CHAPTER 18

PRODUCTION OF GOODS AND SERVICES

Production is the effective management of resources in producing goods and services.

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 formula is:

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

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 improve employee motivation so that they will be willing to produce more and efficiently
so.
 improved quality control and assurance systems to ensure that there are no wastage of
resources

Inventory Management
Firms can hold inventory (stock) of raw materials, goods that are not completed yet (a.k.a
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 level of inventory the business should hold at the very minimum
to satisfy customer demand at all times. 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.
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 risk
 damage during movement
 Unnecessary inventory - too much inventory takes up valuable space and incurs cost
 Motion - unnecessary moving about of 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

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 Defects – any fault in equipment can halt production and waste valuable time. Goods can
also turn out to be faulty and need to be fixed- taking up more money and time

By avoiding such wastage, a firm can benefit in many ways

 less storage of raw materials, components and finished goods- less money and time tied up
in inventory
 quicker production of goods and services
 no need to repair faulty goods - leads to good customer satisfaction
 ultimately, costs will lower, which helps reduce prices, making the business more
competitive and earn higher profits as well

Now, how to implement lean production? The different methods are:

Kaizen: it’s a Japanese term meaning ‘continuous improvement’. 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.

Benefits:
 increased productivity
 reduced amount of space needed for production
 improved factory layout may allow some jobs to be combined, so freeing up employees to
do other jobs in the factory

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Just-in-Time inventory control: 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.

Benefits:
 Reduces cost of holding inventory
 Warehouse space is not needed any more, so more space is available for other uses
 Finished goods are immediately sold off, so cash flows in quickly

Cell Production: the production line is divided into separate, self-contained units each making a
part of the finished good. This works because it improves worker morale when they are put into
teams and concentrate on one part alone.

Methods of Production

Job Production: products are made specifically to order, customized for each customer. Eg:
wedding cakes, made-to-measure suits, films etc.

Advantages:
 Most suitable for one-off products and personal services
 The product meets the exact requirement of the customer

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 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 they are usually labour-intensive
 Production often takes a long time
 Since they are made to order, any errors may be expensive to fix
 Materials may have to be specially purchased for different orders, which is expensive

Batch Production: 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 etc.

Advantages:
 Flexible way of working- production can be easily switched between products
 Gives some variety to workers
 More variety means more consumer choice
 Even if one product’s machinery breaks down, other products can still be made

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
 Lots of raw materials will be needed for different product batches, which can be expensive.

Flow Production: large quantities of products are produced in a continuous process on the
production line. e.g: 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 be affected

Factors that affect which production method to use:

 The nature of the product: Whether it is a personal, customized-to-order product, in which case
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

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 but not in very large quantities, batch production is most suitable.
 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. For less frequent demand, batch and
job will be appropriate.
 The size of the business: Small firms with little capital access will not produce using large
automated production lines, but will use batch and job production.

Technology and Production

 Automation: equipment used in the factory is controlled by computers to carry out
mechanical processes, such as spray painting a car body.
 Mechanization: production is done by machines but is operated by people
 CAD (computer aided designing): 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): computers monitor the production process and
controls machines and robots-similar to automation
 CIM (computer integrated manufacturing): 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): 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): 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
 More accurate demand levels are forecast since computer monitor inventory levels
New products can be introduced as new production methods are introduced

Disadvantages of technology in production

 Unemployment rises as machines and computers replace human labour
Expensive to set up
 New technology quickly becomes outdated and frequent updating of systems will be
needed-this is expensive and time-consuming.
 Employees may take time to adjust to new technology or even resist it as their work
practices change.