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Chapter 17 - Production of Goods and Services (Advantages of new…
Chapter 17 - Production of Goods and Services
Production: the provision of a product or service to satisfy consumer wants and needs
The production process applies to manufacturing as well as service industries.
In adding value, businesses
combine the 'inputs'
of a business (factors of production such as land, labour, capital, and enterprise)
to produce more valuable 'outputs'
(good or service) to satisfy consumer wants or needs
However, these
factors of production
, also called
economic resources
, can be combined in different proportions - as
inputs
- to the production process
For a business to be
competitive
, it should combine these inputs of resources efficiently so that the business makes the best use of resources at its disposal to keep
costs low and increase profits
.
Developing country
: 'labour-intensive'
Developed country
: 'capital-intensive'
Operations department's role in a business is to take inputs (physical goods or service) and change them into outputs for customer use
a
Factory Manager
will be responsible for the quantity and quality of products coming off a production line. Includes maintenance of production line and other necessary repairs
a
Purchasing Manager
who will be responsible for providing the materials, components and equipment required for the production
a
Research and Development Manage
r who will be responsible for the design and testing of new production processes and products
In a
retailing
business, it will be similar but Factory Manager will be replaced by managers for the shops. In a
service
business, the Operation Department will include managers for each of the business
Productivity: the output measured against the inputs used to create it
Can be measured by: Quantity of output / Quantity of inputs
Labour productivity: Output (over a given period of time) / Number of employees
Ways to increase productivity
introduce new technology
improving employee motivation
improved quality control/assurance reduces waste
improve inventory control
train staff to be more efficient
use machines instead of people to do jobs (automotion)
Benefits of increasing efficiency / productivity
increased output relative to the inputs required
lower costs per unit (average cost)
fewer workers may be needed, possibly leading to lower wage costs
higher wages for workers increases motivation
Productivity can either mean using
fewer inputs to produce the same output
or u
sing the same inputs to produce much greater output.
As employees become more
efficient
, the amount of output produced per employee will
rise
and therefore the costs of producing the product will
fall
. Businesses strive to
increase productivity
in order to become more
competitive
.
Lean Production
: A term for those techniques used by businesses to cut down on waste and therefore increase efficiency, for example, by reducing the time it takes for a product to be developed and become available for sale.
There are 7 types of waste that can occur in production and they are:
overproduction - producing goods before they have been ordered by customers. This results in high storage costs and possible damage to goods whilst in storage
waiting - when goods are not moving or being processed in any way then waste is occurring
transportation - moving goods around unnecessarily causes waste and is not adding value to the product. Goods may also be damaged when they are being moved around
unnecessary inventory - if there is too much inventory then this takes up space, may get in the way of production and costs money
motion - any actions, including bending or stretching movements of the body of the employee wastes time. it may also be a health and safety risk for the employees. This also applies to the movement of machines which may not be necessary
over-processing - if complex machinery is being used to perform simple task then this is wasteful. Some activities in producing the goods may not be necessary if the design of the product is poor
defects - any faults require the goods being fixed and time can be wasted inspecting the products.
Benefits. Costs are saved through:
less storage of raw materials or components
quicker production of goods or services
no need to repair defects or provide a replacement service for a dissatisfied customer
better use of equipment
cutting out some processes which speeds up production
less money tied up in inventories
improved health and safety leading to less time off work due to injury
Reduced costs can lead to lower prices for customers, businesses being more competitive and possibly also increased profits
Lean production might include using the following methods:
Kaizen
Just-in-time inventory control
Cell production
Why businesses hold inventories (stock)
If a business runs out of stock, the shop might have had higher sales than usual or else their delivery stock might have been late. To ensure that there is always
enough inventory
to satisfy demand, inventory
levels
must be carefully
controlled
.
When inventories get to a certain point (reorder point), they will be
reordered
to bring inventories back up to the
maximum
level again. Business
must reorder
before inventories
get too low
to allow time for the goods to be delivered.
If inventory levels get
too low
they might actually run out if there is an unexpectedly high demand for the goods. If
too high
a level of inventory is held then this costs a lot of money; the business has bought goods but they are not being used and the money could be put to better use.
Kaizen: a Japanese term meaning ‘continuous improvement’ through the elimination of waste.
Improvement does not come from investing in new technology or equipment but through the ideas of the workers themselves.
This has proceed effective because no one knows the problem that exist better than the workers who work with them all the time, so they are often the best to think of ways to overcome them. Eliminates waste.
advantages:
increased productivity
reduced amount of space needed for the production process
work-in-progress is reduced
improved layout of the factory floor may allow some jobs to be combined, thereby freeing up employees to carry out some other job in the factory.
