Production of goods and services Ch. 17
Word Bank
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Productivity : the output measured against the inputs used to create it
Buffer Inventory Level : the extra stock held in case of a sudden change in customer
demand for deliveries of the product
Lean Production : techniques used to cut down on waste to increase efficiency
Kaizen : Japanese term for continuous improvement through the elimination of waste
Just-in-time (JIT): production method that involves eradicating or lessening the need to
hold stock of raw materials or unsold products of the finished one. Supplies will arrive
just when they are needed
Job production: where a single product is made at a time
Batch production : where a quantity of one product is made, then a quantity of another
item will be produced
Cell production: where the production line is divided into separate, self-contained units
which each make an identifiable part of the finished product
Flow Production: This is where large amounts of a product are produced in a non-stop
process, a.k.a. mass production basically.
Managing resources effectively to produce goods and services
Production is the provision of a product or a service to satisfy consumer wants and needs. This
involves businesses adding value to a product and the value added is the difference between
the cost of the inputs and the final selling price of the product or service.
This production process applies to manufacturing as well as service industries and businesses
combine the ‘inputs’ of a business to produce more valuable outputs. These inputs are
basically the factors of production.
To be competitive: The business needs to combine the inputs of resources efficiently and make
the best use of them to keep low costs and to increase profits reasonably.
Labor Intensive – more prevalent in developing countries where it is more efficient to use more
workers than machines to produce their goods
Capital Intensive – labor costs are high in developed countries, so it is more efficient to use
machines/robots as the majority instead of people.
Operations Department
Their role in business is to take inputs and change them into outputs for customer use. Inputs
are either physical goods or services.
Operations Manager – responsible for making sure raw materials are provided and made into
finished goods or services.
The sections of the operations department changes depending on what the business
produces/offers.
A typical manufacturing business will have:
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A factory manager – takes care of the quality & quantity of products coming off the
production line, and also responsible for the maintenance of the production line & other
repairs.
A purchasing manager – provides the materials, components and equipment required
A research and development manager – responsible for the design and testing of new
production products and processes. Very important.
Productivity
Productivity is how a business can measure its efficiency.
Productivity = quantity of output / quantity of inputs
An example of what a business will use this equation for is to measure the productivity of one
of its factors of production, e.g. labor.
Labor productivity = output (over a given period of time) / # of employees
Productivity can either mean using fewer inputs to produce the same output or using the same
inputs to produce a much greater output.
Efficiency increases = output increases = cost of producing the product decreases
Remember: Different levels of success at being productively efficient account for the difference
between a firm’s ability to be competitive remain trading and being able to generate profits.
Ways to improve productivity:
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Improving the layout of the machines in a factory to reduce wasted time and therefore
increase efficiency
Improving labor skills by training workers so they have more productive techniques of
working
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Introducing automation
Other ways
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Improve quality control/assurance reduces waste
Use machines instead of people to do jobs (automation)
Improve employee motivation
Introduce new technology
Train staff to be more efficient
Improve inventory control
Benefits:
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Increased output relative to the inputs required
Lower costs per unit (avg cost)
Fewer workers may be needed, possibly leading to lower wage costs
Higher wages for workers increases motivation
Why businesses hold inventories (stock)
Reasons why a business may run out of stock:
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Late delivery
Higher demand than usual
Examples of inventories:
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Raw materials
Components
Partly finished goods
Finished products ready for delivery
(sometimes) spare parts for machinery in case of breakdowns
(Re-order point) when inventories get to this point, they need to be re-ordered to bring back
maximum inventory level again. They need to re-order before the inventories get too low to
allot for time that will be spent in delivering the goods. The inventory needs to not be too high
since it will cost a lot of money to maintain which could be used otherwise.
Lean Production
This covers a variety of techniques used by businesses to cut down on waste and increase
efficiency.
Seven types of waste that occur in production:
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Overproduction: producing goods before they have been ordered. This creates high
storage costs and can possibly damage the goods while they are in storage.
Waiting : when goods are not moving or being processed in any way then waste is
occurring
Transportation: moving goods around unnecessarily causes waste and is not adding
value to the product. It can be further damaged.
Unnecessary inventory: if there is too much inventory then this takes up space, might
obstruct production and cost money.
Motion: any actions, including bending or stretching movements of the body of the
employee wastes time. It’s also a possible health and safety risk.
Over-processing: complex machinery doing simple tasks is wasteful. Some activities in
producing the goods may not be necessary if the design of the product is poor.
Defects: time needing to be used to fix these problems is wasteful overall.
Benefits of lean production
Costs are saved by:
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Less storage space required
Quicker production
No need to repair / replace defected products
Better use of equipment
Cutting out unnecessary processes
Less money tied to inventory
Improve health and safety leading to less time off work due to injury
Lean production might use these methods:
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Kaizen
Just in time delivery control
Cell production
Kaizen
‘Continuous improvement’ in Japanese, its focus is on the elimination of waste.
Example of using this:
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Small groups of workers group together to discuss problems and possible solutions.
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Eliminates waste by getting rid of piles of inventory/reducing time taken for workers to
walk between jobs to get rid of excess movement
Re-organizing the factory machinery alignment to improve movement
Advantages:
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Increased productivity
Reduced amount of space needed for the production process
Work-in-progress is reduced
Improved layout of the factory floor creates the possibility for the jobs to be combined
which frees up employees to carry out some other job in the factory.
Just in time inventory control
This focuses on eliminating the need to hold inventories.
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The costs for holding the inventory are all reduced since there isn’t a need for them.
Warehouse space becomes unnecessary
The finished product is sold quicker, so money comes back faster to the business
increasing cash flow.
