C18 Productivity
Production – process of making of a product or
service to satisfy consumer wants and needs
Productivity: measure of the output of a business in
relation to its inputs ; is a measure of efficiency
Formula: Output/Input (number of worker/machine)
Reasons for Calculating Output per Worker:
1. Calculate wage (k) some workers are paid
piece rate so must know output made
2. Measures labor efficiency
3. Can compare with previous years/other
businesses
4. Identify training needs (k)
5. For employee appraisal (k) can give bonus to
those who meet targets set
6. Identify poor performing workers/indicate
problems with morale so HR can address the
issues
7. Has an impacts on unit cost [k]
Why is Labor Productivity Important?
1. High productivity can lower AC (k) can help
improve price competitiveness
2. High productivity can lower AC (k) increases
profit margins (an)
3. High productivity mean effective use of
resources
4. High productivity increase competitiveness
of business and helps meet customers
demand o
5. more output means more sales
Efficient business: achieve objective in a cost-
effective manner; (uses minimum resource inputs)
Benefits of Being Efficient
✓ reduces unit costs (k) so bz can keep prices low
✓ improves reputation(k) as products are delivered
on time so attract more customers
✓ less waste (k) need less materials (ap)
✓ increased output OR quicker production [k] so
have more sales [an]
✓ Fewer workers needed [k] so save labor cost
✓ Better able to compete [k] in a competitive
market [app]
✓ Fewer errors (k) improve reputation and sales
C18: Production
Inefficiency: input output ratio is low;
not maximize productivity; implies poor of resources
Problems of Inefficiency
X High unit costs lead to a loss of competitiveness
and hence lower sales.
X Waste of time and resources
X Unable to supply on time
X Quality defects
Methods to Improve Productivity/Efficiency
1. Introduce new technology (k) less likely to
break down [an] result in quicker production
of products & an increase in the output per
employee. However, the bz would need to
ensure they can afford it [an]
2. Automation – Replace workers with
machines [k] – no need to rest/no drop in
quality due to tiredness [an]. Change to
automated or CI methods - machines don’t
have to take break and can work longer
periods so are able to produce more in the
same amount of time
3. Improve working conditions to improve
morale [k]
4. Training so workers understand what they
are doing so less mistakes/improve skills [an]
but training is expensive & time-consuming
5. Higher employee motivation (k) increase pay
so employees work harder (ap) Payment by
performance (k) use of piece rate [k] as
workers will produce more to earn more
[app]
6. Improve quality control/assurance [k] so less
rework required/workers take more care [an]
to reduce level of waste [ap]
7. Use of TQM [k] so workers are more
responsible for work [an]
8. Improve inventory (stock control)/introduce
JIT [k] so materials are available when
needed [app] lowers AC (an)
9. Use Kaizen: Improve layout of machines [k]
so less wasted time moving between
different areas (an)
10. Use of cell production/kaizen [k] as it allows
employees to discuss/solve problems
affecting production [app]
11. Change management style [k] to democratic
rather than autocratic [app] so that workers
feel involved and willing to work [an].
12. Specialization: use DOL, workers concentrate
on what they are good at
1
Does Improving Efficiency Increase Profits?
Yes: higher efficiency lowers unit costs (k) so able to
lower prices [an] which could help boost demand
[an] for its products. Higher efficiency can lower
prices which could lead to lower costs [an].
No: Faster production could compromise quality [k].
Introducing new technology might increase costs [k]
when already worried about lower profits.
Eval: other ways to improve profits e.g. Reduce fixed
costs OR increase revenue
18.2 Production Methods
1. Labor intensive: production process where
workers input is the key resource used in the
business
✓ Can make specialized products as per consumer
preference (job production) so is able to charge
higher prices
X Do not benefit from EOS, produce in small quantity
so have higher AC
C18: Production
2. Capital intensive: production processes where
machinery and technology are the dominant
resource input
Benefits of CI Methods to the Business:
✓ higher of output (k), so able to meet more orders
(an)
