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Basics of Production

Industrial Location
This is the decision that a business or an industry makes concerning its geographical placing in a country. There are many factors which influence the precise location of a business or an industry, including:

The cost and the availability of land. Land in an urban area is clearly less abundant (and therefore more expensive) than land in rural locations or on the edge of towns and cities. Therefore it would be advisable, and also more feasible, for a business which requires a large amount of land to locate away from the centre of an urban area.

The cost and the availability of labour. The unemployment rate varies in different areas of the UK, and a business which is labour-intensive may choose to locate near to an area of high unemployment in order to take advantage of the availability of labour at a fairly low wage.

Communication links. Many businesses choose to locate near to motorways, rail links, seaports or airports if they either have a significant amount of raw materials to receive, or a significant number of products to distribute across a wide area of the country.

Transport costs/proximity to the market. Some businesses will locate in certain areas of the country in order to minimise their transportation costs. For example, producers of fast-moving consumer goods (f.m.c.gs) will often have to distribute their products nationwide, and therefore will try to locate as near to the market as possible so their transportation costs are not excessively high.

Availability of raw materials. Some businesses will try to locate near to their suppliers or to the source of their raw materials. For example, businesses which require bulky raw materials, such as timber, will often try to locate near their suppliers so to reduce the lead-time between ordering and receiving the raw materials.

Government location incentives. The UK government has over the past 30 years offered a range of incentives to businesses to locate in depressed areas of the UK, in order to reduce the unemployment rates in those areas by creating jobs. The incentives (such as grants, tax breaks, and reduced rent and rates) are offered both to existing businesses to relocate to the depressed areas, as well as to new businesses which are about to set up.

Industrial inertia refers to the situation when a business or an industry decides to remain in its original location and is very reluctant to relocate, even after the reasons for it locating there in the first place are exhausted.Possible reasons for this include: 1. 2. The cost of moving may be very large. Strong links with the local community and with other local businesses may have been developed and a move away from there may destroy those links.

Scottish whisky). flow production and cell production. English is the first foreign language taught in Japan. If the industry goes into decline and no other industries or businesses wish to move to this area. etc). batch production. As well as the reasons for location mentioned earlier. Low wage rates in the UK.job production.g. Job production This method of production involves an item being manufactured entirely by one worker or by a group of workers. Over the past 25 years. Nissan. The Japanese companies are enticed to locate in the UK through a number of factors: 1. These Japanese companies (e. 3. These factors include: • • • • the language spoken legal differences the economic environment the stability of the political structure. Sony) create wealth for the UK by providing employment and income to workers.g. Some areas and products have an international reputation which may be difficult to establish if the business were to locate elsewhere (e. rates. there are a number of other factors that a business will need to consider before choosing a foreign country in which to locate. and many of these unemployed will not be trained to perform any other jobs. International location International location of industry is also a very important factor in today's global business environment. Production Methods There are four ways for manufacturing businesses to organise their production . Gateway for selling goods to other EU countries.g. then mass unemployment is created. cheap rent. industrial inertia can actually make an area become depressed if that area depends on a particular industry or business for employment and wealth-creation. . the UK government has encouraged much foreign investment into the UK from outside Europe . They can help to rejuvenate depressed areas and often purchase their supplies and raw materials from other UK businesses.3. 2.specifically from Japan. Government incentives to locate in the UK (e. and paying tax to the UK government. 4. However.

