4.1.

Production of Goods and Services

Production: The process of combining the factors of production in different proportions to
produce a good or service that satisfies consumer wants and needs.
• The production process adds value to raw materials and bought in components.
• For a business to be competitive, the factors of production should be combined
efficiently to keep costs low and increase profits.
Production vs Productivity
• Production: The total output of a business in a given time period.
• Productivity: The output measured against the inputs used to create it.
𝑶𝒖𝒕𝒑𝒖𝒕
𝑷𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒗𝒊𝒕𝒚 =
𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝒐𝒇 𝒊𝒏𝒑𝒖𝒕
𝑶𝒖𝒕𝒑𝒖𝒕
𝑳𝒂𝒃𝒐𝒖𝒓 𝑷𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒗𝒊𝒕𝒚 =
𝑵𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝑬𝒎𝒑𝒍𝒐𝒚𝒆𝒆𝒔
Productivity can be raised by:
• Using fewer inputs to produce the same level of output
• Using the same number of inputs to produce a higher level of output.
Any method that causes the aforesaid also increases productivity.
Methods of Increasing Productivity/Efficiency
• Improve the quality of products – fall in the number of replacements required – lesser
inputs used
• Automation (replace employees with machines) – lesser human errors – lesser
replacement products required
• Automation (replace employees with machines) – faster production as machines can
work without breaks – higher output
• Improve training – higher skill level of employees – better customer service
• Motivate employees more effectively – employees work harder – higher output of
goods and services produced
• Introduce new technology – increased output
Benefits of Increasing Productivity/Efficiency
• Reduced inputs needed for the same output level – lower warehouse/storage costs
• Lower average cost per unit – higher profitability
• Fewer workers may be needed – lower wage costs
• Higher wages may be paid to existing workers – increased motivation
Why Businesses Hold Inventories
• If a firm is unable to supply customers from goods held in storage, then sales could be
lost to firms that hold higher inventory levels. This might lead to future lost orders too.
 • If inventories of raw materials and components run out, then production will have to
stop, leaving expensive equipment and labour idle – increase in the costs of lost output
and wasted resources
• If an urgent order is given to a supplier to deliver additional materials due to shortages,
then extra costs might be incurred in administration of the order and in special delivery
charges.
• Keeping low inventory levels may mean only ordering goods and supplies in small
quantities – firms lose out on bulk discounts
• To survive during periods of uncertain consumer demand
• To survive during periods of uncertain deliveries of supplies.
Costs of Holding Inventories
• Opportunity cost: Working capital tied up in goods in storage could be put to other
uses such as pay off loans, buy new equipment or pay off suppliers early to gain an
early-payment discount.
• Storage costs: Inventories have to be held in secure warehouses. They often require
special conditions, such as refrigeration.
• Risk of wastage and obsolescence: If inventories are not used or sold as rapidly as
expected, then there is an increasing danger of goods deteriorating or becoming
outdated.
Lean Production
• Lean Production: The techniques used by businesses that reduce waste, and therefore,
increase efficiency.
Advantages:
• Less storage of raw
materials or components
• Quicker production of
goods or services
• Eliminates the need to
repair defects or provide a
replacement service for a
dissatisfied customer
• Lesser money tied up in
inventories
• Improved health and safety, leading to a reduction in worker absenteeism rate due to
injury.
Methods to Achieve Lean Production
1. Kaizen
o Kaizen means continuous improvement through the elimination of waste.
o Management culture must be directed towards involving staff and giving their
views and ideas importance
 o Small groups of workers meet regularly to discuss problems and possible
solutions.
o To facilitate this, teamwork should be encouraged as suggesting and discussing
new ideas to improve productivity is best done in groups.
o Each worker or group has
the power to take
decisions to allow
speedier introduction of
new ideas
o Kaizen also eliminates waste by getting rid of excess inventory due to lower
levels of work-in-progress
o It also improves the flow of production in factories by repositioning machines
tightly together in cells so that workers can walk between jobs easily and
eliminate unnecessary movements.
Advantages Disadvantages
Workers have higher responsibility – increased Areas of improvement need to be identified
motivation – higher productivity initially – time consuming to implement changes
Reduced amount of space needed for production Senior employees may resist changes to the
– easier expansion of businesses existing culture – failed implementation of
kaizen
Work-in-progress is reduced – lesser inventory of Only focuses on incremental or gradual
semi-finished goods – risk of products being improvements – not sufficient for larger-scale
damaged reduces problems that require expensive investments
The improved layout of factory floor allows Training may be required to organise meetings in
some jobs to be combined – lesser workers the beginning – lost output and/or increase in
required – lesser wage costs investment of time and resources
2. Just-in-time Inventory Control: A production method that involves reducing or
eliminating the need to hold inventories of raw materials or unsold inventories of the
finished product.
Advantages Disadvantages
Reduces the opportunity cost of holding Dependence on suppliers – delayed deliveries
inventory – higher profits
Reduced storage/warehouse space – space Frequent deliveries required – higher
released can be used for a more productive transportation costs
purpose
The finished product is sold quickly – quickerLimited ability of firms to respond to unexpected
cash inflow changes in demand – damaged customer
relationships
Fewer goods held in storage – reduced risk of Many small orders need to be processed – rise in
damage/wastage administration costs
Each order is likely to be small – no bulk buying
discounts – increased average cost of production
 • Evaluation Ideas
o Small firms could argue that the expensive IT systems needed to operate JIT
effectively cannot be justified by the potential cost savings.
o Rising global inflation makes holding inventories of raw materials more
beneficial as it may be cheaper to buy a large quantity now than smaller
quantities in the future when prices have risen.

