 1,000s)
per Gallon
Factory (France)
4,600
$4.25
Factory (Spain)
3,900
$4.00
11. Explain the concept of interlinking and its significance.
12. A manufacturer of gear hobbers has a 30 percent customer retention rate. Their accounting
department estimates the incremental contribution to profit and overhead as 20 percent.
Customers purchase the workstations every two years at an average cost of $3,500. Determine
the average value of a loyal customer.
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13. A Pelton turbine manufacturer currently has a 20 percent customer defection rate. Their
accounting department estimates the incremental contribution to profit and overhead as 40
percent. Customers purchase computers every four years at an average cost of $2,000. In an
effort to reduce the defection rate, the company is improving both the quality of its computers
and its post-sale service. Determine the increase in the average value of a loyal customer if the
defection rate drops to 10 percent.
14. Patrick rents car from a local car rental company. On an average, he spends $100 a month.
The company’s contribution margin is 35 percent and the average customer defection is 50
percent. Determine the value of a loyal customer.
15. A guest at Raphael’s Italian Restaurant generally spends $250 on a meal. Most of Raphael’s
customers are locals and eat at the restaurant twice a month. If the restaurant’s margin is 50
percent, and a loyal customer is estimated to be worth $4000, determine the average defection
rate.
16. A retail store sells a popular cosmetic called Anya, and the store manager is given $100,000
by the corporate office to improve store performance any way she thinks best. The “base case”
information is a price of $50 per bottle, a contribution margin of 0.50, a customer defection rate
of 25%, and a repurchase frequency of 3 times a year. If these improvement funds could be used
to either increase the contribution margin to 0.58 or reduce the customer defection rate to 15%
or increase the repurchase frequency to 4 times per year, what is the best way to spend these
funds? (Assume all other variables remain at the base case level for each improvement option.)
You may want to use the table below to help organize your computations and answer.
Option
Price
Contribution
Margin
Repurchase
Frequency
Defection Rate
VLC in $
Base
$50
0.50
3
25%
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case
(a)
$50
0.58
3
25%
(b)
$50
0.50
3
15%
(c)
$50
0.50
4
25%
Note: BLC is 1/0.25 = 4 years and 1/0.15 = 6.67 years.
17. A retail store sells a popular cosmetic called Krypton, and the store manager is given
$300,000 by the corporate office to improve store performance any way she thinks best. The
“base case” information is a price of $30 per bottle, a contribution margin of 0.50, a customer
defection rate of 20%, and a repurchase frequency of 4 times a year. If these improvement
funds could be used to either (a) increase the contribution margin to 0.60 or (b) reduce the
customer defection rate to 15% or (c) increase the repurchase frequency to 5 times per year,
please answer the questions listed below. (Assume all other variables remain at the base case
level for each of the three improvement options.)
a.
What is the value of a loyal customer (VLC) for improvement option (a)?
b.
What is the best way to use the $300,000 in improvement funds?
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18. A coffee shop’s average transaction price is $3, the contribution margin is 60 percent, a
typical customer makes a purchase once a week or 52 weeks per year, and the management
estimates the value of a loyal customer over the buying life cycle as $520. What is the customer
defection rate?
19. Provide some examples of criteria that can be used to help select and delete performance
measures from an organization’s information system.
20. Discuss the seven categories of the Malcolm Baldrige National Quality Award.
ANS: The seven categories are:
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21. Briefly discuss the four performance perspectives of the Balanced Scorecard Model.
ANS: The four performance perspectives are:
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22. Explain the concepts underlying the Service-Profit Chain model.