The Nature of Production

The term ‘production’ is seen as any activity that a firm undertakes to add value to the factors of
production by converting them into another product. For example, production takes place when bauxite
is converted into alumina. The production of any good has to go through a process which is often
referred to as the ‘production process’.

The production processes

The production process outlines the steps involved in converting input to output. This process is divided
into three sections: the input, the throughput, and the output.

Input

This is the raw materials or components of production. It represents the items that a firm is going to
convert to a finished product. It includes things such as bauxite, gold and agricultural produce. These
raw materials would come from the factor of production – land. It is important to note that a finished
product from one industry could be used as an input in another industry. For example, flour, which is
the end result of processing wheat, could now be used in a bakery as an input to bread production.

Throughput

This is the process that the raw materials or components go through before being converted into
finished products. The range of processes will differ from industry to industry but may include things
such as crushing, melting, moulding, welding, cooking, and baking, etc.

Output

This is the outcome of the conversion of inputs (raw materials). The output represents the finished
goods that have been generated from production. It includes such things as bread, aluminium, banana
chips or a gold knob.

Factors of production

These are land, labour, capital and entrepreneurship and they represent inputs into production for the
purpose of making a profit.

However, before production can begin there are certain decisions that must be made by the firm. These
decisions are imperative because of the economic problem known as ‘scarcity’. This is a condition where
resources are limited but human wants are unlimited. Therefore, the firm will never be able to fulfil the
wants of everyone. It will then have to make decisions on what to produce, how to produce, when to
produce and where to produce.
What to Produce?

The decision of what to produce is largely influenced by the level of demand for the firm’s product.
‘Demand’ is defined as the willingness and ability of a person to purchase a particular product at a
particular price at a particular period of time. Simply put, it is an individual want backed by the ability to
pay. To this end, the product with the highest demand will be produced. In order to ascertain the needs
and wants of consumers, the firm usually conducts market research.

Another important, yet not very popular, influence on what to produce is the practice of producing what
the firm can and then trying to find a market for the product. Some organizations will produce the
products that they have the technology and machinery to produce. Instead of finding out what
consumers want, the firm will produce the product that its current equipment and technology can
produce.

The financial viability of the product is another factor that would influence its production. The producer
would want to know that the product will be able to make enough money to cover the investment costs
and also earn a profit in the foreseeable future.

Production Methods

Job production

Job production is used when a single product is produced to meet individual specifications. Such
products are usually a one-time production built to the buyer’s design and specifications –

for example, a custom-built car, a wedding dress, ship building or bridge building. Job production usually
involves a single worker (for example, a dressmaker) or group of workers (for example, construction
workers) working on the particular product.

The following are some of the notable characteristics of job production:

 The focus is on the individual customer and not the entire market
 The product is usually highly priced
 The labour force is highly versatile and skilled
 Machinery and equipment are usually flexible so that they can be used for different jobs
 Only one product is made at a time

This form of production method is quite popular in the handcraft industry, where simple tools are used
and each product is made at different times. While production may not be done on a large scale, there
are advantages in using this method of production.

Advantages of job production

 The product is tailored to the needs of the consumer

 It is easier to isolate any problem that may arise
 The workforce is greatly involved with the product, which will improve job satisfaction
 The product is usually of high quality.
Disadvantages of job production

 Very high per unit cost

 Requires a very skilled and flexible labour force
 High spending on machinery and equipment
 Products are normally very expensive

Batch production

This method allows a group of products to undergo a production process at the same time. With batch
production the work can be organised into a number of steps, with each batch of products going
through each step at the same time before moving to the next step.

For example, in the soft drinks industry, drink would be poured into a group of bottles, then corks would
be fitted and then the batch of bottled drinks would be labelled and so forth. Batch production is a
popular method used in the food, chemical and pharmaceutical industries. Items that are made using
this method carry a batch number which makes it easy for them to be traced in case of a problem with a
particular batch of products.

Batch production is known to have the following characteristics.

 Skill level of the labour force is relatively high but lower compared with job production
 Appropriate for repeated customer orders
 Equipment cost is lower, as one piece of equipment is used on a number of products
 Produces a standardised product Usually has a high inventory of work in progress
 Machines are organised and grouped based on the functions that they perform

Advantages of batch production

 Lower machinery requirement compared with job production

 Quality control can be done as the products pass through each process
 Lower labour costs, as workers are less skilled
 Takes less time to complete a product, so firms can respond quickly to orders
 Lower per unit costs as a result of large-scale production.

