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
  • Tinned food is usually produced using batch production
  • 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 organization 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

  • 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

  • A product that is in its growth stage may require mass production
  • 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 well known methods
  • The level of technology to which the firm has access will definitely determine whether or not it can utilize the desired production methods
• Initial capital outlay


  • The final decision of the firm in terms of its production method rests largely on its ability to afford or secure funding for the machinery and equipment needed to start production
• When to produce


  1. Storage space and costs

  2. Seasonal demand

  3. Lifespan of the product
• Location of production


  • 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
• Location decision


  • One of the most important strategic issues determining its long-term performance
  • Impact on all aspects of the profit equation
• Quantitative factors affecting location

  • Site costs
  • Transportation costs
  • Labour costs
  • Government incentive
  • Revenue potential
• Site costs


  • Fixed costs that should be of utmost concern to the business
  • The firm may want to locate in an area where the site costs are manageable
• Transportation costs


  • The firm would want to ensure that the transportation cost is not too high, whether transporting raw materials or finished goods
  • 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
• Labour costs


  • The firm needs to ensure that labour is available and has the different level of skills as needed
  • Some firms may desire to have cheap unskilled labour while another may want highly skilled or semi-skilled but not 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
• Government incentives


  • Some governments may give firms an incentive to locate their business in particular areas
  • It could grant firms tax breaks or holidays or the firm could benefit from zero-rated construction materials and customs-free shipment of equipment
• Revenue potential


  • The firm must examine the revenue potential of locating in an area
  • 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
• Qualitative factors affecting location


  • Community factors
  • Demand factors
  • Expansion potential
  • Suppliers
  • Environmental policy
• Community factors


  • Local amenities & services (for example schools, professional services)
  • Local government attitude to supporting business (including financial assistance)
  • Language
  • Political stability
• Demand factors


  • Customer convenience
  • Labour skills
  • Site suitability
• Expansion potential


  • Future production capacity often has to be taken into account
  • A location might tick many other boxes, but if it provides limited scope for expansion then it might be rejected
  • If a location restricts output, then revenues are potentially damaged
• Suppliers


  Continuous and quality supply of the raw materials is another critical factor in determining the location of manufacturing facility
• Environmental policy


  Understanding of environmental policy for the facility location is another critical factor