✓ lower AC (k) as benefit from technical economies
of scale (an)
✓ better quality (k), so able to charge higher prices
for products (an)
✓ uniformity of products [k] as less errors are made
[an]
✓ improves productivity [k] which can help reduce
average costs [an]
✓ reduce labor costs [k] so lower total costs for
business [an]
✓ faster production [k] as machines can make more
in less time [an]
✓ machines are able to handle more complex work
[k] so able to develop better/more advanced
products [an]
Impact of CI Methods on Employees:
✓ greater job security for those with jobs [k] if profit
increases [an]
✓ chance to learn new skills [k] or even gain more
responsibility [k]
✓ need for re-training [k] which could create
promotion opportunities [an]
✓ opportunities to learn new skills [k] which could
improve chances for self-improvement or
promotion, higher pay [an]
✓ safer conditions as up to date technology [k] so
less risk of injury [an]
✓ work less tiring [k] as machines do the repetitive
work [an]
X fear of redundancy (loss of jobs) as machines
replace jobs [k] could decrease motivation [an]
X deskilling [k] so workers become bored due to
repetitive nature of job [an]
X implications for pay e.g. lower wages [k] so lower
living standards [an]
X workers might lose their jobs [k] leading to lower
living standards [an].
Eval: some clearly benefit [eval] but as machines are
usually introduced to reduce the labor force, more
workers are likely to be worse off leading to lower
standard of living [eval]
2
 C18.3 JIT
Businesses hold inventories to ensure that there are Problems of High Inventory Level
always enough products to satisfy demand of
customers. If a business doesn’t have enough stock X increased insurance/security costs [k] as more
of a product it might lead to lower sales. goods need to be protected against theft [an]
X increased storage costs [k] as will need more
Factors that influence the amount of inventory held space/increases business expenses [an]
X cash flow/liquidity problems [k] as money held as
1. Demand from customers/amount of sales- stock [an]
the higher the demand, the more inventory X risk of obsolescence/wastage [k] because customer
held requirements might change [an]
2. Perishability of the items – the more X risk of damage [k] as need to be stored which could
perishable, the less inventory held increase costs [an]
3. Storage space available: less storage space X opportunity cost [k] resources could be used
limits the amount of inventory held elsewhere to become more efficient (app)
4. Cost of storage: the higher the cost of
storage, the less inventory held Benefits of Low Inventory Level
5. Delivery charges: the higher the delivery
charges, the more the inventory held ✓ lower inventory holding costs [k] help reduce fixed
6. Amount of money available (to buy costs such as rent[an]
inventory): the more the cash flow, the
✓ lower security OR insurance [k] as less for
more inventory held
inventory needs to be safeguarded (an)
7. Lead time/reliability of supplier: the longer
✓ more flexible [k] as adapt to each different batch
the lead time or the less reliable the
[app]
supplier, the more inventory is held
8. Method of production: (mass may require ✓ help cash flow [k] money is not tied up in inventory
high inventory compared to job production ✓ less risk of waste OR damage OR obsolescence
9. Inventory System: a business that uses JIT
will keep minimum inventory
Problems of Low Inventory Level
Buffer: minimum stock held by a business to deal
with uncertainty in customer demand & delay in X possible delays in production [k] as batches delayed
supplier delivery (JIC) [app] leading to lower output [an]
X less or no purchasing economies of scale [k] which
Advantages of Buying Bulk (High Inventory) could help reduce cash outflows [app]
X unable to meet orders [k] of customers [app] so
✓ purchasing economies of scale [resources will be could damage reputation [an]
cheaper] as discounts reduce cash outflow [app]
✓ able to meet orders [k] as goods ready to be sent
out [app] so able to offer better customer
service[an]
✓ no delays in production (k) materials always
available when needed so able to maintain its flow
production [an]
✓ little chance of stock outs [running out of stock]
✓ requirement to order less often, so less admin and
transport costs
✓ save on delivery costs
✓ avoid supply problems [k] as some types of goods
might be difficult/long time to obtain [app]

