Production of goods and services- Business chapter 18

• Production is managing resources effectively to produce goods and services (is also the provision of a product or a service to satisfy consumer wants and needs)
• The process of production adds value to the raw materials and bought-in components. The production process applies to manufacturing as well as service industries. In adding value, businesses combine the inputs of a business (factors of production) to produce more valuable outputs to satisfy consumer wants and needs
• For a business to be compettiive, it should combine these inputs of resources efficiently so that it makes the best use of resources at its disposal to keep costs low and increase profits. In a developing country, where wages are low, it may be more efficient to use many workers and few machines to produce goods-called labour intensive. However, in developed countries where labour costs are high, production is often capital intensive, where businesses use machines/ robots and employ few workers
• The level of production is the total output of a business in a given time period. This is different to productivity.

  Productivity is how the business can measure its efficiency, its the output measured against the inputs used to create it.
• Productivity: output (can be quantity produced or revenue) divided by quantity of input (labour or machinery)

  Labour productivity: Output (over a given period of time) divided by number of employees
• • Productivity can be raised by either using fewer inputs to produce the same output or using the same inputs to produce a higher level of output.
  • If employees become more efficient, the amount of output produced per employee will rise and therefore the costs of producing each product will fall. This will make the business more competitive and is the main reason why businesses are usually very focused on increasing productivity.
• Ways to increase productivity and efficiency:

  • Improve quality of product and inventory control to reduce waste (good inventory control means can deliver products faster to customers)
  • Replace employees with machines- automation (frees up employees to do other jobs that machines can't do, and machines don't need breaks)
  • Improve training to increase employee efficiency (but increases company's costs and risk of employees company with the new skills after trained)
  • Introduce new technology (machine can mass produce things)
  • Use more automation
• Benefits of increasing productivity/ efficiency:

  • Reduced inputs needed for the same output level (more output with less input)
  • Lower costs per unit (average costs), gains economies of scale, so can charge the product at cheaper price, so the business would be more competitive
  • Fewer workers may be needed, possibly leading to lower wage costs (save costs for business, if workers become very efficient, company can lay off some workers, cuz one worker can do the job of 2 workers)
  • Higher wages might now be paid to workers, which increases motivation
• Why businesses hold inventories:

  • To ensure that there is always enough inventory to satisfy demand, inventory levels must be carefully controlled
  • 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 bought the goods but they are not being used and the money could be put to a better use.

  
• Lean production: Is a term for those techniques used by businesses to cut down on waste and therefore increase efficiency, for example, by reducing the time it takes for a product to be developed and become available for sale.
• Lean production coveres a variety of techniques used by businesses to cut down on waste of resources, including time, and therefore increase efficiency. It aims to reduce the time it take for a product to be developed and become available in the shops for sale. Lean production cuts out on any activities which do not add value for the customer and this can apply to services as well.
• Seven types of waste in production:

  • Overproduction- producing goods before they have been ordered by customers. This results in high storage costs and possible damage to goods while in storage.
  • Waiting- When goods are not moving, or being processed in any way, waste is occuring.
  • 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.
• Seven wastes in production:

  • Motion- Any actions, including bending or stretching movements of employee, wastes time. It may also be a health and safety risk for the employees. This also applies to the movement of machines which may not be necessary
  • 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 and be because the product's design is poor.
  • Defects- Any faults require the goods to be fixed and time can be wasted inspecting the products, more resources to fix it, costs increase
• Benefits of lean production:

  • Less storage of raw materials or components.
  • Quicker production of goods or services
  • No need to repair defects or provide a replacement service for a dissatisfied customer (save on repair costs)
  • Better use of equipment.
  • Cutting out some processes, which speeds up production
  • Less money tied up in inventories (cash flow problems with high inventories)
  • Improved health and safety leading ot less time off work due to injury (bad layout of factory leads to injuries, workers can trip over something, when workers injured, company needs to pay for their insurance)
• Kaizen:

  • Kaizen is a Japanese term meaning continuous improvement through the elimination of waste.
  • Its focus is on the elimination of waste. The improvement doesn't come from investing in new technology or equipment but through the ideas of the workers themselves. (as no one knows the problems that exist better than the workers who work there all the time)
  • Kaizen eliminates waste, eg by getting rid of large amounts of inventory or reducing the amount of time taken for workers to walk between jobs so that they eliminate unnecessary movements. (reorganise factory floor)
• Kaizen advantages:

  • Increased productivity
  • Reduced amount of space needed for the production process
  • Work in progress is reduced
  • Improved layout of the factory floor may allow some jobs to be combined, thereby freeing up employees to carry out other jobs in the factory
• Just-in-time inventory control:

  • Is a production method that involves reducing or virtually eliminating the need to hold inventories of raw materials or unsold inventories of the finished product (but longer wait time for customer)
• Just-in-time:

  • All this reduces the cost of holding inventory, as no raw materials and components are ordered to keep in the warehouse just in case they are needed.
  • Warehouse space is not needed, again reducing costs
  • The finished product is sold quickly and so money will come back to the business more quickly, helping its cash flow
• Cell production:

  • Is where the production line is divided into separate, self contained units (cells), each making an identifiable part of the finished product, instead of having a flow or mass production line.
  • This method of production improves the morale of the employees and makes them work harder so they become more efficient. The employees feel more valued and are less likely to strike or cause disruption. (more motivated cuz workers with similar skills are working together in the same group, improve motivation and productivity.)
• Just-in-time:

  • To operate just in time, inventories of raw materials, work in progress and finished products are run down and no extra inventory is kept.
  • The business therefore needs very reliable suppliers and an efficient system of ordering raw materials or components, because sometimes suppliers may not be able to supply on time, or in the required quantity in such short notice, so the business cant sell the product to customers. The wait time is also very long, as suppliers need to produce the product once ordered.
• Methods of production:

  • Job production: is where a single product is made at a time
  • Batch production: Is where a quantity of one product is made, then a quantity of another item will be produced
  • Flow production: Is where large quantities of a product are produced in a continuous process. It is sometimes referred to as mass production
• Job production (products made specifically to order, best for niche markets where there is little amount of customers)

  Advantages:

  • It is most suitable for personal services or one-off products
  • The product meets the exact requirements of the customer
  • The workers often have more varied jobs (they don't carry out just one task, they do it from beginning to end)
  • More varied work increases employee motivation- giving them greater job satisfaction (then higher productivity for the business)
  • It is flexible and often used for high-quality goods and services, a higher price can be charged
• Disadvantages of job production:

  • Skilled labour is often used and this raises costs
  • The costs are higher because it is often labour intensive
  • Production often takes a long time
  • Products are specially made to order and so any errors can be expensive to correct
  • Materials may have to be specially purchased, leading to higher costs
• Batch production

  • where similar products are made in batches or blocks, like a small bakery making batches of bread, several houses built together using the same design.
• Advantages of batch production:

  • It is a flexible way of working and production can easily be changed from one product to another (much more flexible than job production)
  • It still gives some variety to workers jobs (but less variety than job production)
  • It allows more variety to products which would otherwise be identical. This gives more consumer choice (like different flavours of ready meals)
  • Production may not be affected to any great extent if machinery breaks down
• Disadvantages of batch production:

  • It can be expensive as semi finished products will need moving about to the next production stage.
  • Machines have to be reset between production batches which means there is a delay in production and output is lost
  • Warehouse space will be needed for inventories of raw materials, components and finished batches of foods. This is costly.
• Flow production (not suited for niche market products, as they only have a little customers, would be a waste to invest in all that machinery)

  Advantages:

  • There is a high output of a standardised product.
  • Costs of making each item are kept low and therefore prices are also lower.
  • It is easy for capital intensive production methods to be used- reducing labour costs and increasing efficiency
  • Capital intensive methods allow workers to specialise in specific, repeated tasks and therefore the business may require only relatively unskilled workers- little training may be needed
• Flow production advantages:

  • It may benefit from economies of scale in purchasing (have to bulk buy all the same materials for their products)
  • Low average costs and therefore low prices usually mean high sales
  • Automated production lines can operate 24 hours a day
  • There is no need to move goods from one part of the factory to another as with batch production, so time is saved.
• Flow production disadvantages:

  • It is a very boring system for the workers, so there is little job satisfaction, leading to a lack of motivation for employees (employees may only need to package/seal products after its produced by machines)
  • There are significant storage requirements- costs of inventories of raw materials and finished products can be very high unless JIT systems are used (cuz produce a lot, have to store it)
  • 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 (lost sales opportunity)
• 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 ot 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
• Factors affecting which method of production to use:

  • The size of the 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
• Factors affecting which method of production to use:

  • The size of the 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
• Technology keeps businesses ahead of the competition, keeps costs falling, reduces prices and improves the products manufactured:
• Automation

  • is where the equipment used in the factory is controlled by a computer to carry out mechanical processes, such as 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 that everything proceeds smoothly
• Mechanisation

  • is where the production is done by machines but operated by people, for example, a printing press. 
  • Robots are machines that are programmed to do tasks and are particularly useful for unpleasant, dangerous and difficult jobs. They are quick, very accurate and work non-stop, 24 hours a day
• CAD (computer-aided design)

  • is computer software that draws items being designed more quickly and allows them to be rotated to see the item from all sides instead of having to draw it several times.
  • It is used to design new products or to re-style existing products. It is particularly useful for detailed technical drawings.
• CAM (computer -aided manufacture)

  • is where computers monitor the production process and control machines or robots on the factory floor. 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 paint the car
• 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.
• Technology has also improved productivity in shops with electronic

  payment methods and scanners at the tills.

  EPOS (electronic point of sale).

  • This is used at checkouts where the operator scans the barcode of each item individually. 
  • The price and description of the item is displayed on the checkout monitor and printed on the till receipt. The inventory record is automatically changed to show one item has been sold and if inventory is low (at the reorder point) then more inventory can be automatically ordered.
• EFTPOS (electronic funds transfer at point of sale).

  • This is where the electronic cash register is connected to the retailer’s main computer and also to banks over a wide area computer network.
  • The shopper’s card will be swiped at the till and the bank information will automatically be read from the card. The money will be directly debited from the customer’s account after they have  signed for the debit to be made or have entered their PIN (personal identification number). A receipt will be printed as confirmation that the payment has gone out of the customer’s account.