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Production

Copyright 2002 by Harcourt, Inc. All rights reserved.

Definition of production

Production takes place when


resources such as raw materials or
components, are changed into
products.
It refers to those activities that bring
a product into being.

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Copyright 2002 by Harcourt, Inc. All rights reserved.

Production Function

States the relationship between inputs and outputs


Inputs the factors of production classified as:
Land all natural resources of the earth not just solid earth!

Price paid to acquire land = Rent

Labour all physical and mental human effort involved in


production

Price paid to labour = Wages

Capital buildings, machinery and equipment


not used for its own sake but for the contributioit makes to
production

Price paid for capital = Interest

Copyright 2002 by Harcourt, Inc. All rights reserved.

Production Function

Inputs
Land
Labour

Process

Product or
service
generated
value added

Capital

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Output

Final Product /
Service

Production Function
There is a production function for every good that
shows the maximum output you can get from any
quantities of inputs. The production function is the
description of the current best technology for
making a good.
Production functions apply to firms.
E.g., Maruti Suzuki has a production function for
producing Swift. GM has a production function for
producing Chevrolets.

Copyright 2002 by Harcourt, Inc. All rights reserved.

Production Function

Mathematical representation
of the relationship:
Q = f (K, L, La)
Output (Q) is dependent upon the amount
of capital (K), Land (L) and Labour (La)
used

Copyright 2002 by Harcourt, Inc. All rights reserved.

Analysis of Production Function:


Short Run
In the short run at least one factor fixed in supply but all other

factors capable of being changed


Reflects ways in which firms respond to changes
in output (demand)
Can increase or decrease output using more or less of some
factors but some likely to be easier
to change than others
Increase in total capacity only possible in the long run

Copyright 2002 by Harcourt, Inc. All rights reserved.

Analysis of Production Function:


Short Run
In times of rising
sales (demand)
firms can increase
labour and capital
but only up to a
certain level
they will be limited
by the amount of
space. In this
example, land is
the fixed factor
which cannot be
altered in the
short run.

Copyright 2002 by Harcourt, Inc. All rights reserved.

Analysis of Production Function:


Short Run
If demand slows
down, the firm
can reduce its
variable factors
in this
example it
reduces its
labour and
capital but
again, land is
the factor which
stays fixed.

Copyright 2002 by Harcourt, Inc. All rights reserved.

Analysis of Production Function:


Short Run
If demand slows
down, the firm can
reduce its variable
factors in this
example, it
reduces its labour
and capital but
again, land is the
factor which stays
fixed.

Copyright 2002 by Harcourt, Inc. All rights reserved.

Analysing the Production


Function: Long Run

The long run is defined as the period of time taken to vary all
factors of production
By doing this, the firm is able to increase its total capacity
not just short term capacity
Associated with a change in the scale of production
The period of time varies according to the firm
and the industry
In electricity supply, the time taken to build new capacity
could be many years; for a market stall holder, the long run
could be as little as a few weeks or months!

Copyright 2002 by Harcourt, Inc. All rights reserved.

Analysis of Production Function:


Long Run

In the long run, the firm can change all its factors of production thus
increasing its total capacity. In this example it has doubled its capacity.

Copyright 2002 by Harcourt, Inc. All rights reserved.

Scales of production

One-off/Job

Batch

Mass (continuous flow)

One product not a prototype.


From two up to a few hundred thousand.
Hundreds & hundreds of thousands of products.

Copyright 2002 by Harcourt, Inc. All rights reserved.

Characteristics of the different


scales of production
One-off/Job

Labour costs

Batch

Mass (continuous
flow)

High

Medium

Low

Low

Medium/High

High

Specialised

Specialised

High

Medium

Low

Capital
investment

Low

Medium/High

High

Labour
intensity

High

Medium

Low

Efficiency
Tools
Unit costs

General

Copyright 2002 by Harcourt, Inc. All rights reserved.

Three methods of production


Figure:
Methods of production

Job production

Batch production

Flow production

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Copyright 2002 by Harcourt, Inc. All rights reserved.

Three methods of production


It involves the production
Job
Jobproduction
production

of a single product at a
time.