C18: Production 3
JIT: method to eliminate inventory of raw materials How to Solve Problems with Suppliers
and finished goods. Supplies arrive just as the time
needed in production
Factors to Consider Before Using JIT
1. Reliability of Suppliers: will supplier be able
to deliver on time in the right quantity. What
is the / distance from suppliers. Are the
materials readily available at suppliers
2. Predictable Demand: for JIT to work the
business must have a steady production or
predictable demand so it can plan its
purchases
3. Efficient system of ordering / good
communication systems: business needs to
have an electronic system that can monitor
inventory and can re-order when supply
level falls
4. Discounts for Bulk Purchases: business
needs to consider possible discounts gained
from bulk buying before using JIT
5. Cost of Rent: before business buys more
inventory, it must consider the cost and
availability of storage space.
Benefits and Limitations of JIT:
✓ Less inventory held [k] so less chance of wastage
[an] or going outdated
n]
✓ Lower security costs [k] as don’t have to spend as
much on insurance [an] which will help reduce
expenses
✓ Less warehouse space needed [k] so have more
space available for production [an]
✓ Lower storage costs [k] so business saved on
rental costs (an)
✓ Improve working capital [k] as less money tied up
in inventory [an] improve cash flow
✓ Improved quality [k] as ingredients are fresher
[app] so increase in sales [an]
1. Improved communication [k] with suppliers
[app] so suppliers understand when stock is
needed [an]
2. Change (to local) suppliers [k] so do not need
to import [app] so less chance of the delays,
due to transport issues [an]
3. Hold more inventory [k] so have stock readily
available [an] to be able to meet increased
demand [app]
4. Increase number of suppliers [k] so have
more options to get inventory on time [app]
Factors in Choosing Suppliers
1. Price charged [k] to maximize profits, a
business will prefer to buy from cheapest
supplier to reduce AC
2. Credit Terms: a business will prefer to buy
from supplier with good credit terms to help
improve its cash flow [an]
3. Variety: business will buy from supplier that
has a wide range so it can get what is needed
4. Reliability: Buy from supplier who deliver
right quantity at the right time
5. Quality: buy quality inputs to make quality
outputs
6. Location: a far distance can affect lead time
and transport costs