carpenters). rather than the workers continually moving to the car. often with the use of a moving conveyor belt (e. This type of production is usually undertaken by small businesses and craft industries (e.These items are often made to customer requirements. This method of production was first established by Henry Ford in the 1920s. . A collection (or 'batch') of items each have one of these tasks completed. This may be a problem if the business is in a fashion industry. instead of being produced in batches. a car assembly line). and then the batch moves onto the next manufacturing task. This method should boost labour productivity and reduce average cost of production even further. repetitive tasks which humans may easily become bored in performing. rather than being mass produced. where customers' tastes can change quickly and unpredictably.g.g.it is for these reasons that much machinery is today used on these production lines to perform simple. bridges) may also use this production method. In other words. This type of production is usually undertaken by large businesses. Flow production This method of production involves the tasks which were identified in 'batch' production becoming continuous for each unit. This production method can result in the build-up of large amounts of stock and work-inprogress. demotivation and absenteeism amongst the employees . It is often argued that flow production leads to high rates of alienation. This involved each car passing the workers on a moving conveyor belt. several items have the same task performed on each of them and then they move onto the next task together in a group. when he developed the world's first automated production line.g. Each unit is produced individually. although larger businesses which specialise in 'one-off' products (e. leaving the business with much stock that it is unable to sell. Batch production This method of production involves the manufacture of an item being divided into a number of small tasks.

then their work will have more meaning and therefore their levels of motivation and job satisfaction will be greatly enhanced.' The prototype which best meets the needs of the customers and the business is then likely to be commercialised. since much money can be spent on ideas that will never be commercialised. with each cell comprising several workers who each possess different skills. innovative product is immeasurable. The benefit of being the first company to launch a new. Research and Development (R&D) All businesses need to develop long-term strategies. such as computers and aerospace) that extensive R&D spending today can result in a huge competitive advantage in the future. It is estimated that only about one product in the pharmaceutical industry reaches the commercialisation stage (i. It is often argued that if the group of workers in each cell can see the completion of the finished product. It is within the 'sunrise' industries (i.g.e. and then developing a range of prototypes. since the company can charge a high price and build up a strong market share as it faces no competition. and each cell will usually have an output target to achieve for a given period of time. Each cell is independent of the other cells and will usually produce a complete item. and an important part of this strategy must be the continual development and launch of new products. It can often be a very risky process. This is the purpose of research and development (R&D). the company will have massive R&D costs to recoup when it actually launches a new product. Unilever spent over £600 million on R&D in 1997).Cell production This method of manufacturing an item organises workers into 'cells' within the factory. each to a slightly different specification. The development of products can take several years to complete and many businesses spend a huge amount of money on this process (e.e. and it will probably take several years before it will have broken-even and covered all the R&D costs. Therefore. launched onto the market) for every ten which are developed and test-marketed. industries which are fairly young and have rapid growth potential. or amendments made to existing products. R&D can basically be defined as: 'carrying out extensive scientific research into the product and its design. .

then it will aim to experience falling average costs of production (i. This is known as benefiting from economies of scale. however. its average cost of production starts to fall).e.e. Scale of Production Economies of scale a business grows in size and produces more units of output.e. the average cost of production will fall for all the businesses in a particular industry). Economies of scale can be divided into internal and external economies: • • Internal economies of scale simply benefit a single business as it grows (i.and geographic-markets than their rivals. since the machinery can be used 24 hours a day. Internal economies of scale Internal economies of scale fall into four main categories: • Technical. compete in more product.The businesses which are most likely to succeed in the future are those which develop more new products than their closest rivals. each unit of output costs less to produce). the business is becoming more efficient in its use of its inputs to produce a given level of output. External economies of scale. with no breaks and with a constant level of output per hour. . benefit all the businesses in a particular industry (i. bring their new products to the market in less time than their rivals. In other words. and provide very strong after-sales service to customers. This refers to the fact that the use of automated equipment and machinery to produce output is far more cost-effective than using labour. on average.