Cell Production
The production line is split into separate, self-contained units which each make an identifiable
part of the finished product instead of having a flow or mass production line. This method
improves the morale of the employees and makes them work harder and become more
efficient. This also makes them feel more valued and decreases chances of them from striking
out or causing a disruption.
Methods of production
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Job production
Batch production
Flow production
Job production
This is where a single product is made at a time, e.g. a cake is ordered and a single employee
makes it. Each order is different, and may or may not be repeated. Another e.x. is specialist
machinery. This is where manufacturers who manufacture a machine for another business do it
to meet a particular specification. Examples: bridges, ships, made-to-measure suits, cinema
films, or individual computer programs that perform specialized tasks.
Adv.
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Suitable for one off products/personal services
Products meet exact requirements of the customer.
Workers have more varied jobs
Flexible and often used for high-quality goods and services = higher price can be charged
Disadv.
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Skilled labor is needed
Costs are higher = labor intensive
Production takes a long time
Products are specially made to order so errors are expensive to fix
Materials may have to be specially purchased leading to higher costs
Batch production
Products are made in blocks or batches. A certain number of another product is made, and so
on. E.g. making a group of a certain types of cakes like chocolate and then making another type
for sale too. Or several houses built together following a similar design, furniture production
and famously, clothing designs.
Adv.
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Flexible way of working and production can easily be changed
Gives variety to workers’ jobs
Allows more variety to products which would otherwise be identical = increases
consumer choice
Production may not be affected to any great extent if machinery breaks down
Disadv.
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Can be expensive since semi/finished products will need moving about
Machines have to be reset between production batches which means there is a delay in
production and output is lost
Warehouse space is costly
Flow Production
This is where large quantities of a product are produced in a continuous process. A.k.a. mass
production. E.g.: cars, cameras, televisions, packaged foods and drinks. Any mass produced
standardized product which is sold to a mass market is most likely produced in this way.
Adv.
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High output of standardized product
Costs are kept low and therefore prices are also lower
Easy for capital intensive production methods to be used = reducing labor costs and
increasing efficiency
Capital intensive methods allow workers to specialize in tasks which means little training
is needed due to unskilled workers
Might benefit from economy of scale in purchasing
Low average costs = low prices = high sales
Automated production lines can operate 24hrs a day
Goods are produced quickly and cheaply
No need to move goods from one part of the factory to another like batch production =
time saved
Disadv.
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Boring system = low job satisfaction = lack of motivation
High storage requirements – cost of inventories of raw materials/components and
finished products can be very high
Capital costs of setting up the production line can be very high
If one machine breaks down the whole production line will have to be paused.
Factors affecting which method of production to use
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Nature of the product: a unique/individual service is required = job production. If it can
be mass produced = flow production.
Size of the market: demand is high / more products can be sold but not in large
quantities = batch production. International market? = flow production.
Nature of demand: large and steady demand for the product? (Soap powder e.g.) then
it’s economic to set up a production line by = flow production. Less frequent
demand?(furniture) then = job or batch production fits.
Size of the business: small business and capital? Job or batch production most likely.
Only large businesses can really afford to maintain a flow production method
How technology has changed production methods:
Technological advances have allowed the mechanization and automation of production
methods in many industries. The car industry is almost entirely automated. Robotics,
automation, CAD/CAM keeps businesses ahead of the competition, keeps costs falling, reduces
prices and improves products manufactured.
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Automation – where equipment used in the factory is controlled by a computer to carry
out mechanical processes like paint spraying on a car assembly line. The production line
will consist mainly of machines and only a few people will be needed to ensure success.
Mechanization – production is done by machines but operated by people. E.x. printing
press. Robots are machines that are programmed to do tasks that are useful for
unpleasant, dangerous and difficult jobs. They are quick, accurate and work non-stop 24
hours a day.
CAD (computer aided design) – computer software that draws items being designed
quickly and allows them to be rotated to see the item from all sides instead of having to
draw it several times. It can restyle old/design new products. It is useful for technical
drawings.
CAM (computer aided manufacture) – computers monitor the production process and
control machines or robots on the factory floor. E.x. car plant computers control the
robots that spot-weld the car body together or the robots that spray paint the car.
CIM (computer integrated manufacturing) – total integration of CAD and CAM. They
are directly linked together.
Technology also improved productivity in shops with electronic payment
methods and scanners at tills.
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Epos (electronic point of sale) – where the barcode is scanned when you pay, the
information is displayed on a screen then printed on a receipt. The inventory record is
also updated to show one item has been and sold and if they stock has reached the
reorder point then more inventory is automatically re-ordered.
EFTPOS (electronic funds and transfer at point of sale) – this is where the electronic
cash register is connected to the retailers’ main computer and also to banks over a wide
area computer network. The card is swiped at the till and bank information is
automatically read from the card. Money is directly debited from the customer’s
account after they have signed for the debit or entered their pin. A receipt is printed as
confirmation that the payment has been done.
The advantages of new technology
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Increased productivity due to new methods of production
Increased job satisfaction to stimulate workers since boring jobs are done by machines
Types of jobs are changed as more skilled workers are needed to use the new
technology.
Better quality control on products = better quality products
More accurate consumer demand results from computers being used to monitor
inventory levels
Quicker communication and reduced paperwork, owing to computers, lead to increased
profitability.
The information that is available to managers is much greater and this results in faster
and better decision making
New products are introduced as new methods of production are introduced. The market
tastes changed with the consumer.
The disadvantages of new technology
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Unemployment rises as machinery/robots replace humans
Expensive to invest in. this increases the risks as large quantities of products need to be
sold to cover the cost of purchasing the equipment.
Employees are unhappy with the changes in their work practices when new technology
is introduced.
New technology is introduced all the time so it will need to be updated to keep the
business competitive.
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