X Very reliant on suppliers to deliver stock when

needed / if parts not available or late, it will delay
production [k]
X May not be able to meet sudden/unexpected
order [k]so lost sales (an)
X Little room for mistakes (as minimal stock available
for rework) [k] delay in delivery to customers
X Less (purchasing) economies of scale [k] loss of
discounts

C18: Production 4
18.4 Lean Production 18.5 Technology

Lean Production: techniques to cut down waste & Automation or System of production where
increase efficiency Automated machinery and technology
Production carry out the work so few
Lean Production Methods/Techniques workers are needed.

1. Kaizen: means continuous improvement by Mechanization Production is done by

the elimination of waste. It involves workers machines and robots, but
meeting regularly to discuss problems and to operated by people. Useful for
find solutions. dangerous and difficult jobs
2. Kaizen: reorganized floor plan to save space
and improve workflow. Computer aided Software to draw items being
3. JIT: Eliminate the need to hold stock. Order design (CAD) designed more quickly. It is
materials when needed for production, used to design or re-style
which reduces storage costs [an] existing products
4. Cell Production (teamwork ) : where
production is divided into separate units Computer aided Computers monitor the
(cells) each making a part of the finished manufacture production process done by
product. Rather than having a flow or mass (CAM) machines and robots
production. Cell Production improves Computer integration of CAD and CAM;
employee morale so they work harder and integrated computers design products
more efficient. manufacturing and are linked to the
(CIM) computers that aid in the
manufacturing process
Benefits of Using LP Methods
EPOS (retail) used in checkout where
✓ better quality and less defects (k) use of Cell price/description of the item is
Production means workers work in teams – satisfy displayed and printed in
social needs - so more motivated staff [an] receipt. Inventory record is
✓ motivated workers (k) Use of Kaizen mean automatically changed and at
workers involved in giving suggestions to improve re-order point, inventory can
production – workers are more motivated [k] could be automatically re-ordered.
lead to better quality [an]
✓ Time saved : use of kaizen reorganizes
operational space needed to reduce time moving
between workstations [k] which could lower rental IMPACT of TECHNOLOGY to the SHAREHOLDERS
costs [an]
✓ Time saved [k] Cutting out some processes so ✓ Impact on efficiency – lower AC- sell cheaper-
quicker production [app] so greater output possible more sales and more profits
[an] more orders can be taken
✓ Reduced stock holding costs [k] use of JIT means X Increased investment costs
lower levels of stock required on site [an] so less
capital tied up as stock
✓ Saves storage costs [k] use of JIT so less space
needed for storing (an) and areas released can be
put to more productive use. Lower fixed costs.
✓ Less waste/obsolescence (k) some goods have
short life cycles (ap) by using JIT goods arrive when
needed so more fresh, less waste

