The meaning of production

Production – Process of adding value to a product (using four factors of

production – land, labour, capital and enterprise) to satisfy customer needs
and wants.

Productivity – How a business measures it’s efficiency

Productivity could mean using fewer inputs to produce the same amount of

output. Or using the same amount of input to produce a greater amount
of output

Ways to improve productivity

 Improving layout of factory so production becomes faster and more

efficient
 Training workers so they can be more productive
 Using automation

Benefits of increasing efficiency/productivity

 Lower cost per unit

 Less employees needed (reduce labour cost)
 Reduces overall costs.

Why do businesses hold stock?

Businesses keep stocks for a variety of reasons, for example, factories keep
raw material inventory to make sure there are enough materials for production
while a shop might hold stock to ensure that products are available to
customers.

Too much stock 

 Money wasted on storage cost

 Depreciation cost
 Shelf life (items may reach best before date before being sold)
 Money could’ve been used on something else

Not enough stock

 Opportunity lost (profit could be made if product sold)

Buffer stock (aka safety stock) – inventory to deal with sudden customer
demands for a product or in case supplies doesn’t get delivered on time.

What is Lean production?

Lean Production – Term for techniques used by businesses to cut down
waste and increase efficiency.

Common wastes in businesses

  Overproduction – Producing too many products which then costs the
business money to keep the product in storage. (and may get
damaged/expires etc..)
 Waiting – Goods not being processed
 Transporting – Materials being moved around the factory inefficiently
 Over-processing – e.g. using advanced machine to do simple tasks
 Defects- production of faulty products which can’t be sold.

Costs can be reduced by lean production

Benefits of lean production

 Less storage of raw materials (e..g no need for refrigeration costs,

warehouse etc…)
 Less defects in production (broken products don’t get produced)
 Better use of equipment
 Speeding up production by cutting out unnecessary tasks
 Less money tied up in stock

3 Common lean production techniques

Kaizen – Kaizen means continuous improvement by eliminating waste.

 Workers meet regularly to discuss problems and possible solutions

 In this way, wastage is reduced and efficiency is improved
 Factory floors are usually rearranged so that the flow of production
from one activity to the next is improved.

Just-in-time production

 Focus on reducing the need to hold stocks of raw material or parts

that are needed (This reduces storage costs)
 Raw materials are delivered just in time by suppliers for production
 Reliable suppliers are needed for this to work

e.g. Milk gets delivered to milkshake factory 30 minutes before production

starts, this means that the milkshake factory won’t have to spend money on
expensive refrigerators to store milk before it gets produced.

Cell production

 The production line is divided into separate teams of workers, each

makes a part of the finished production
  Motivation is improved due to the variety of tasks and the worker
belonging to a team

The main methods of production

 

Job Production – Each product is different and made to specific instructions

by the consumer. e.g. tailor made suits, customizable birthday/wedding cakes

Advantages of Job production

 Workers have more varied job (They won’t become bored)

 Higher price can be charged for product
 Product meets requirements of the customer

Disadvantages of Job production

 Costs of production are high because skilled labour is used

 Product takes a long time to produce
 Products are made to order so any errors may be expensive for the
company to fix

Batch production – Similar products are made in batches (e.g. batch of white
shirts then another batch of green shirts are made)

Advantages of Batch production

 Gives more variety of jobs to workers

 Production can be easily changed from one product to another
 Gives consumers a variety of products (e.g. many colour shirts)

Disadvantages of Batch production

 Expensive to produce goods

 Machines have to be reset when changing from one batch to another
which slows down production (e.g. change colour of shirts from white
to green dye)
 Warehouse space is needed to store products

Flow production (Mass production) – Large quantities of identical products

are produced on a continuous basis
Advantages of Flow production

 Goods are produced quickly and cheaply (economies of scale)

 Increased efficiency through use of machinery
 Less labour is needed (machines do the work)
 Automated production line means production can operate overnight

Disadvantages of Flow production

 Very boring for workers (same product over and over)

 Starting costs are high (expensive machines, big factory etc…)
 If a machine breaks down the whole production line may stop
 Expensive storage costs as they are lots of products

Factors affecting which method of production to use

1. The nature of the product – Unique products will require job

production.
2. Size of the market – Products with small number of customers mean
job or batch production is used. Products with large amount of
consumers = flow production should be used.
3. The nature of demand – Small and infrequent demand by
customers means job or batch production will be used.
4. The size of the business – Small businesses tend to operate using
job and batch production while large business may use flow
production.

How technology has changed production

methods
Improvements in technology can help reduce costs and improve product
quality

 Automation – Production by equipment which are controlled by

computers.
 Mechanisation – Production by machine operated by workers
(human)
 Computer aided design (CAD) – 3D drawing software to design
new products
 Electronic point of sale – Used at checkouts where stock records
are automatically adjusted as an item barcode is scanned when it is
sold. e.g. supermarket stock
  Electronic funds transfer at point of sale (EFTPOS) – Cash
registers connected to bank (Customer’s card is swiped and money
is transferred right away from customer’s bank account

Advantages of technology

 Higher productivity
 Improved motivation as boring jobs are now done by machines
 Better quality products are produced
 Faster communication
 Improved flow of information for managers

Disadvantages of technology

 Higher unemployment as machines replace human labour

 Technology is expensive
 Technology becomes outdated very quickly and may needs to be
upgraded often

Identify and classify costs

Fixed cost  – A cost that does not change as the amount of products
produced or sold changes.

 Examples of fixed cost – rents such as office space or land,

insurance and employee salaries
 Fixed cost per product can be lowered by making more products.

