4.1 Production of goods and services

By Thames Published September 13, 2017 4. Operations management, Businesswidget

Cambridge IGCSE Business Studies 4.1 – Production of goods and services

4.1.1 – The meaning of production

Production – Process of adding value to a product (using four factors of production – land, labour, capital and enterprise) to satisfy customer needs and wants.

Productivity – How a business measures it’s efficiency

Productivity could mean using fewer inputs to produce the same amount of output. Or using the same amount of input to produce a greater amount of output

Ways to improve productivity

Improving layout of factory so production becomes faster and more efficient
Training workers so they can be more productive
Using automation

Benefits of increasing efficiency/productivity

Lower cost per unit
Less employees needed (reduce labour cost)
Reduces overall costs.

Why do businesses hold stock?

Businesses keep stocks for a variety of reasons, for example, factories keep raw material inventory to make sure there are enough materials for production while a shop might hold stock to ensure that products are available to customers.

Too much stock

Money wasted on storage cost
Depreciation cost
Shelf life (items may reach best before date before being sold)
Money could’ve been used on something else

Not enough stock

Opportunity lost (profit could be made if product sold)

Buffer stock (aka safety stock) – inventory to deal with sudden customer demands for a product or in case supplies doesn’t get delivered on time.

What is Lean production?

Lean Production – Term for techniques used by businesses to cut down waste and increase efficiency.

Common wastes in businesses

Overproduction – Producing too many products which then costs the business money to keep the product in storage. (and may get damaged/expires etc..)
Waiting – Goods not being processed
Transporting – Materials being moved around the factory inefficiently
Over-processing – e.g. using advanced machine to do simple tasks
Defects- production of faulty products which can’t be sold.

Costs can be reduced by lean production

Benefits of lean production

Less storage of raw materials (e..g no need for refrigeration costs, warehouse etc…)
Less defects in production (broken products don’t get produced)
Better use of equipment
Speeding up production by cutting out unnecessary tasks
Less money tied up in stock

3 Common lean production techniques

Kaizen – Kaizen means continuous improvement by eliminating waste.

Workers meet regularly to discuss problems and possible solutions
In this way, wastage is reduced and efficiency is improved
Factory floors are usually rearranged so that the flow of production from one activity to the next is improved.

Just-in-time production

Focus on reducing the need to hold stocks of raw material or parts that are needed (This reduces storage costs)
Raw materials are delivered just in time by suppliers for production
Reliable suppliers are needed for this to work

e.g. Milk gets delivered to milkshake factory 30 minutes before production starts, this means that the milkshake factory won’t have to spend money on expensive refrigerators to store milk before it gets produced.

Cell production

The production line is divided into separate teams of workers, each makes a part of the finished production
Motivation is improved due to the variety of tasks and the worker belonging to a team

4.1.2 – The main methods of production

Job Production – Each product is different and made to specific instructions by the consumer. e.g. tailor made suits, customizable birthday/wedding cakes

Advantages of Job production

Workers have more varied job (They won’t become bored)
Higher price can be charged for product
Product meets requirements of the customer

Disadvantages of Job production

Costs of production are high because skilled labour is used
Product takes a long time to produce
Products are made to order so any errors may be expensive for the company to fix

Batch production – Similar products are made in batches (e.g. batch of white shirts then another batch of green shirts are made)

Advantages of Batch production

Gives more variety of jobs to workers
Production can be easily changed from one product to another
Gives consumers a variety of products (e.g. many colour shirts)

Disadvantages of Batch production

Expensive to produce goods
Machines have to be reset when changing from one batch to another which slows down production (e.g. change colour of shirts from white to green dye)
Warehouse space is needed to store products

Flow production (Mass production) – Large quantities of identical products are produced on a continuous basis

Advantages of Flow production

Goods are produced quickly and cheaply (economies of scale)
Increased efficiency through use of machinery
Less labour is needed (machines do the work)
Automated production line means production can operate overnight

Disadvantages of Flow production

Very boring for workers (same product over and over)
Starting costs are high (expensive machines, big factory etc…)
If a machine breaks down the whole production line may stop
Expensive storage costs as they are lots of products

Factors affecting which method of production to use

The nature of the product – Unique products will require job production.
Size of the market – Products with small number of customers mean job or batch production is used. Products with large amount of consumers = flow production should be used.
The nature of demand – Small and infrequent demand by customers means job or batch production will be used.
The size of the business – Small businesses tend to operate using job and batch production while large business may use flow production.

4.1.3 – How technology has changed production methods

Improvements in technology can help reduce costs and improve product quality

Automation – Production by equipment which are controlled by computers.
Mechanisation – Production by machine operated by workers (human)
Computer aided design (CAD) – 3D drawing software to design new products
Electronic point of sale – Used at checkouts where stock records are automatically adjusted as an item barcode is scanned when it is sold. e.g. supermarket stock
Electronic funds transfer at point of sale (EFTPOS) – Cash registers connected to bank (Customer’s card is swiped and money is transferred right away from customer’s bank account

Advantages of technology