SECTION 4: OPERATION MANAGEMENT

Unit 17: Production of goods and services

 Managing resource effectively to produce goods and services
Production is the provision of a product or a service to satisfy consumer wants and needs.
The process involves firms adding value to a product.

 Productivity
Productivity is not the same as production. It is the output measures against the input being
used to produce it.
Productivity = Output
Input (Number of worker or capital employed)

The most common way of measuring productivity is usually by labour. As employees

become more efficient, the amount of output produce per worker will rise. Thus, rising
productivity of labour which will result to a fall in cost of production.
Labour productivity = Output
Number of employees

How to increase productivity:

1. Introduce new technology which will increase efficiency
2. Improving labour skills by training workers – to be more efficient
3. Introducing automation (more capital intensive)
4. Improve quality control / assurance (reduce waste)

Benefits of increasing efficiency / productivity

 Increase output relative to the input required
 Lower costs per unit (average cost)
 Fewer worker may be needed
 Higher wages for worker to increase motivation

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Why business hold inventories (stock)
To ensure that there is always enough stock to satisfy demand, stock levels must be carefully
controlled. When stock level get to a certain point, they will be recorded to bring them back
up to the maximum level again. The business must re-order before stock get too low so as
to allow time for the goods to be delivered. It depends upon the lead time.

Lead time

It is the margin of time between the date when stock is obtained and the date when it is sold
on. That is, the time taken for the goods ordered to be delivered.

 Lean production
Lean production refer to the various techniques used by business to cut down waste and
therefore to increase efficiency.
There are 7 types of waste that can occur in production and they are:

1. Overproducing
2. Waiting
3. Transportation
4. Unnecessary inventory
5. Defects
6. Over processing
7. Motion

Benefits of lean production

 Less storage of raw materials

 Quicker production of products
 No need to repair defects
 Better use of equipment
 Cutting out some processes which speed up production

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It might include using any of the following methods:

 Kaizen
Kaizen is a Japanese term meaning continuous improvement. Its focus is on the elimination
of waste. It gets rid of piles of stock or reducing the amount of time taken for worker to work
between jobs so that they eliminate movement.
Advantage of kaizen:

∞ Increase productivity
∞ Reduce amount of space needed for the production process
∞ Work-in progress is reduced
∞ Improved layout of the factory by combining some jobs

 Just-in-time
It is a production method that eliminate the need to hold stock of raw material of finished
product. The raw materials or finished products are delivered just-in-time to be use in the
production process. The finished good is made to be delivered just-in-time to the customer.
All these reduces the cost of holding stock as no extra stock is ordered to be kept in the
warehouse.

 Cell production
Cell production is where the production line is divided into separate self-contained unit each
making an identifiable of the finished product instead of having a flow production line.

 Methods of production
There are 3 main methods of production which are as follows:

 Job production - It is where a single product is produce at a time. This is where the
products are made specifically to order, that is according to customer requirement.
Example: tailor, hair dresser
Advantages:
1. The products meet the exact requirement of the customer
2. The work have more varied job thus, increasing employees’ motivation.

Disadvantages:
1. Skilled worker is usually used.
2. The cost of production is usually high as it is labour intensive system.

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  Batch Production – It is where similar products are made in blocks or batches. It is
where a quantity of one product is made, then a quantity of another product will be
produced. Example: bakery,
Advantages:

1. It is a flexible way of working as production can easily be changed from one product to
another.
2. It offers some variety to workers’ job
3. Production may not be affected to a great extent even if machinery break down

Disadvantages:
1. It can be expensive as the finished product will need moving about
2. Warehouse space will be needed for stock of raw-material and components

 Flow Production – It is also known as mass production. It is where large quantities

of a product are produced in a continuous process. In flow production a large quantity
of a standardized (identical) product is produced. Example: Coca cola
Advantages:
1. The business will benefit from economies of scale as it produces in bulk
2. The cost are kept low, therefore the product price are also low
3. Goods are produced quickly and cheaply

4. Capital-intensive method do not require highly skilled worker, therefore little training is
needed.

Disadvantages:
1. Capital cost of setting up the production line can be very expensive

2. It is a very boring system for workers, so there is little job satisfaction which can
demotivate workers
3. If one machine breaks down, the whole production line will be stopped.

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  Factors affecting which method of production to use.
The factors which determine which method of production to use are as follows:

 Nature of the product – If a fairly unique product is required, job production will
be used. If the production can be mass produce using an automated production line
then flow production can be used.

 Size of the market – If demand is higher and more product can be sold but not in
large quantities, batch production can be used. The product will be produce in a
certain quantity to meet the particular product.

 Nature of demand – If there is a large and fairly fixed demand for the product, it
become economic to set up a production line and continuously produce the product.
If there is less demand, then production may be more likely to be job or batch
production.

 Size of business – If a business is small and do not have access to large amount of
capital, then it will not produce on a large scale of production. Small business are
likely to use job or batch production.

 How technology has changed production methods

Technological advances have allowed the mechanization and automation of production
method in many industries. The use of automation, CAD, CAM keep business ahead of the
competition keep cost low and improve the quality of the product manufactured.

 Automation – It is where equipment used in a factory is controlled by a computer to

carry out mechanical process such as spraying paint on a car.
 CAD (Computer Aided Design) – It is a computer software that draws items being
designed more quickly.
 CAM (Computer Aided Manufacturing) – It is where computer monitor the
production process and control machines on the factory floor.

Advantages of new technology:

 Productivity increase as new methods are being used and workers have greater job
satisfaction as the routine and boring job are done by machine
 Better quality products are produced or into better production techniques
 Quicker communication take place and there is a decline in paper work due to use of
computers and this increases the profitability of the business
 New products can be introduced as taste of consumers change due to new methods of
production

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Disadvantages of new technology:

 Unemployment may rise as most of the job will be performed by technology

 It is expensive to invest in huge capital project
 New technology is changing all the time and will often become outdated very quickly
and need to be replace each time if the business is to remain competitive.