C18: Production 5
BENEFITS of TECHNOLOGY to the BZ IMPACT of TECHNOLOGY on CUSTOMERS

✓ Improves labor productivity (k) more output made ✓ method could result in lower costs and hence
can meet more orders [an] increase sales (an) business can sell at lower prices
✓ Quality products (k) can charge higher prices [an] ✓ quality standards should be constant
✓ Ensure consistent quality [k] as machinery likely to ✓ improved availability
make fewer errors [an] which can help enhance
reputation [an] X production costs might rise in the short term which
✓ Increase labor productivity [k] which can help may result in higher prices
reduce average costs [an] can sell at lower prices X not automatically lead to lower prices so the
✓ use of CAD/CAM can make innovative products (k) company might benefit but not the customer
increasing potential sales [an]
✓ Less workers needed (k) so save on labor costs (k)
so lower total costs
IMPACT of TECHNOLOGY to the EMPLOYEES
✓ Quicker (k) machines do not need breaks [k] so
more output can be made. Machines can make more
✓ Possible training – enhance skill, which could
in less time [an]
create opportunities for promotion [an] and may
✓ Safer for workers (k) Machines are able to handle
receive higher pay [an]
more complex work (an) Less risk of worker injury
✓ Increase safety - complex work done by machines
✓ Continuous production 24/7 operation (k) no
so less risk of worker injury [an]
break so more output
✓ Company survives [k] because they remain
✓ Reduce wastage/less mistakes [k] help reduces re-
competitive [app] so workers keep their jobs [an]
work costs (an) improves reputation (an)
✓ More skilled workers may be needed [k] leading to
✓ Increased reputation of the business
higher pay [an]
X Higher cost of equipment [k] which business might
X Fewer workers needed (k) possible loss of jobs –
not be able to afford [an] increases FC
lower standard of living for workers (an)
X Risks of job insecurity [k] could lead to other
X More job insecurity (k) so could reduce motivation
demotivation [an] lead to inefficiency
(an)
X Workers may struggle to adapt OR resist new
X Possible change to working practices – fear of
training [k] slowing production OR decreasing
change [k] as production process likely to change
productivity
how they do things [an]
X Need for retraining [k] which would increase costs
X Less skills needed [k] so could mean lower wages
X Cost of maintenance [k]
[an] leading to lower living standards [an]
X Impact on motivation e.g. demotivate
workers/boring [k] as skilled [app] so may not want
Eval: Technology will not benefit all employees as it
to leave (an)
depends on the individual worker. Those who lose
their jobs will not see the benefit from technology
Eval: Tech can reduce AC and improve profitability,
[eval] whereas those who keep their job can benefit
but there are other ways to improve profits. Use
from learning new skills. [eval]
cheaper materials to lower VC; introduce KAIZEN
and redesign factory outlet to make it more efficient.
Bz can also increase advertising but this can be
expensive and may not be effective.

C18: Production 6
18.6 INVEST in NEW MACHINES Factors to consider when deciding to introduce new
technology in a business.
✓ Accuracy so less mistakes, less wastage of
resources 1. Cost of technology [k] is the business able to
✓ Lower labor costs e.g. fewer employees to afford [an]
pay/less overtime/training 2. Cost of training time taken for training/are
✓ Less maintenance costs e.g. less machine workers able or willing to learn how to use it
breakdown/lower maintenance costs [k] business must train its workers increasing
✓ Less running costs e.g. less electricity (as more its expenses [an]
efficient) 3. Potential efficiency gains [k] how much
output will be gained, the higher the output,
✓ Increase productivity [k].
the lower average cost [an] so can be price
competitive
X Need to retrain workers to use new machine [k]
4. How many workers may lose jobs/number of
which will increase training expenses [an]
redundancies [k]
X Cost of investment [k] bz may have to take loans
5. Level of demand [k] high D justifies the need
(an) to pay for new machines
to use technology
X Reaction of employees/fear of unemployment
6. Opportunity cost [k] could the funds be used
[k]workers may not have the skills to use new
for some other expense
machine
7. Availability of power [k] technoloqy requires
power supply
Is recruiting more workers or buying new
8. Sufficient space available [k] as if not the rent
machinery a better way to increase productivity?
might increase [an]
Introducing machinery:
✓ Likely to be more consistent (k) so better quality
products made with fewer mistakes [an]
reducing the amount of rework/wastage [an]
✓ Machines do not need to rest [k] so can work for
longer periods of time/24-7 [an]
✓ Higher productivity [k] lower average cost [an]

