4.

1 Production of goods and services

Managing resources effectively to produce goods and services

Production is the provision of a product or a service to satisfy consumer wants and

needs. The process involves firms adding value to a product.

The production process applies to manufacturing as well as service industries. In adding

value, businesses combine the “inputs” of a business (factors of production, such as
land, labour, capital and enterprise) to produce more valuable ‘outputs’ (the final good or
service) to satisfy consumer wants or needs. However, these factors of production, also
called economic resources, can be combined in different productions – as inputs – to
the production process.

The operations department in a firm overlooks the production process. They must:
Use the resources in a cost-effective and efficient manner
• Manage inventory effectively
• Produce the required output to meet customer demands
• Meet the quality standards expected by customers

PRODUCTION: is the process of converting inputs such as land, labour and capital, into
goods and services of economic value.

PRODUCTIVITY: is a measure of the efficiency of inputs used in the production process

over a period of time.

The productivity of a business can be measured by:

Productivity = Quantity of output / Quantity of inputs

Businesses often want measure the productivity of one of the factors of production or
inputs, usually labour. This is measured by dividing the output over a given period of
time by the number of employees:

Labour productivity = Output (over given period of time)

Number of employees

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Productivity can be increased by either using fewer inputs to produce the same output
or using the same inputs to produce a much greater output

As employees become more efficient, the amount of output produced per employee will
rise and therefore the costs or producing the product will fall. Businesses strive to
increase productivity in order to become more competitive.

There are a number of ways to increase productivity:

• Improving labour skills by training workers so they have more productive

techniques of working
• Introducing automation and better technology (using machinery and IT
equipment to control production) so that production is faster and error-free
• Improve employee motivation so that they will be willing to produce more and
efficiently.
• Improved quality of management decisions to ensure that there are no wastage
of resources.

Benefits of increasing efficiency/productivity

• Increased output relative to the inputs required.

• Lower costs per unit (average cost) so can enjoy benefits of economies of scale.
• Fewer workers may be needed, possibly leading to lower wage costs.
• Higher wages for workers increases motivation.

Why businesses hold inventories (stock)

Inventories are the stock of raw materials, work in progress and finished goods held by
a business.
When inventories get to a certain point (recorder point), they will be recorded to bring
inventories back to the maximum level again. The business must reorder before
inventories get too low to allow time for the goods to be delivered. If inventory levels get
too low they might actually run out if there is an unexpectedly high demand for the
goods. If too high a level of inventory is held then this costs a lot of money; the
business has the goods but they are not being used and the money could be put to
better use. The following graph demonstrates how inventory levels can be managed.

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Effectively managing inventory levels is very important to all types of businesses,
especially manufacturing and retail businesses.

METHODS OF PRODUCTION

JOB PRODUCTION

Job production is the production of items one at a time. This method is normally used for
the production of single unique products. Each individual item is completed before
another is started. Products are made specifically to order and are customized.
E.g. ships, bridges, designer dress
Job production usually needs highly skilled workers and specialized equipment.

Advantages of job production

• Unique high quality products are made – so can charge a higher price, increasing
the profit margin
• The product meets the exact requirements of the customer – increase customer
satisfaction with possibility of higher sales
• The workers often have more varied tasks – making the labour force more flexible as
they can move between the tasks when required.
• Employees are often motivated and take pride in their work - gives them greater job
satisfaction as they find the work more interesting – this reduces labour turnover.

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• It is most suitable for personal services or ‘one-off’ products.

Disadvantages of job production.

• Skilled labour is often used – higher wages
• The costs are higher because it is often labour intensive.
• Production often takes a long time - may delay the delivery of finished items to
customers making them unhappy.
• Products are specially made to order and so any errors can be expensive to correct.
• Small quantities of specific raw materials purchased - leading to higher costs. (no
bulk purchases, no discounts)
• Small output (relative to batch or flow) – raises unit costs / lack of economies of
scale

BATCH PRODUCTION
This is where similar products are made in batches. Each batch is completed before
another batch could be started. Examples: small bakery making batches of bread, bun
doughnuts, several houses build together using the same design. A certain level of
customization can be brought between batches (different colours, size, taste)

Advantages of batch production

• Flexible way of working- production can be easily switched between products

• It still gives some variety to workers.
• Production may not be affected to any great extent if machinery breaks down.
• It allows more variety to products. This gives more consumer choice (for eg.
different flavours of bread).
• Materials can be bought in bulk – so they are cheaper as business can get discounts

Disadvantages of batch production

• Ware house space will be need for stock of raw materials and finished goods. This is
a huge cost.
• Machines have to be reset between production batches which means there is a
delay in production and output is lost.

