Operations Management
Producing Goods and
Services
IGCSE BUSINESS STUDIES
Definitions
• Production – Process of adding value to a product (using four factors
of production – land, labour, capital and enterprise) to satisfy
customer needs and wants.
• Productivity – How a business measures it’s efficiency
Calculating Productivity
Productivity could mean using fewer inputs to
produce the same amount of output. Or using
the same amount of input to produce a greater
amount of output
Increasing Productivity
Ways to improve productivity
• Improving layout of factory so production becomes faster and more
efficient
• Training workers so they can be more productive
• Using automation
Benefits of increasing efficiency/productivity
• Lower cost per unit
• Less employees needed (reduce labour cost)
• Reduces overall costs.
Holding Stocks
Why do businesses hold stock?
• Businesses keep stocks for a variety of reasons, for example, factories keep raw material inventory
to make sure there are enough materials for production while a shop might hold stock to ensure
that products are available to customers.
Too much stock
• Money wasted on storage cost
• Depreciation cost
• Shelf life (items may reach best before date before being sold)
• Money could’ve been used on something else
Not enough stock
• Opportunity lost (profit could be made if product sold)
Stock Control Chart
Buffer stock is inventory
to deal with sudden
customer demands for
a product or in case
supplies doesn’t get
delivered on time.
Defining Lean Production
Lean Production is a term for techniques used by businesses to cut down
waste and increase efficiency.
Common wastes in businesses
• Overproduction – Producing too many products which then costs the
business money to keep the product in storage. (and may get
damaged/expires etc..)
• Waiting – Goods not being processed
• Transporting – Materials being moved around the factory inefficiently
• Over-processing – e.g. using advanced machine to do simple tasks
• Defects- production of faulty products which can’t be sold.
How Lean Production reduces cost
Costs can be reduced by lean production
Benefits of lean production
• Less storage of raw materials (e..g no need for refrigeration costs,
warehouse etc…)
• Less defects in production (broken products don’t get produced)
• Better use of equipment
• Speeding up production by cutting out unnecessary tasks
• Less money tied up in stock
Lean Production via Kaizen
Kaizen means continuous improvement by eliminating waste:
• Workers meet regularly to discuss problems and possible solutions
• In this way, wastage is reduced and efficiency is improved
• Factory floors are usually rearranged so that the flow of production
from one activity to the next is improved.
Lean Production via JIT
Just-in-time (JIT) production focuses on:
• Focus on reducing the need to hold stocks of raw material or parts
that are needed (This reduces storage costs)
• Raw materials are delivered just in time by suppliers for
production
• Reliable suppliers are needed for this to work
As example, fruit might get delivered to for processing 30 minutes before
production starts, this means that the factory won’t have to spend money
on expensive refrigerators to store fruit before it gets produced and
produced into cans.
Lean Production via cell production
Cell production is where:
• The production line is divided into separate teams of workers, each
makes a part of the finished production
• Motivation is improved due to the variety of tasks and the worker
belonging to a team
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Methods of Production
JOB PRODUCTION
Job Production is where each product is different and made to specific instructions by
the consumer. e.g. tailor made suits, customizable birthday/wedding cakes
Advantages of Job production
• Workers have more varied job (They won’t become bored)
• Higher price can be charged for product
• Product meets requirements of the customer
Disadvantages of Job production
• Costs of production are high because skilled labour is used
• Product takes a long time to produce
• Products are made to order so any errors may be expensive for the company to fix
Methods of Production
BATCH PRODUCTION
Baitch production s similar products are made in batches (e.g. batch of white shirts then
another batch of green shirts are made)
Advantages of Batch production
• Gives more variety of jobs to workers
• Production can be easily changed from one product to another
• Gives consumers a variety of products (e.g. many colour shirts)
Disadvantages of Batch production
• Expensive to produce goods
• Machines have to be reset when changing from one batch to another which slows
down production (e.g. change colour of shirts from white to green dye)
• Warehouse space is needed to store products
Methods of Production
FLOW PRODUCTION
Flow production (Mass production) is where large quantities of identical products are produced on a continuous basis
Advantages of Flow production
• Goods are produced quickly and cheaply (economies of scale)
• Increased efficiency through use of machinery
• Less labour is needed (machines do the work)
• Automated production line means production can operate overnight
Disadvantages of Flow production
• Very boring for workers (same product over and over)
• Starting costs are high (expensive machines, big factory etc…)
• If a machine breaks down the whole production line may stop
• Expensive storage costs as they are lots of products
Methods of Production
WHAT PRODUCTION?
Factors affecting which method of production to use
• The nature of the product – Unique products will require job
production.
• Size of the market – Products with small number of customers mean
job or batch production is used. Products with large amount of
consumers = flow production should be used.
• The nature of demand – Small and infrequent demand by customers
means job or batch production will be used.
• The size of the business – Small businesses tend to operate using job
and batch production while large business may use flow production.
Technology effects
Improvements in technology can help reduce costs and improve product quality
• Automation – Production by equipment which are controlled by computers.
• Mechanisation – Production by machine operated by workers (human)
• Computer aided design (CAD) – 3D drawing software to design new products
• Electronic point of sale – Used at checkouts where stock records are
automatically adjusted as an item barcode is scanned when it is sold. e.g.
supermarket stock
• Electronic funds transfer at point of sale (EFTPOS) – Cash registers connected
to bank (Customer’s card is swiped and money is transferred right away from
customer’s bank account
Technology good or bad?
Advantages of technology
• Higher productivity
• Improved motivation as boring jobs are now done by machines
• Better quality products are produced
• Faster communication
• Improved flow of information for managers
Disadvantages of technology
• Higher unemployment as machines replace human labour
• Technology is expensive
• Technology becomes outdated very quickly and may needs to be upgraded
often
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