Copyright 2002 by Harcourt, Inc. All rights reserved.

Job production
Advantages:
Able to produce
unique orders to meet
customers individual
needs.
More likely to
motivate workers (see
end results)
Fairly simple way of
production(one a time)

Disadvantages:
Labor intensiveness
and high costs
High selling costs
Not fit for mass
production and large
demand

Copyright 2002 by Harcourt, Inc. All rights reserved.

Three methods of production

Job
Jobproduction
production

Batch
Batchproduction
production

This involves dividing the


work into a number of
different operations, or a
method that involves
completing one operation
at a time on all units
before performing the
next.

Copyright 2002 by Harcourt, Inc. All rights reserved.

Batch production
Advantages:
Suitable for a wide
range of similar
products
Reducing the need for
skilled workers
More standardized
products and less
machinery needed

Disadvantages:
Higher unit costs for
small batch
Less motivated
workers for repetitive
one operation
Careful planning
needed to reduce idle
machines or worker
waiting

Copyright 2002 by Harcourt, Inc. All rights reserved.

Three methods of production


Job production

Batch production
Flow production

It is a method of large-scale
production of standardized
products, where each
operation on a unit is
performed continuously one
after another, usually on a
production assemble line
It often includes mass,
repetitive and process
production.

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Copyright 2002 by Harcourt, Inc. All rights reserved.

Flow production
Advantages:
Large scale production
and reduced unit costs
Highly automated and
high efficiency
Able to produce large
quantity of products

Disadvantages:
Very high investment cost
in machinery and
equipment
Limited ability to meet
unique customer needs
Repetitive operation and
less motivation
High costs with the
breakdown of machines

Copyright 2002 by Harcourt, Inc. All rights reserved.

Factors affecting the choice of proper


production methods

The nature of the product


Different products may require a specific production method.

The size of market

A big or small market may require a different production method.

The stage of business development

A start-up firm or large established firm will use different production methods.

The current state of technology

Changes in technology result in firms using new mass production methods.


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Copyright 2002 by Harcourt, Inc. All rights reserved.

Strategic Importance of the


Production Function

Mass Productionsystem for manufacturing


products in large amounts through effective
combinations of employees with specialized
skills, mechanization, and standardization

Assembly Linemanufacturing technique that


carries the product on a conveyor system past
several workstations where workers perform
specialized tasks.

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The Job of Production Managers

Inventory Control

Requires balancing the need to keep stocks on

hand to meet demand against the expenses of


carrying the inventory
Perpetual inventory: system that continuously
monitors the amounts and location of inventory
Vendor-managed inventory: system that hands
over a firms inventory control functions to
suppliers

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The Job of Production Managers

Implementing the Production Plan

Just-in-Time Systemmanagement

philosophy aimed at improving profits and


return on investment by minimizing costs and
eliminating waste through cutting inventory on
hand.

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The Job of Production Managers

Implementing the Production Plan

Material Requirement Planning (MRP)

computer-based production planning system by


which a firm can ensure that it has needed parts
and materials available at the right time and
place in the correct amounts.

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The Job of Production Managers

Controlling the Production Process

Production planningdetermines the amount

of resources (including raw materials and other


components) a firm needs to produce a certain
output
Routingdetermines the sequence of work
throughout the facility and specifies who will
perform each aspect of production at what
location

Copyright 2002 by Harcourt, Inc. All rights reserved.

The Job of Production Managers

Controlling the Production Process

Schedulingdevelopment of timetables that


specify how long each operation in the
production process takes and when workers
should perform it.

Copyright 2002 by Harcourt, Inc. All rights reserved.

The Job of Production Managers

Controlling the Production Process

Gantt charttracks projected and actual work

progress over time


PERT (Program Evaluation and Review
Technique)chart which seeks to minimize
delays by coordinating all aspects of the
production process

Critical Pathsequence of operations that requires


the longest time for completion

Copyright 2002 by Harcourt, Inc. All rights reserved.

Sample Gantt Chart

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PERT Diagram for Building a Home

Copyright 2002 by Harcourt, Inc. All rights reserved.