A large pool of available labour in a particular area of the country which has been trained at a local college. on average. and therefore secure their supplies at a far lower cost per unit than a smaller business. since the larger business represents less of a risk because it is more financially secure. A wide range of commercial and support services often cluster together in a certain area near a number of rival businesses (e. Larger businesses are more likely to be able to bulk-buy their supplies and their raw materials. waste disposal. it is also possible that as a business grows in size and produces more units of output. Larger businesses are more likely to be able to afford to employ managers who are specialists in a particular field. on average. will possess specialised skills which will be useful to the whole industry. • Financial. each unit of output costs more to produce).• Purchasing. • Managerial. rather than simply to just one business. each unit of output costs more to produce). However. rather than just one of them. External economies of scale External economies of scale fall into three main categories: • Labour. component suppliers. Banks and other financial institutions are more likely to offer a lower rate of interest on a loan repayment to a larger business than to a smaller business. • Joint ventures. These managers can therefore devote all their time to specialising in one particular field (resulting in higher levels of efficiency and hopefully falling average costs). Clearly this benefits all the businesses in the area. then it will actually experience rising average costs of production (i. Two or more businesses may decide to join forces (perhaps for R&D) in order to spread the costs and the risks of developing a new product or manufacturing process. then it will actually experience rising average costs of production (i. Smaller businesses will often employ managers who have to perform a variety of tasks and therefore cannot specialise in a single area of the business. Diseconomies of scale can also be divided into internal and external economies: . Dis-economies of scale It is also possible that as a business grows in size and produces more units of output. This is known as experiencing diseconomies of scale.e.e.g. or even at a rival business. etc). distribution. the business is becoming less efficient in its use of its inputs to produce a given level of output. In other words. cleaning. • Support services.

Management effort and resources can then be concentrated on ensuring that these 'critical' activities are completed on schedule. affect all the businesses in a particular industry (i. which in turn can result in falling levels of productivity and. the late deliveries of finished goods to customers or warehouses. Other activities (which are not critical) have a degree of flexibility in the amount of time taken to complete them. higher costs. • Motivation. the channels of communication lengthen and are more prone to delay and distortion. • Co-ordination. the average cost of production will rise for all the businesses in a particular industry). It shows which of the activities are 'critical' . the number of departments and the number of different plants. All these factors will affect all the businesses in a particular area and therefore push up their costs of production and distribution. its average cost of production starts to rise). This ensures that the waste of time and resources are minimised. The project is broken down into a number of separate activities. therefore. and the late arrival of employees to work. this can lead to higher costs. This can result in inefficiency in terms of the time taken to perform a task and. and each activity is then placed in the correct sequence. and the profitability of the project is maximised. so to minimise the duration of the project. a building project) can be completed in the shortest possible time. Critical Path Analysis This is often referred to as 'Network Analysis' and it is a way of showing how a lengthy and complex project (e. then the overall co-ordination of all these can become very difficult. Internal diseconomies of scale Internal diseconomies of scale fall into three main categories: • Communication. As a business grows in terms of the number of employees.e.this means that if these activities are delayed. More and more meetings will be required and this all costs both time and money. therefore. External diseconomies of scale. however. This can result in falling levels of job satisfaction and motivation. the late arrivals of supplies and raw materials. As the number of workers increases in a business. .• • Internal diseconomies of scale simply affect a single business as it grows (i. External diseconomies of scale External diseconomies of scale often result from the overcrowding of businesses in a particular area and the resulting congestion. This refers to the fact that as a business grows in size.e.g. then the project will not be able to be completed on time. each worker will be seen to be making only a very small contribution to the finished product.

The Latest Finish Time (L. A node is the start or finish of an activity. starting with the E. • • • • Activity A is the start of a project (duration 3 days) Activity B can start when activity A is completed (duration 5 days) Activity C can start when activity A is completed (duration 7 days) Activity D follows all the other activities (duration 2 days) .T in each node.S.T in the final node. Work backwards through the diagram. and it is represented by a circle.it is represented by an arrow.F. 3.T) is calculated from left to right on the diagram.T) is calculated from the right to the left after the E. by adding the duration of the previous activity to its own E. the order in which each activity must be undertaken the duration of each activity the earliest date at which later activities can commence Each diagram is composed of 'Activities' and 'Nodes': • • An activity is that part of the project which requires time and resources . 2.S. Diagram 2.F.Ts have been calculated. and deduct the duration of each activity to arrive at the L.S.T.S. Diagram 1 illustrates what a node looks like and diagram 2 illustrates a simple network : Diagram 1.A critical path diagram shows: 1. The Earliest Start Time (E. Each diagram must start and end on a single node and no activity lines must cross eachother. running from left to right.

