4.

1 – Production of Goods
and Services
Production is the effective management of resources in producing goods and
services.

Operations department:

The role of operations department in a business is to take inputs and change them
into outputs for customer use.

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

Productivity
Productivity is a measure of the efficiency of inputs used in the production process
over a period of time. It is the output measured against the inputs used to produce it.
The productivity of a business can be measured by :
 Businesses often measure the labour productivity to see how efficient their
employees are in producing output. The formula for it is:

Businesses look to increase productivity, as the output will increase per employee
and so the average costs of production will fall. This way, they will be able to sell more
while also being able to lower prices.
Ways to increase productivity:
• Improving labour skills by training them so they work more productively and waste lesser resources
• Introducing automation (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 so.
• Improved quality control and assurance systems to reduce waste
• Introduce new technology
• Improve inventory control

Benefits of increasing efficiency /productivity:

• Reduced inputs needed for the same output level

• Lower costs per unit (average cost)
• Fewer workers may be needed , leading to lower wage costs
• Higher wages for workers increases motivation

What is the relation between efficiency and competitiveness?

When productivity increases, efficiency increases which leads to a decrease in unit costs. A decrease
in unit costs enable the firm to sell at lower price hence enables the firm to compete well in the
market, i.e. increase its competitive power in the market.

Why businesses hold inventories (stock) ?

• Give consumers choice and good availability

• Keep production supplied with resources
• Provide cover for supplier hold up

Firms can hold inventory (stock) of raw materials, goods that are not completed yet
( work-in-progress) and finished unsold goods. Finished good stocks are kept so that
any unexpected rise in demand is fulfilled.

• When inventory gets to a certain point (reorder level), they will be reordered by the firm to bring the
level of inventory back up to the maximum level again. The business has to reorder inventory before
they go too low since the reorder supply will take time to arrive at the firm.
• The time it takes for the reorder supply to arrive is known as lead time.
• If too high inventory is held, the costs of holding and maintaining it will be very high.
• The buffer inventory level is the inventory held to deal with uncertainty in customer demand and
deliveries of supplies.
During the lead time the inventory will have hit the buffer level and as reorder arrives, it will shoot
back up to the maximum level.

Lean Production
Lean production refers to the various techniques a firm can adopt to reduce wastage
and increase efficiency/productivity.

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.

The seven types of wastage that can occur in a firm:

• Overproduction– Producing goods before they have been ordered by customers. This results in too
much output and so high inventory costs
• Waiting– When goods are not being moved or processed in any way, then waste is occurring
• Transportation-Moving goods around unnecessarily is simply wasting time. They also be damaged
during movement
• Unnecessary inventory-Too much inventory takes up valuable space and incurs cost
• Motion-unnecessary moving about my employees and operation of machinery is a waste of time and
cost respectively.
• Over-processing-Using complex machinery and equipment to perform simple tasks may be
unnecessary and is a waste of time, effort and money
• Defects– Any fault in equipment can halt production and waste valuable time.

Benefits of Lean production:

Costs are saved through--

• Less storage of raw materials, components and finished goods.

• Less money tied up in inventories
• Quicker production of goods and services
• No need to repair faulty goods- leads to good customer satisfaction
• Better use of equipment
• Improved health and safety , leading to less time off work due to injury

• Costs will lower, which helps reduce prices, making the business more competitive and earn higher
profits as well

Lean production can be achieved by using the following methods :

• Kaizen

• Just-in-time inventory control

• Cell production

• Kaizen: It’s a Japanese term meaning ‘continuous improvement’ through the elimination of waste. It
aims to increase efficiency and reduce wastage by getting workers to get together in small groups
and discuss problems and suggest solutions. Since they’re the ones directly involved in production
they will know best to identify issues. When kaizen is implemented, the factory floor, for example, is
rearranged by re-positioning machinery and equipment so that production can flow
smoothly through the factory in the least possible time.

R EPO RT T HIS AD

Benefits:

• Increased productivity
• Reduced amount of space needed for production process
• Improved factory layout may allow some jobs to be combined, so freeing up employees to
carry out other jobs in the factory

• Just-in-Time inventory control: (JIT)- 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.
• This technique eliminates the need to hold any kind of inventory by ensuring that supplies arrive just
in time they are needed for production.
Benefits:
• Less possibility that the stock is damaged
• Less storage expenses
• Less possibility that the workers might misuse the stock
• Finished goods are immediately sold off, so cash flows in quickly

Disadvantages
• There might be high transportation costs
• They will lose the benefit of bulk purchasing
• The production process might stop in case of sudden problems

• Cell Production: the production line is divided into separate, self-contained units(Cells) , each
making a part of the finished good.
This method of production improves worker morale and makes them work harder so they become
more efficient.