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FLOW PRODUCTION
Flow production is where large quantities of standardized products are produced in a
continuous process on the production line. It is sometimes referred to as mass
production because of the large quantities of standard product is produced. Examples:
cars, packaged foods and drinks.

Advantages of flow production

• Costs are low in the long run and so prices can be kept low
• Can benefit from economies of scale in purchasing
• Automated production lines can run 24×7
• Goods are produced quickly and cheaply
• Capital-intensive production, so reduced labour costs and increases efficiency

Disadvantages of flow production

▪ Workers get bored due to repetitive work, so increases mistakes leading to

decrease labour productivity.
▪ The 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 halted.
▪ There are significant storage requirements – costs of inventories of raw
materials/components and finished products can be very high.

FACTORS AFFECTING WHICH METHOD OF PRODUCTION TO USE

▪ The nature of the product. If a fairly unique product or an individual service is

required (in fact many services are individual to the customer and will be
specifically tailored to their requirements), job production will be used. If the
product can be mass produced using an automated production line then flow
production will be used.

▪ The size of market. – If demand is higher and more products can be sold but not
in very large quantities, batch production will be used. The product will be
produced in a certain quantity to meet the particular order. Small local markets or
niche markets will be served by businesses using job or batch production.
International markets are served by businesses using flow production.

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▪ The nature of demand. - If there is a large and fairly steady demand for the
product, such as soap powder, it becomes economic to set up a production line
and continuously produce the product (flow production). If demand is less
frequent, such as for furniture, then production may be more likely to be job or
batch production.

▪ The size of business. - If the business is small and does not have the access to
large amounts of capital then it will not produce on a large scale using automated
production lines. Only large businesses can operate on this scale. Small
businesses are more likely to use job or batch production methods.

LEAN PRODUCTION
Lean production is management process which focuses on minimizing or eliminating
wastage while improving the quality of the product.

It refers to the techniques used by businesses to cut down waste and therefore increase
efficiency, by reducing the time it takes for a product to be developed and become
available for sale. Lean production cuts out any activities which do not add value for the
customer and this can apply to services as well.
There are six types of waste that can occur in production and they are:
▪ Over production - Producing goods before they have been ordered by customers.
This results in high storage costs and possible damage to goods whilst 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. Goods may also be damaged when they are being
moved around

▪ Unnecessary inventory- if there is too much inventory then this takes up space,
may get in the way of production and costs money

▪ Over processing- if complex machinery is being used to perform simple tasks

then this is wasteful. Some activities in producing the goods may not be
necessary if the design of the product is poor

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 ▪ Defects- any faults require the goods being fixed and time can be wasted
inspecting the products.

Benefits of lean production

Costs are saved through:
• Less storage of raw materials or components
• Quicker production of goods and services
• No need to repair defects or provide a replacement service for a dissatisfied
customer
• Better use of equipment
• Cutting out some processes which speeds up production
• Less money tied up in inventories
• Improved health and safety leading to less time off work due to injury.
Reduced costs can lead to lower prices for customers, businesses being more
competitive and possibly also increased profits.

Lean production might include using any of the following methods

▪ Kaizen
▪ Just in time (JIT) inventory management
KAIZEN
Kaizen means ‘continuous improvement’ in Japanese and it focus is on the elimination
of waste. The improvement does not come from investing in new technology or
equipment but through the ideas of the workers themselves.
In Kaizen, small group of workers meet regularly to discuss problems and possible
solutions. This has proved effective because no one knows the problems that exist
better than the workers who work with them all the time, so they are often the best ones
to think the ways to overcome the problems.
Kaizen estimate waste, for example, by getting rid of piles of stock or reducing the
amount of time taken for works to walk between jobs so that they eliminate unnecessary
movements.
The advantages of kaizen

▪ Increased productivity
▪ Reduced amount of space needed for production process
▪ Work in progress is reduced

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 ▪ Improved layout of the factory floor may allow some jobs to be combined,
thereby freeing up employees to carry out some other job in the factory.