X High cost/expensive to invest in equipment [k]

which would increase cash outflows [an] which a
small business might not be able to afford [an]
X May not have space to introduce machinery [k]
X May required more skilled workers [k] increasing
labour costs [an]
X Higher maintenance costs [k] increasing expenses
[an]
X Can become outdated quite quickly/need to
replace regularly [k]

Recruit some/additional employees:

✓ Cost/time to recruit [k]
X Training may be required [k] increase costs [an]

Eval: It is better for a small business to recruit more

employees, especially if the increase in demand t is
only temporary as the initial cost of machinery
is likely to high. Therefore, it might be safer for a
small business to wait before taking a major financial
decision to see whether the higher level of demand
can be sustained.

C18: Production 7
18.7 Production Methods
1. Job Production: single specialized product is made
at a time.
Produce a personalized product individually;
Makes one product from start to finish (before
starting the next one)
Feature: labor-intensive; highly skilled workers; high
quality, single product, flexible
✓ Can meet exact customer demands [k] so able to
charge higher price [an] in a niche market
✓ Unique / meet exact customer needs [k] can
help brand loyalty [an]
✓ Flexible [k] can easily change from one product to
another which can help them remain competitive
[an]
✓ higher motivation [k] More varied work – help in
retention - leading to fewer workers leaving OR less
absenteeism
✓ Skilled workers are less likely to make mistakes [k]
which helps ensure quality assurance so less need
for rework [an]
X Skilled labor costs more [k] which increases labour
costs [an]
X No purchasing economies of scale possible [k] buy
few raw materials [app] leading to higher AC [an]
X Production can take longer [k] f which reduces
output and productivity [an]
X Unit costs are higher in LI than CI (k) so must be
sold at higher prices
X Products are made to order so mistakes can be
expensive to correct
C18: Production
2. Batch Production: A production method where
similar items are produced together – a whole batch
moves through the different stages of production
together.
Is where a quantity of one product is made, then a
quantity of another item will be produced
The production of goods whereby each batch of
products passes through one stage of production at
the same time before moving on to the next stage.
Feature: goods made in sets ; change over time is
needed, large volume, EOS
✓ Flexible (k) easily able to change production to
meet changes in customer demand [an] so more
sales
✓ Variety of jobs to workers [k] helping improve
employee motivation [app] so fewer employees leave
[an]
✓ Allows variety of products [k] so customers have
more choices & lead to more sales (an)
✓ Spread risk [k] as they are not reliant on one
product for all sales [an] and can make variety of
products could lead to more sales (an)
✓ Allows division of labor and use of specialist skills
[k] so able to take advantage of specialization [app]
to increase output [an]
✓ Used when level of demand not too high to justify
the use of flow production [k]
✓ Larger numbers are made [k] lower unit costs
✓ Production not affected if machinery breaks down
[k] so other stages can continue OR some output
made [an]
✓ Some EOS: Allows buying in bulk [k] discounts
lower AC
X Time lost in switching machines between batches
[k] as modified batches are produced, machines are
reset between batches [k] could lead to lost output
X Added Cost of moving or storing semi-finished
goods [k]
X Inventory may be sitting around between stages
[k] increasing costs [an]
X A fault with one product is likely to affect entire
batch [k] which could increase waste
X Warehouse space to store inventory to store RM,
WIP, FG
8
Why use BATCH?
1. Level of demand not too high [k] as there
may not be sufficient demand to use flow
production for its product
2. Allows flexibility and quicker to respond to
changes in demand [k] so if one product is
more popular it is quick to adapt to another
(ap)
3. Demand is seasonal and not continuous [k]
so will use batch
4. Not enough capital to use capital-intensive
methods [k]
5. Nature of Product: if demand is seasonal,
use Batch; if demand is continuously high,
use Flow
Should Bz Change from JOB to BATCH?
Job meets exact customer demands / unique /
higher quality [k] so able to charge higher price [an]
in a niche market (ap). Both job and batch allows
varied work leads to higher motivation [k] leading to
few workers leaving / less absenteeism [an]. Change
can also damage reputation [k] for its luxury product
[app] which could lower its sales [an]
However, if there is a large increase in demand, job
production is no longer suitable. Business may have
to produce standardized products instead of
specialized to meet demand. Batch allows flexibility
to switch production so able to quickly change styles
to meet customer needs. Some EOS, leading to
lower AC. Batch is able produce more [k] which is
important as demand has increased [app] so maybe
able to meet additional demand [an]. Batch can de-
motivating for employees (as work likely to be more
repetitive) [k].
Eval: There are cost in changing process. Bz has to
purchase equipment, train workers which is
expensive. Can the bz afford? The bz needs to see if
it can meet demand using job and if can’t must
change its methods.
C18: Production
3. Flow Production: large quantities of standardized
product are produced in a continuous moving
process
feature e.g. large volumes, identical products,
continuous production, capital intensive, repetitive
tasks, inflexible, low skilled labor, fast method
✓ more output OR fast production [k] so more sales
(an)
✓ Produces 24 hours a day OR continuous
production [k] as it can be automated
✓ Allows for specialization / simple repetitive tasks
allows for greater use of cheaper unskilled labor
which is cheaper
✓ Use of CI reduces labor costs (k) have fewer
employees [k] help lower cash outflows for labor
costs [app]
✓ Continuous movement of goods along a
production line [k] so output is faster [an] without
interruption
✓ Economies of scale (k) Produce in large volumes of
so but materials in bull – discounts. Costs are kept
low [k] so might be able to reduce its prices [an]
✓ Standardized products/consistent quality (k) so can
maintain reputation (an)
✓ High Overhead spread over many units
✓ Goods can be produced quickly [k] so more sales
and help improve its cash inflows [app]
✓ Technology improves flexibility [k] so the business
can react to changes in demand [an
X Repetition of work [k] – workers could become
bored and demotivated as they are always doing the
same task [k] so less efficient [an]
X One machine breaks down the whole production
line will stop [k] so not able to meet demand
X High setup costs [k] may have to borrow money
X Inflexible (k) cannot easily change products if
demand changes [k]
X Capital intensive [k] so high fixed costs [an]pay for
repairs and maintenance
X Need access to reliable supply of materials [k] or
flow will not work effectively as the work stops while
waiting for materials.
X Workers may fear redundancy [k] as machines
replace them [an]
X Significant storage requirements [k] space needed
to store materials – higher rent costs (an)
9
Should Bz Change from BATCH to FLOW?
YES:
If selling to mass market or demand is rising, then
using flow is ideal to make more output. Flow also
leads to EOS and reduces AC- so bz more price
competitive.
NO:
Workers may become demotivated as they produce
standardized products and work is more repetitive
than batch [app] so they become less productive.
This will depend if bz can afford to pay for high costs
of flow methods. There is also more inflexibility in
flow as business cannot easily switch to meet
demand [an]. As work become automated, workers
may fear redundancy [k] as machines replace them
[an] so less employees needed [app].
C18: Production
Factors in Deciding the Method of Production:
1. Nature of Product – unique /luxury products
are tailor made and needs job production;
standardized identical products will use flow
production;
2. Level of Demand - low demand products use
job production, if D is high but not in large
quantities, batch production is used, and a
very large, steady demand will use flow
production. Small local markets or niche
markets will use job or batch production.
International markets use flow production.
3. Costs/ Availability of Funds – small firms
have less funds to afford flow methods so
use job order or batch production; larger
firms that have huge funds and can afford to
use flow production
4. Flexibility - if the bz wants flexibility and
make it quicker to respond to changes in
demand - it will use job or batch production
5. Access to suitable space: flow production
requires larger space than job production
6. Access to (suitable/skilled) employees: job
production requires skilled workers; flow
production is mostly automated and uses
unskilled workers
10