3. Cell Production: The production line is divided into separate, self-contained units
(cells), each making an identifiable part of the finished product.
Advantages Disadvantages
More autonomy and responsibility of work – High initial investment – higher costs
higher motivation of employees – lower average
cost of production
Reduces the time and effort required to move Dependence on skilled workers – in case of
between different workstations – higher absences or shortage of skilled workers,
efficiency – lesser mistakes/waste production may be disrupted
Main Methods of Production
1. Job Production: Where a single product is made at a time.
Advantages Disadvantages
It is most suitable for personal services Skilled labour is used – increases wage costs
Products meet the exact requirements of Labour intensive work – higher cost of
customers – encourages repeat purchases or production
brand loyalty
The workers often have more varied jobs – higher Production takes a long time – slower response
job satisfaction – higher motivation to consumer demand/limited capacity to fulfil
consumer demand
Workers can see the final result of their efforts – Products are specially made to order – any errors
higher motivation – lower average cost of can be expensive to correct
production
Flexible – can quickly be adjusted according to Materials may have to be specially purchased for
the market demand – lower waste each product – higher cost of production
Often used for high-quality goods and services –
higher price can be charged
2. Batch Production: Where a quantity of one product is made first, after which a
quantity of another item will be produced.
Advantages Disadvantages
It is a flexible way of working and production can It can be expensive as semi-finished products
easily be changed from one product to another. need to be moved to the next production stage.
It gives some variety to workers’ jobs. Machines have to be reset between producing
different batches, causing a delay in production
and output is lost.
It allows more variety to products which would Warehouse space is needed for inventories,
otherwise be identical. which increases costs
 As the production is limited, it is not affected to
a great extent if machinery breaks down.

3. Flow Production/Mass Production: Where large quantities of a product are

produced in a continuous process.
Advantages Disadvantages
There is a high output of a standardised product, Boring system for the workers, so there is little
can cater to a high demand. job satisfaction, leading to little motivation
Costs of making each item are kept low and There are significant storage requirements, hence
therefore prices are also lower. cost of inventories are
It is easy for capital-intensive production Breakdown of machinery can cause a large-scale
methods to be used, reducing labour costs and disruption in production
increasing efficiency.
Capital-intensive methods allow workers to
specialise in repeated tasks, hence businesses
only require unskilled workers.
Unskilled workers required less training
It may benefit from economies of scale in
purchasing.
There is no need to move goods from one part of
the factory to another as with batch production,
so time is saved.
Recommending an Appropriate Method of Production
• The nature of the product: Unique product or mass produced
• The size of the market: Mass market or niche market
• The nature of demand: Frequency of demand
• The size of the business: Small or large business
Change in Production Methods due to Technology
• Automation: Equipment used in the factory is controlled by computers to carry out
mechanical processes.
• Mechanisation: The production is done by machines but operated by people.
• CAD (computer-aided design): 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 manufacture): Computers monitor the production process
and control machines or robots on the factory floor.
• CIM (computer-integrated manufacturing): The integration of CAD and CAM. The
computers that design the product using CAD are 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.
• EFTPOS (electronic funds transfer at point of sale): Customers can swipe their debit
card at the till, information is read by the scanner, and an amount is withdrawn from
the customer’s bank account.
• Contactless payment: A wireless financial transaction in which the customer
authorizes payment for a purchase by moving a security token in close proximity to the
vendor's point of sale reader.
Advantages Disadvantages
Greater productivity as machines can work all Unemployment rises as machines and computers
day long, without breaks replace human labour
Greater job satisfaction as boring and routine Expensive to set up
tasks are done by machines
Better quality products as machines are more New technology quickly becomes outdated and
efficient and less likely to make mistakes frequent updating of systems will be needed –
this is expensive and time-consuming.
Quicker communication and less paperwork Employees may take time to adjust to new
technology or even resist it as their work
practices change
More accurate demand levels are forecasted since
computers monitor inventory levels
New products can be introduced as new
production methods are introduced