Disadvantages of batch production

 Cash may be tied up in work in progress

 Machinery and equipment ‘down’ time as the firm switches between batches of products
 The level of motivation may be lower for the workforce
 Small batches of products may lead to an increase in unit costs

Flow production

Where there is very high demand, flow production is the most suitable method to use. It involves the
organization of the work process in sequential steps so that each item passes through each stage before
moving to the next. It uses a series of repetitive processes to produce standardised products. Unlike in
batch production, the products are produced continuously and do not have to wait on a batch of
products. The products pass through each stage via a conveyer belt or an assembly line. This method is
used to mass-produce products and meet high demand. It makes use of division of labour and
specialisation. Flow production has a very high capital outlay but cost can be recovered over time due to
mass production and sales.

Examples of flow production can be found in the car manufacturing industry and other large
manufacturing plants.

Flow production may take different forms, depending on the industry and the manufacturing process.
These forms may include:

Mass production – which involves the production of identical and standardised products. This type of
production is done on a very large scale and requires the production of goods in a relatively short time.
It is usually synonymous with high and sustained demand for the goods being produced – for example,
household appliances

Continuous flow production – this is where the product being produced goes through a continuous
series of processes. There is no stoppage until the product is complete. This is often used in conjunction
with process production

Process production – as the name suggests, this form of flow production involves the product going
through different processes until completion. It is used to convert raw materials into finished products,
such as converting crude oil into petroleum products.

The common features or characteristics of flow production are:

 Uses a greater amount of semi-skilled or unskilled workers

 The product price is lower due to mass production
 Firms experience economies of scale
 The process is highly automated
 Large amounts of raw materials and components
 A standardised product is produced
 Set-up cost is exorbitant

Advantages of flow production

 Lower ‘per unit’ costs as a result of economies of scale

 Large amounts of goods can be produced quickly
 Can be used to meet the ever-growing demands of the market
 There is a reduced need to store large amounts of finished goods due to the speed of
production

Disadvantages of flow production

 Very high set-up cost

 If something goes wrong, the entire assembly line can be halted
 Quality is sometimes sacrificed for quantity
 Work can be repetitive and boring, which leads to low motivation for workers
  Usually inflexible, as it is difficult to alter the production process if consumers’ tastes change

Cellular production

Cellular production is also known as ‘cellular manufacturing’. It involves dividing the factory into cells
that will carry out specific tasks on the product. Each cell is equipped with the machinery needed to
complete that part of the product. Once the task is completed, the product will then move to the next
cell.

For example, in making a shirt one cell might be responsible for sewing sleeves and another collars or
buttons. The shirt will pass through each cell before it is completed. Cell production could also be used
to produce a particular product or product family. In this case, each cell would be independent of the
others and the products produced will form a part of its production target. Cell production promotes
teamwork, and each member is responsible for maintaining quality and design of the product.

Benefits of cellular production

 Quality is improved, as each cell has to ensure that quality is maintained

 Team working normally leads to increased motivation Improvement in the skill level of
employees
 There is a reduction in the amount of floor space used, as each cell occupies less space than if an
assembly line was being used
 The firm could see a reduction in work in progress

Disadvantages of cellular production

 The level of output may be less than if using a flow production method
 Capital and equipment costs could be very high

Factors that influence the method of production used

Nature of the good – the type of product to be produced may require a particular method of production.
For example, tinned food is usually produced using batch production, while roads or houses will be
produced using job production

Expected sales (demand) – the expected level of sales or demand will influence the method of
production chosen. If the organisation is expecting high sales or demand, it may need to employ a flow
production method where goods can be produced quickly and in large quantities

Size of the market – this factor has some connection with the preceding one. Larger markets usually
mean higher demand for the firm’s products. As the firm expands its market reach or share, it also must
expand its scale of production. This might result in the firm switching from a batch production method
to flow production

Stage of the product lifecycle – later in the unit we will examine this concept. However, a product that is
in its growth stage may require mass production but a slowing down of production as it reaches the
decline stage
The level of technology – flow production requires a large amount of automation compared with the
other two popular methods. The level of technology to which the firm has access will definitely
determine whether or not it can utilise the desired production method

Initial capital outlay – the final decision of the firm in terms of its production method rests largely on its
ability to afford the cost of setting up its production facility. The method of production used will be
influenced by the firm’s ability to afford or secure funding for the machinery and equipment needed to
start production

When to produce

Storage space and costs

The available space for storage and the cost of storing the products are two of the deciding factors of
when to produce. If the rate of sales turnover is low, then the firm might find that a lot of money will be
wasted in trying to secure stock and dealing with spoilage or outdated products. In order to minimise
the aforementioned problems firms can utilise the principle of economic order quantity (EOQ). This
principle is used to calculate the optimum level of stock that should be held by the firm in order to
reduce costs.

