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TOPIC 6 — THE PRODUCTION FUNCTION - Coggle Diagram
TOPIC 6 — THE PRODUCTION FUNCTION
6.1. The Production Function: Concept and Objectives
The production subsystem manages this transformation process
Production systems differ widely (service vs. industrial, make-to-order vs. continuous), but share common elements
Firms transform inputs (raw materials, labor, capital goods, energy, etc.) into outputs (products/services)
Main Objectives of Modern Production Management
Cost
Optimize productivity: Productivity = (Value of outputs) / (Value of input
Higher productivity → same inputs produce more → lower cost per unit
Lower productivity → higher cost per unit
Quality (Technical quality only)
“Fitness for customer use”
Compliance with standards (meets required specs)
Aesthetics (appearance, texture, sound, etc.)
Reliability (functions properly over time)
Maintenance & service quality
Durability (useful life before replacement is better)
Flexibility
Ability to adapt/change quickly with minimal time/cost/performance loss
Types of flexibility:
Product flexibility
Fast development & launch of new products
Adapt products to individual customer needs
Volume flexibility
Adjust output levels without major cost increase
Process flexibility
Mix flexibility: produce many different products without modifying facilities
Input flexibility: use alternative materials depending on availability
Also important in services (e.g., restaurant adapting menus, diets, events)
Delivery (Time-based competition)
On-time deliveries
Additional objectives:
Condition upon arrival (no damages)
Ease of ordering (simple, quick process)
Accuracy (quantities & specs correct)
Fast deliveries
Services / Solutions (Servitization)
Innovation
R&D&I: Research, Development & Innovation
Increasingly important in production and environmental areas
Radical innovations: major breakthroughs (e.g., 3D printing replacing traditional manufacturing).
Incremental innovations: gradual improvements (e.g., efficiency upgrades).
6.2. Strategic Decisions in the Production System
6.2.1. What to produce? (Product Definition)
Responsibility of the entire company, not only production
Management must know:
Technical feasibility
Production cost
Investment required
Workforce needs and skills
First and most fundamental decision (all others depend on it)
Steps:
Determine how they will be achieved
Define types, quantities, and quality levels
Identify product functions
Use flow diagrams to:
Visualize tasks
Identify value-added activities
Detect improvements
Make-or-buy Decision
Some components can be bought externally
Make internally when:
Brings highest value
Strategically important
Related to core competencies
Buy/Outsource when:
Not strategic
Not core
Low value-added
Advantages of outsourcing: flexibility, cost reduction
Disadvantage: loss of quality control
6.2.2. Where to produce? (Location)
Determine physical location of production unit, facilities, and
logistics structures
Factors influencing location
Market-related:Transportation and distribution costs
Want plant close to target market
Production-process-related:
Access to raw materials (e.g., heavy industries near sources)
Access to cheap/skilled labor
Need for auxiliary or supporting industries
Installation & cost-related:
Land price
Local legislation
Subsidies, incentives, tax benefits
6.2.3. How much to produce? (Production Capacity)
Must identify max production capacity per time period
Formula:Capacity = (Maximum available time) / (Time needed to produce one unit)
Must consider limiting resources.
Production Capacity ≠ Production Volume
Capacity = maximum output possible
Volume = actual output
Idle capacity = capacity − volume (absolute or %)
Factors in setting plant size & capacity:
Economies of scale & scope
Average costs fall as production increases.
Unit Cost = Unit Fixed Cost + Unit Variable Cost
Forecasted sales volume
Necessary to design capacity appropriately
Break-even point (quantity)
Q* = CF / (P – CV)
Higher fixed costs → higher break-even point.
Example: Structure A vs. Structure B
At low production volumes → lower fixed cost structure is better
At high production volumes → higher fixed cost but lower variable cost becomes better
6.2.4. How to produce? (Process Design)
Three main alternatives:
1. Project-based production
Unique, one-off products
High complexity
Example: building a museum
Low standardization
Low fixed cost / high variable cost
2. Batch production
Several products with multiple options
Produced in batches (e.g., automobiles)
High fixed cost / low variable cost
Medium standardization
3. Continuous production
Standardized, homogeneous products
Continuous flow → high stability
Very high fixed cost / very low variable cost
Example: chemical, oil, cement industries
6.3. Tactical Decisions in the Production System
(Day-to-day, short-term decisions based on strategic choices)
6.3.2. Inventory Management:
Inventories hide inefficiencies
Leads to the development of Just In Time (JIT) and Lean Manufacturing
Reasons inventories are needed
Large vs. small order trade-off:
Large = higher inventory, lower ordering costs
Small = lower inventory, higher ordering costs
Non-continuous supplier deliveries
Different capacities between production stages
Demand fluctuations
Costs of holding inventory
Repairs, damage, obsolescence
Transport and handling
Labor costs
Capital tied in stock
Storage space
Purposes
Serve customers without delays
Avoid production stoppages
Applies also to services (cannot store services but can store materials).
Inventories exist because input flows and output flows are not perfectly synchronized.
6.3.1. Production Planning
Result → Manufacturing program (what to produce + what to purchase)
Three planning levels:
Detailed Production Schedule (Job Scheduling)
Ensures MPS execution
Determines start times of production orders
Very short-term (daily/weekly)
Master Production Schedule (MPS)
Links demand forecasts with capacity
Must be consistent with APP
More detailed: individual products
Shorter term (e.g., 3 months)
Aggregate Production Plan (APP)
General work plan
Quantities + timing at family/product line level
Medium term (e.g., 1 year)