The LFT at node 3 is simply 12 days minus the 2 days that it takes for activity D to be completed.e.3 days = 0) Diagram 3 illustrates a more complicated network: Diagram 3. The LFT at node 2 will be 10 days minus the duration of activity C of 7 days (since this is longer than activity B). The LFT at node 1 is simply 3 days minus the duration of activity A (i. This gives an LFT at node 2 of 3 days. because the earliest completion time for the project is day 12. The LFTs are calculated by working backwards from right to left.The critical path is ACD. then the EST at this node is determined by the longest preceding activity (in this case activity C). so the management would want the LFT to also be 12. Activit Order/ y dependency Duration (days) A 1st dependency 4 B must follow A 4 . between day 3 and day 10). The critical path is represented by double arrows. (The first and the last nodes will ALWAYS have the same EST and LFT). Consider the following table and use it to draw up a fully labeled network showing ESTs. The only activity with any spare time (called 'float time') is activity B. It is clear to see from diagram 2 that if more than one arrow feeds into a node (as in node 3). since if any of these activities are delayed then the project will not be able to be completed in 12 days. This gives an LFT at node 3 of 10 days. LFTs and the critical path. the LFT will also be 12 days. but has 7 days in which to be completed (i. which takes 5 days to complete. Therefore it has 2 days 'float time'. In node 4.e. 3 days .

and H) can be completed when appropriate. activities B.e. the critical activities) will cause the duration of the project to be more than 20 days. F. (8 days. E. C. 8 days. Any delay to activities A.e. and 1 day respectively) The minimum time in which the project in diagram 3 can be completed is 20 days. activities B.D. or G (i. and any resources which are not being used at these locations can be transferred to the critical activities to ensure that these are completed on time.E and H all have 'float time' available.C must follow A 6 D must follow B 4 E must follow C 2 F must follow C 8 G must follow F 2 H must follow F 1 * Critical path is ACFG * Therefore. D. 8 days. The activities which have some float time available (i. .

it does need to be followed strictly and rigidly if it is to be a success and it does not allow for any changes in the external environment having a detrimental effect on the length of the project (e. Become more capital intensive in the production of the products.g's).e. In order to retain this competitive advantage over other foreign rivals then there are a number of criteria which must be met: 1. Develop a strong reputation for customer service and after-sales service (helping the customer as much as possible is likely to keep them loyal to you). 2. 3. 5. The UK is seen to have a distinct international competitive advantage in several industries. Don't assume that a low-priced product will outsell its higher-priced rivals (price no longer provides the competitive edge that it once did). and pharmaceuticals. based on factors such as price. or a high level of absenteeism amongst the employees). International Competitiveness This term refers to the ability of a business to compete effectively with foreign competitors in a particular industry. However. quality. which are more expensive than many other rival products on offer. Develop strong marketing and branding (i.g. guarantees.m. as well as identifying the potential areas which may cause problems. since a strong pound may result in a fall in demand from both foreign and domestic customers and a corresponding increase in imports entering the UK. Instead. other factors such as the quality. reliability and after-sales service offered (e.g. design. as well as producing high value-added products which contribute greatly towards the overall profitability of the business. find out what the customer wants and develop a strong corporate image to help sell the products). high quality products. Over recent years. since it can help to reduce the total time and the resources that are needed to complete a difficult project.c. insurance and banking. and lead times. the price of the product has been less of a consideration for many customers as the main reason for purchasing one brand over another. instead of short-term gains. 4. Selling these products at high prices enables the business to establish an upmarket. Look for long-term growth and profitability. warranties. including fast moving consumer goods (f. etc) have become important selling-points for products. Companies and brands such as BMW and Technics have achieved high sales levels and profits through selling well designed. The competitiveness of a UK business with overseas rivals will often be affected by the exchange rate of the pound (£) against foreign currency. well built. poor weather conditions for a building project. .Critical Path Analysis is a very useful management tool when a large and complex project is being undertaken. quality image.