Just-in-time inventory control: A production method that involves reducing or virtually eliminating the need to hold inventories of raw materials or unsold inventories of the finished product. Supplies arrive just at the time they are needed.
all this reduces the costs of holding inventory, as no raw materials and components are ordered to keep in the warehouse just in case it is needed
warehouse space is not needed, again reducing costs
the finished product is sold quickly and so money will come back to the business more quickly, helping its cash flow
To work just-in-time, inventories of raw materials, work-in-progress and finished products are run down and no extra inventory is kept. The business will therefore need very reliable suppliers and an efficient system of ordering raw materials or components.
Methods of production
job production: Where a single product is made at a time.
Advantages
it is most suitable for personal services or 'one-off' personal services
the product meets the exact requirements of the customer
the workers often have more varied jobs (they don't carry out just one task)
more varied work increases employee motivation - giving them greater job satisfaction
it is flexible and often used for high-quality goods and services meaning that a higher price can be charged
Disadvantages
skilled labour is often used
the costs are higher because it is often labour intensive
production often takes a long time
products are specially made to order and so any errors can be expensive to correct
materials may have to be specially purchased leading to higher costs
batch production: Where a quantity of one product is made, then a quantity of another item will be produced.
Advantages
it is a flexible way of working and production can easily be changed from one product to another
it still gives some variety to workers' jobs
it allows more variety to products which would otherwise be identical. This gives more consumer choice (for example, different flavours of ready-meals)
production may not be affected to any great extent if machinery breaks down
Disadvantages
it can be expensive as semi-finished or finished products will need moving about.
machines have to be reset between production batches which means there is a delay in production and output is lost.
warehouse space will be needed for stocks of raw materials and components. This is costly.
flow production: Where large quantities of a product are produced in a continuous process. It is sometimes referred to as mass production.
Advantages
there is high output of a standardised product
costs are kept low and therefore prices are lower
it is easy for capital-intensive production methods to be used - reducing labour costs and increasing efficiency
capital-intensive methods allow works to specialise in specific, repeated tasks and therefore the business may only need relatively unskilled workers - little training may be needed
it may benefit from economies of scale
low average costs and therefore low prices usually mean high sales
automated production lines can operate 24 hours a day
goods are produced quickly and cheaply
there is no need to move goods from one part of the factory to another as with bath production, time is saved
Disadvantages
it is a very boring system for the workers, so there is little job satisfaction, leading to a lack of motivation for employees
there are significant storage requirements - costs of inventories of raw materials/components and finished products can be very high
the capital costs of setting up the production can be very high
if one machine breaks down the whole production line will have to be halted
Cell Production
The production line is divided into separate, self-contained units (cells), each making an identifiable part of the finished product, instead of having a flow or mass production line
This method improves the morale of the employees and makes them work harder so they become more efficient. Employees feel more valued and are less likely to strike or cause disruption
Factors affecting which method of production to use
the nature of the product
size of the market
nature of demand
size of the business
How technology has changed the production methods
Automation
is where the equipment used in the factory is controlled by a computer to carry out mechanical processes
Mechanisation
is where the production is done by machines but operated by people
CAD (computer aided design)
is computer software that draws item being designed more quickly and allows them to be rotated to see the item from all sides instead of having to draw it several items
CAM (computer aided manufacture)
is where computers monitor the production process and control machines or robots on the factory floor
CIM (computer integrated manufacturing)
is the total integration of CAD and CAM.
Electrical payment
EPOS (electronic point of sale)
used at checkouts where the operator scans the bar code of each item individually
EFTPOS (electronic funds transfer a point of sale
) is where the electronic cash is register is connected to the retailer's main computer and also to banks over a wide area computer network.
Disadvantages of new technology
unemployment rises as machines/computers replace people on the factory floor and in offices
it is expensive to invest in, which also increases the risks as large quantities of products need to be sold to cover the cost of purchasing the equipment
employees are unhappy with the changes in their work practices when new technology is introduced
new technology is changing all the time and will often become outdated quite quickly and need to be replaced if the business is to remain competitive.
Advantages of new technology
productivity is greater as new production methods are used
greater job satisfaction stimulates workers, as routine and boring jobs are now done by machines
the types of jobs have changed as more skilled workers are needed to use the new technology. businesses must offer training to existing workers in the use of new technology. The workers are more motivated and therefore improve the quality of their work
better quality products are produced owing to better production methods and better quality control
more accurate consumer demand results from computers being used to monitor inventory levels
quicker information and reduced paperwork, owing to computers, lead to increased profitability
the information that is available to managers is much greater and this results in better and quicker decision making
new products are introduced as new methods of production are introduced. The market and tastes of the consumer have changed