Methods of Production
It includes:
Job production
Batch production

Flow production

• Job Production: is where a single product is made at a time.

• Products are made specifically to order, customized for each customer. Eg: wedding cakes, made-to-
measure suits, films, bridges, ships etc.

Advantages:
• Most suitable for one-off products and personal services
• The product meets the exact requirement of the customer
• Workers will have more varied jobs as each order is different, improving morale
• Very flexible method of production

Disadvantages:
• Skilled labour will often be required which is expensive
• Costs are higher for job production firms because it is often usually labour-intensive
• Production often takes a long time
• Since they are made to order, any errors may be expensive to correct
• Materials may have to be specially purchased for different orders, which is expensive

• Batch Production: is where a quantity of one product is made. Then a quantity of another item will
be produced.
• Similar products are made in batches or blocks. A small quantity of one product is made, then a small
quantity of another. Eg: cookies, building houses of the same design, a small bakery making batches
of bread etc.
Advantages:
• Flexible way of working- production can be easily switched between products
• Gives some variety to workers
 • More variety means more consumer choice
• Production may not be affected to any great extent if machinery breaks down.

Disadvantages:
• Can be expensive since finished and semi-finished goods will need moving about
• Machines have to be reset between production batches which delays production
• Warehouse space will be needed for inventories of raw materials , which can be expensive.

• Flow Production: is where large quantities of a product are produced in a continuous process. It is
sometimes referred to as mass production.
• large quantities of products are produced in a continuous process on the production line. Eg: cars ,
cameras, televisions, a soft drinks factory.

Advantages:
• There is a high output of standardized (identical) products
• 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:
• A very boring system for the workers, leads to low job satisfaction and motivation
• Lots of raw materials and finished goods need to be held in inventory- this is expensive
• Capital cost of setting up the flow line is very high
• If one machinery breaks down, entire production will have to be stopped
R EPO RT T HIS AD

Factors that affect which production method to use:

• The nature of the product: Whether it is a personal, customized-to-order product( an individual

service is required), job production will be used. If it is a standard product, then flow production will
be used.

• The size of the market: For a large market, flow production will be required. Small local and niche
markets may make use of batch and flow production. Goods that are highly demanded but not in very
large quantities, batch production is most suitable. International markets are served by businesses usig
flow production.

• The nature of demand: If there is a fair and steady demand for the product, it would be more
suitable to run a production line for the product ( eg. soap powder) ( flow production) .If demand is
less frequent,, batch and job will be appropriate.(furniture)

• The size of the business: Small firms with little capital access will not produce using large automated
production lines, small businesses are more likely to use batch and job production.
 How Technology has changed Production Methods:
Technological advances have allowed the mechanization and automation of production methods in
many industries:

• Automation: is where the equipment used in the factory is controlled by computers to carry out
mechanical processes, such as spray painting a car body.
• Mechanization: is where the production is done by machines but is operated by people
• CAD (computer aided designing): is a computer software that draws items being designed more
quickly and allows them to be rotated, zoomed in and viewed from all angles.
• CAM (computer aided manufacturing): is where computers monitor the production process and
controls machines and robots on the factory floor -similar to automation
• CIM (computer integrated manufacturing): is the integration of CAD and CAM. The computers that
design the product using CAD is connected to the CAM software to directly produce the physical
design.
• EPOS (electronic point-of-sale):is used at checkouts/tills where operator scans the bar-code of each
item bought by the customer individually. The item details and price appear on screen and are printed
in the receipt. They can also automatically update and reorder stock as items are bought.
• EFTPOS (electronic funds transfer at point-of-sale): is where 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 (after the PIN is entered).

Advantages of technology in production

• Greater productivity
• Greater job satisfaction among workers as boring, routine jobs are done by machines
• Better quality products
• Quicker communication and less paperwork
• Better and quicker decision making
• New products can be introduced as new production methods are introduced
• Better consumer service

Disadvantages of technology in production

• Unemployment rises as machines and computers replace human labour
• Expensive to start up a production line with technology
• New technology quickly becomes outdated and frequent updating of systems will be needed- this is
expensive and time-consuming.
• Employees might be unhappy with the changes in their work when new technology is introduced.

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