Seasonal demand

Products that are sold year-round are less affected by this factor and the firm can produce whenever it
chooses. However, for seasonal products, such as some agricultural products, Christmas ornaments or
Easter buns, the firm may have a challenge. As it prepares for these seasons, the firm has to produce
sufficient amounts to meet the peak in demand but has to ensure that it is not left with a lot of stock
after the season has finished. To this end, careful research and planning have to be done so that the
right amount can be produced at the right time.

Lifespan of the product

A product that perishes easily and quickly cannot be produced too long before its actual sale. This is
particularly important for the food industry. A restaurant would not want to cook its meals too early, as
it may have to discard everything due to spoilage. Products that have a long shelf life can be produced at
varying times since spoilage may not be an immediate issue – for example, appliances.

Location of production

Location is the key to the success of the business. Identifying the ideal place for location may mean the
difference between having a customer base or not. However, there are some businesses or industries
where location is not paramount, as the firm’s success is not tied to its location. Such industries are
referred to as ‘footloose industries. These are industries whose location is neither influenced by the
market or sources of raw material nor tied to any area so that it cannot relocate –

for example, an e-service centre as opposed to an oil refinery. It is also important in discussing location
that the concept of industrial inertia be explained. This occurs when a firm refuses to relocate even after
the original benefits of locating in that area have gone. The firm may not want to relocate because of
the costs involved in relocating or it may have developed ties with the area by being a good corporate
citizen and a household name. Before a firm chooses an area to locate in, it must take a number of
factors into consideration. These factors can be broken down into two broad categories: quantitative
factors and qualitative factors.

Quantitative factors affecting location

Quantitative factors refer to those that can be measured in monetary terms. They include:

Site costs

These are possibly the first costs that would come to a potential investor’s mind when making a decision
to locate in an area. Site costs are usually fixed and so should be of utmost concern to the business. This
means that once the firm occupies the location these costs will be incurred even if it does not produce
any unit of the product. Site costs usually include the purchasing of property, payment of rent or lease
and modification costs or construction costs. Other costs such as payment of taxes, fees and utilities are
sometimes added to the previous list. The firm may want to locate in an area where the site costs are
manageable. It has to be careful, however, that it does not locate in a remote area because of the low
costs. This could mean that sales will be low and the business may fail. At the same time, it should not
locate in an area where costs are exorbitant as it might not be able to cover those costs and could go
bankrupt fairly quickly.

Transportation costs

The firm would want to ensure that the transportation cost is not too high, whether transporting raw
materials or finished goods. It should take the necessary steps to minimize such costs. This could be
done by, for example, locating close the source of raw materials or close to the market. The firm would
have to make a decision on which of the transportation costs would be greater – that is, transporting
raw materials or finished goods to the market. The general idea is to locate closer to the one that will
cost more to transport. For example, if raw materials cost more to transport then the firm may want to
locate nearer to the raw materials and then transport the finished goods to the market. The costs of
transportation are often tied to the quality of the transportation system in the area. A good system may
offer quality at a lower cost than a poor and expensive transportation system.

Labour costs

Human capital is an integral part of the organisation and is taken into consideration when seeking where
to locate. The firm needs to ensure that labour is available and has the different levels of skills as
needed. Some firms may desire to have cheap unskilled labour while another may want highly skilled or
semi-skilled but no very expensive labour. If the category of labour needed by the firm is not available in
the area of location, then it may incur huge costs in sourcing the desired category. The nature of the
goods to be produced and the expected production method can be used to assist the firm in making this
decision.

