Business Studies

Chapter 4 Operation Management

4.1 Production of Goods and Services

4.1.1 The Meaning of Production

Definitions:

- Production: Using resources to provide goods and services to satisfy consumers’ needs
and wants.
- Productivity: A measure of the efficiency of the use of resources in a business by
comparing the volume or value of output with the resources inputs used in production.
- Labour Productivity: Average output or revenue per employee.
- Lean Production: Improving efficiency and eliminating waste in a production process
so that products can be made better, cheaper, and faster.
- Inventories: Stocks of materials, work-in-progress and finished goods stored by a
business to ensure uninterrupted production and to meet peaks in consumer demand.
- Just-In-Time Inventory Control: Keeping inventories of materials and
work-in-progress to a minimum by taking delivery of new parts and materials only when
they are needed for production.
- Kaizen: The continuous improvement of production processes to remove waste and
increase efficiency.

Key Ideas:

Benefits of increasing productivity:

- Increase output and revenue

- Reduce the average cost of each item produced and sold
- Increase the ability of the business to compete with rivals on cost and prices
- Increase wages received by employees as their total output increases
- Increase profitability

Average Productivity of Labour = Total Output ÷ Number of Employees

Average Revenue Productivity of Labour = Total Revenue ÷ Number of Employees

Ways of increasing productivity:

- Training employees to improve their skills and to use new technologies

- Rewarding employees who increase their productivity with performance-related pay
- Improving the working environment to increase employees’ job satisfaction
- Introduce new production processes and working practices to reduce waste
- Managing inventories effectively
- Introduce lean production through new processes and ways of working to continually
reduce waste and inefficiency
- Replace old equipment and machinery with new technologies and automating
production processes

Disadvantages of overstocking:

- More cash is used up purchasing inventories leaving the business with less to pay other
commitments
- More storage space must be used or rented by the business
- Work-in-progress and finished goods held in storage for a long time will lose value if
they perish or go out of fashion

Seven types of waste recognized by lean production:

- Transportation: Moving products around unnecessarily

- Stock: Storing too many components, semi-finished and finished products
- Motion: People or equipment moving or walking more than it is required to perform a
task
- Waiting Time: Time wasted between each stage of the production process
- Overproduction: Producing more than is needed to meet customer demand
- Over Processing: Creating unnecessary activities due to poor equipment or product
design
- Defects: the effort involved in inspecting and fixing product defects

Principles of lean production

- Making continuous improvements in the production process

- Speeding up the flow of production through the various stages of the process
- Making the flow of production as continuous as possible
- Reducing waste and improving work quality at all stages