Variable cost – A cost which changes as the amount of goods produced or

sold changes.

 Examples of variable cost – Materials used to produce

product, wages of production workers

Total cost – Fixed cost and variable costs are combined

Average cost per product = Total cost / Number of products produced

Explain, interpret and use a simple break-

even chart
Break Even – method for finding out the minimum level of sales needed for a
firm to pay for its total cost.

Break even: Level of output where total costs equal total revenue

When Total cost = Revenue, the business will break even.

Advantages of break even charts

 Enables managers to see the level of production/sales needed to

break even
 Allows managers to read off expected profit/loss for different
levels of sales
 Impacts of business decisions can be seen (e.g. See effects of 
lowering variable costs)
 Break even chart shows safety margin

Disadvantages 

 The chart is merely a forecast for the future. There is no

guarantee that the figures will prove to be correct.
  Assumes all goods manufactured will be sold. This may not
always happen!
 Assumes costs and revenue are always drawn as straight lines.
This is unlikely to be the case.
Economies and diseconomies of scale
Economies of scale – Factors that lead to a reduction in average cost as a
business increase in size.

 Purchasing economies – Large firms able to negotiate cheaper

prices for raw materials (e.g. Coca-Cola buying large bulks of sugar
from supplier )
 Financial economies – Large firms able to negotiate cheaper
finance deals (e.g. lower bank loans because banks view large
businesses as less risky)
 Managerial economies – Large businesses can afford to hire
specialists to work for them. This increases efficiency.
 Technical economies – Use of specialist machinery to produce
large quantities of products. (Small businesses cannot afford this)
 Marketing economies –  1. Buying own vehicle to distribute product
2. Advertising costs can be spread over a large number of products.

Diseconomies of scale – As a business becomes too large, it becomes less

efficient leading to higher cost of production.

 Poor communication – 

1. Difficult to send and receive accurate messages in large organisations.

2. Takes longer for decisions to be made

3. Top managers lose contact with customers.

 Low motivation – Workers begin to feel unimportant and not valued

by management. This leads to lower efficiency

Achieving quality production

Why quality is important and how quality

production might be achieved
Quality – to produce a good or service which meets customers expectations.

Why Is Quality important for a business?

  Gives competitive advantage
 Encourages return purchases
 Provides customers with information and builds consumer
confidence in the brand
 Reduces costs incurred in solving past sales problem (Customer
refunds etc..)
 Helps improve efficiency

Quality control – Checking product quality at the end of the production

process. If defected products are found, the entire batch will be thrown
away/repaired

Advantages of QC 

 Faults are found before product is sold to customers

 Less training for the worker is required (compared to quality
assurance)

Disadvantages of QC

 Hiring employee to check product costs money

 QC does not explain how fault occurred and can happen again.
 Fixing defected products cost money

Quality Assurance – Checking quality standards of a product throughout the

production process.

Advantages of QA

 Fewer customer complaints

 Tries to eliminate faults or errors before the customer receives the
product
 Fewer defected(low quality) products produced (Reduce cost
because there will be less broken/low quality products to fix)
Disadvantages of QA

 Expensive to train employees

 Relies on employees following instructions

Total Quality Management – Continuous improvement of products and

processes by focusing on quality at each stage of production

Advantages of TQM

 All employees are aware of the need for quality

 Less likely to receive customer complaints
 Waste (defected products) is removed and efficiency increases

Disadvantages of TQM

 Expensive to train employees for TQM

 Relies heavily on employees following this idea

Location decisions

The main factors influencing the location

and relocation decisions of a business
Location factors for a Manufacturing business
 Production methods – Large scale production requires the business
to be near component or raw material suppliers.
 Market – Being near to the customer is important if the product is
bulky/heavy or is perishable (likely to go bad e.g. Fresh food.)
 Availability of labour – is there a sufficient supply of suitably skilled
labour in the area
 Government influence – may offer grants and subsidies to
encourage firms to locate to a specific area (e.g. Government may
want factories to be built in area with high unemployment rates to
 create jobs) The government may also restrict certain locations for
factories a specific reason e.g. to protect the natural environment
 Transport – Suitable transport is required for supplies/products to be
delivered (e.g. near airport to deliver product to customer)
 Power – Reliable source of electricity is needed

Location factors for a Retail business

 Shoppers – Need a lot of consumers in the area
 Nearby shops – Locate near businesses that are visited regularly
(e.g. Schools)
 Parking facilities must be close by
 Security/crime in the area

Clustering – Competitors in the same area attract consumers (e.g. Clothing

stores all next to each other)

Location factors for a Service business

*Retail factors apply to service business  

 Customers – Be near customers for a quick response time (e.g.

Electrician located in residential area can provide service to homes
quickly)
 Labour – Availability of suitably skilled labour in the area
 Rents and taxes in the area – Businesses that don’t need to be near
customers can be located further away where rents are low
 Technology – Some services can be provided online which means
that the business won’t need to be located near customers.
 Personal preference of the owner

Reasons to relocate abroad

 New markets overseas – Locate near customers in another country
(Reduce transport costs)
 Cheaper materials – Raw materials may be cheaper in another
country
 Unstable/expensive labour – A business (especially factories) may
want to relocate to another country with cheaper labour
 Rents and tax may be cheaper in another country
 Government grants for foreign businesses – The government may
give businesses grants(money) and reduce tax because they want
the business to relocate to their country
 Overcome trade and tariff barriers – Some countries may charge tax
on imported goods and businesses can overcome them by relocating
their factory to that country instead