Government incentives

Some governments may give firms an incentive to locate their business in particular areas. This is
particularly important where the government aims to develop or redevelop the area. It could grant firms
tax breaks or holidays or the firm could benefit from zero-rated construction materials and customs-free
shipment of equipment. An example of this would be the new Digicel headquarters building which was
constructed on the waterfront in downtown Kingston, Jamaica in a bid to encourage other investments
as a part of the redevelopment project for the capital city.

Revenue potential

When all is said and done, the firm’s main aim is to make money – and lots of it. Therefore, in addition
to assessing the different costs that might be incurred in locating in a particular area, the firm must also
examine the revenue potential of locating there. If the firm is able to generate huge revenues in a
particular location it will find it easier to pay the costs associated with the location. For this reason,
some firms will locate in very expensive areas such as cities or towns because they can generate high
revenues from that area.

Qualitative factors affecting location

Qualitative factors are those that cannot be measured numerically or in monetary terms. They include:

Infrastructure

This is an important factor in determining location, especially in this 21st century. A firm must consider
the level of infrastructural development in the area in which it wishes to locate. It should consider
factors such as communication, quality of transportation system and quality of the physical
infrastructure such as roads and bridges. Firms are quite aware that not all customers will walk into their
buildings to make a purchase. This means that there must be a proper transportation system in the area
of location. A good system is needed to bring raw materials to the firm on time so that production is not
hampered. The higher the quality of the transportation system, the greater will be the freedom of the
firm in choosing a location. For example, a firm could locate on the outskirts of the city and transport its
products rather than paying the high rent on lands in order to locate in the city. With the rapid growth in
e-commerce, firms would want to know that there is internet access in the location so that they can
explore online options for sales and receipt of payment.

Environmental and planning consideration

With the realities of global warming reaching most, if not all, countries, environmental agencies have
become more vigilant in their pursuit of firms that breach such laws. To this end, and with more firms
displaying corporate social responsibility, the firm must take these issues into consideration when
deciding on a location. Firms have to be mindful of the environmental effects of production and how
locating somewhere will affect town planning activities.

Management preferences

This is a deliberate attempt by the most senior managers of a firm to influence where it is located. The
fact that managers have certain preferences can sway the firm’s locating decision. Where the firm is
new, the investor may have a particular preference for an area and so decide to locate the business
there. Some investors set up businesses in their childhood communities, to give something back there in
terms of job creation.
Other factors influencing location

Closeness to market

If the firm’s products cannot reach the market, it may run into financial problems. Therefore, the
accessibility of the market is very important. The firm should ensure that its customers can easily access
its products. Where the business is offering a service, accessing the consumers is even more important
as where there are no consumers there is no sale. Large manufacturers of products that may need to be
shipped will locate near to a port for ease in getting the products to the market.

Available services and amenities

The organisation needs to ensure that the place of location has some basic services and amenities.
These include utilities (electricity and water), proper waste disposal and education and training facilities.
A major problem in most Caribbean countries is that of the cost of electricity. This is largely because of
their dependence on oil for energy. As a result, the firm has to assess carefully its location and how it
can lower its energy bill. Locating in a country with high energy cost and little alternative could see the
firm incurring huge costs of production. For example, the level of energy consumption by giant car
maker Toyota would make it virtually impossible for its plant to be located in CARICOM. For many years,
bauxite-producing countries such as Guyana and Jamaica have had to export alumina since they are not
able to generate the electricity needed for aluminium production. Locating near educational institutions
may help to solve the problem of finding skilled labour. This will also provide the firm with the
opportunity of honing the skills of the present labour force. Some businesses may want to locate in an
area with other services such as shopping facilities, entertainment and proper housing.

Legal and political factors

The firm has to think about the political stability of the area in which it wants to locate. If the area is
known to have political upheavals and instability then it might not be a good idea to locate there.
Locating in these areas could lead to a loss of investment. Firms must also consider the laws of the
country in which they want to locate. There are some areas where businesses are not allowed to locate,
such as residential areas or certain parts of cities. Other laws may include the Town and Building Act and
the Noise Abatement Law.

Geographical factors

This factor is most important for businesses in the agriculture industry. The climatic condition of some
areas does not make it feasible to grow certain crops. The firm will have to assess the topography and
chemical structure of the land before locating there.

Summary

Firms are faced with four major questions when deciding on production (what, how, when and where to
produce)

Job production is used when a single product is produced to meet individual specifications

Batch production method allows a group of products to undergo a production process at the same time

Flow production uses a series of repetitive processes to produce standardized products