JUST IN TIME
This technique eliminates the need to hold any kind of inventory by ensuring that
supplies arrive just in time they are needed for production. The making of any parts is
done just in time to be used in the next stage of production and finished goods are made
just in time they are needed for delivery to the customer/shop. The firm will need very
reliable suppliers and an efficient system for reordering supplies.

All this reduces the costs of holding stock, as no extra is ordered to keep in the
warehouse just in case it is needed. Therefore, warehouse space is not needed, again
reducing costs. The finished product is sold quickly and so money will come back to the
business quickly, helping its cash flow.

Advantages of JIT
• Lower stock holding means a reduction in storage space which saves rent and
insurance costs
• As stock is only obtained when it is needed, less working capital is tied up in stock
• There is less likelihood of stock perishing, becoming obsolete or out of date
• Avoids the build-up of unsold finished product that can occur with sudden changes in
demand
• Less time is spent on checking and re-working the product of others as the emphasis
is on getting the work right first time.

Disadvantages of JIT

• There is little room for mistakes as minimal stock is kept for re-working faulty product
• Production is very reliant on suppliers and if stock is not delivered on time, the whole
production schedule can be delayed
• There is no spare finished product available to meet unexpected orders, because all
products are made to meet actual orders – however, JIT is a very responsive method
of production.

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How technology has changed production methods

Technological advances have allowed the mechanization and automation of production

methods in many industries. The use of automation, robotics and CAD/CAM keep
businesses ahead of the competition, keep costs falling, reducing prices and improves
the products manufactured.

• Automation: is where the equipment used in the factory is controlled by a computer

to carry out mechanical process such as paint spraying on a car assembly line. The
production line will consist mainly of machines and only few people will be needed to
ensure that everything proceeds smoothly.

• Mechanization: is where the production is done by machine but operated by people,

for example printing newspapers. E.g. farm work.

CAD (computer aided design) Computers are used to help design products using
computer generated models and 3D drawings.

Computer software that draws items being designed more quickly and allows them to be
rotated to see the item from all the sides instead of having to draw it several times. It is
used to design new products or to restyle existing products. It is particularly useful for
detailed technical drawings.

■ Reduces the need to build physical models to test certain conditions, known as
prototypes.
■ However, this can be expensive to produce just for testing purposes (e.g. aircraft
or new cars)

CAM (computer aided manufacture) is where computers monitor the production

process and control machines. For example, on the production line of a car plant
computers will control the robots that spot -weld the car body together or the robots that
spray the paint the car. This reduces labour costs, is more accurate and faster and can
work at any hour of the day.

CIM (computer integrated manufacturing) is the total integration of computer aided

design (CAD) and computer aided manufacturing (CAM). The computers that design the
products are linked directly to the computers that aid the manufacturing process.

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Technology has also improved productivity in shops with electric payment
methods and scanners at the tills.

• EPOS (electronic point of sale) this is used at checkouts where the operator scans
the bar code of each item individually. The price and description of the items is
displayed on the checkout monitor and printed on the sale receipt. The stock record
automatically changed to show one items had been sold if stock is low that is the
reorder point then more stock can be automatically ordered.

• ETPOS (electronic funds transfer at the point of sale) the electronic cash register
at the till will be connected to the retailer’s main computer and different banks. When
the customer swipes the debit card at the till, information is read by the scanner and
an amount is withdrawn from the customer’s bank account.

Advantages of new technology

• Large amounts can be made → economies of scale, meaning unit costs of

production fall
• Productivity of workers improves. The output per worker increases and so labour
costs fall for each product made
• Quality of production can be improved because machines are less likely to make
mistakes → reduce wastage → save money. Improved quality may attract new
customers
• Production can be flexible. Machines can be programmed to produce variety of
products in order to meet needs of individual customers
• Repetitive or dangerous jobs may be done by machines rather than people
• Reduces the time taken to design new products

Disadvantages of new technology

• Need to make workers redundant. Costs of making workers redundant may be high
• May be problems with trade unions as they may take industrial action against the
redundancies
• Firm may need to recruit new employees with skills to use new technology – high
salary
• May need to spend money on training workers which increases cost
• Buying and installing machines can be very expensive.

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