Business Studies

Chapter 17

Managing Resources Effectively to produce goods and services

Production is the provision of a product or a service to satisfy consume wants and needs. The process involves adding value to a product.

•Land
•Labour
INPUTS •Capital
•Enterprise

Production
process

• Goods
OUTPUTS
• Services

Operations Department
The Operations Department’s role in a business is to take inputs and change them into outputs for customer’s use. Inputs can be physical goods or services, The
Operations Department is responsible for making sure that raw materials are provided and made into finished goods or services.

A typical manufacturing business has:

 A Factory Manager – responsible for quantity and quality of products coming off production line also maintenance of production lines and other repairs
 A Purchasing Manager – responsible for providing the materials, components and equipment required for the production
 A Research and Development Manager – responsible for the design and testing of new production process and products

Productivity
Productivity is the output measured against the inputs used to create it OR It is how a business can measure its efficiency.

𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑜𝑓 𝑂𝑢𝑡𝑝𝑢𝑡𝑠
𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 =
𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑜𝑓 𝐼𝑛𝑝𝑢𝑡𝑠

Businesses often want to measure the productivity of one of the factors of production or inputs, usually labour. This is measured by :

𝑂𝑢𝑡𝑝𝑢𝑡 (𝑜𝑣𝑒𝑟 𝑎 𝑔𝑖𝑣𝑒𝑛 𝑝𝑒𝑟𝑖𝑜𝑑 𝑜𝑓 𝑡𝑖𝑚𝑒)

𝐿𝑎𝑏𝑜𝑢𝑟 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 =
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠

Productivity can either mean using fewer inputs to produce the same output or using same inputs to produce greater output. As employees become
more efficient, output per worker will rise and therefore, costs of production will fall

Business strive to increase productivity to be more competitive, remain trading and able to generate greater profits
 Improved Improve Introduce
Quality employee new
control/ motivation technology
assurance

WAYS TO
INCREASE
PRODUCTIVITY

Train staff Improve

Automation inventory
to be more
efficient control

Why Businesses hold inventories (stock)

 To ensure that there is always enough inventory to satisfy demand, inventory levels must be carefully controlled
 It can include inventory as raw materials, components, semi-finished goods, or finished products ready for delivery. It may also include spare parts of
machines, in case of breakdowns
 When inventories get to reorder point, they will be recorded to bring inventories back up to the maximum level again. The businesses must reorder
before inventories get too low as they might run out of stock if demand gets high
 If too high level of inventory is kept, then this costs a lot of money. It could cost even more, if the goods are not being used or sold and money isn’t
spendable in better use

Lean Production
It is 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. Lean production cuts out any activities which do not add value for the customer.

There are 7 types of waste that can occur in production:

Overproduction – producing goods before they are ordered by customers. This results in storage costs and possible damage to goods while in storage
Waiting – When goods are not moving or being processed in any way then waste in occurring
Transportation – moving goods around unnecessarily causes waste and is not adding value to product and may also get damaged as they are moved around.
Unnecessary inventory – if there is excess inventory, it takes up space and can also get in production as it costs money
Motion – Any actions, including bending or stretching, of body of employees wastes times. It may also be safe and health risk for employees. This is also related to
unnecessary movements of machines
Over-processing – If complex machinery is being used to perform simple tasks then this is wasteful. Some activities in production may be unnecessary if design of
the product is poor
Defects – Any faults require the goods being fixed and time can be wasted inspecting the products

Benefits of lean production

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 do 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

Kaizen
It is a Japanese term meaning ‘continuous improvement’ through the elimination of the waste. The improvement doesn’t come from investing in new capital rather
through ideas of workers themselves. Small groups of workers meet regularly to discuss problems and possible solutions. This is effectively as workers know better
their problems and possible ways to overcome them.

Kaizen eliminates wastes, e.g. by getting rid of piles of inventory or reducing amount of time taken by employees to walk between jobs so that unnecessary
movements are reduced. When Kaizen is introduced, the factory floor is reorganised by repositioning or rearranging machines tightly together in cells, to improve
flow of production though the factory.
 Advantages:

 Increased productivity
 Reduced space needed for production processes
 Work-in-progress in reduced
 Improved layout may free up some space by combining jobs, enabling them to work in other jobs in the factory

Just-in-time inventory control (JIT)

It is 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 just arrive at the time they are needed.

 This reduces the costs of holding inventory and Warehouse space, as now no raw materials or components are ordered to keep or store
 The finished product is sold quickly and therefore money will come back to the business quicker, helping its cash flow

As no extra inventory is kept and all work-in-progress and finished are run down - The business needs very reliable suppliers and an effective system of ordering
raw materials or components

Cell Production
It is where production line is divided into separate, self-contained units (cells) each making an identifiable part of the finished product, instead of having flow or
mass production

This method improves morale of employees and makes them work harder, so they become more efficient. They also feel more valued and are less likely to strike
or cause disruption

Methods of Production
Job Production
It is where a single product is made at a time. This is where products are made specifically to order (i.e. special or different custom cakes for
each customer).

Advantages

 Most suitable for personal services or “one-off” (i.e. special or one-of-its-kind) products
 The product meets exact requirements of the customer
 The workers often have more than one tasks – increases motivation and greater satisfaction
 It is flexible and often used for high-quality goods and services meaning that a higher price could be charged

Disadvantages

 Skilled labour is often used, and cost are higher as Job Production is labour-intensive
 Production often takes longer time
 The products are made to order (as per demands) therefore, errors can be expensive to correct
 Materials may have to be specially purchased - leading to higher costs

Batch Production
It is where a quantity (batch) of one product is made, then a quantity of another item will be produced. This is where similar products are
made in block or batches. A certain amount of one product is made, then certain number of another product is made, and so on. (e.g.
Making batch of one type of cake, then batch of another type of cakes)

Advantages

 Flexible way of working – production can easily be changed from one product to another
 It still gives some variety to worker’s jobs
 It allows more variety to same product (e.g. different flavours of ready-meals)
 Production might not be much affected if machines break down

Disadvantages

 Can be expensive as semi-finished or finished products will need moving about

 Machines have to be reset between production batches – delay in production and loss in output
 Warehouse space will be needed for stocks or raw materials and components – Costly.

Flow/Mass Production
It is where large quantities of a product area produced in a continuous process . Products are flowing down continuously on the production
line. The basic ingredients are put together t one end of the production line and then the Production moves down and more parts area
added, and so on, until product is finished, packed and ready for sale.
 Advantages

 High and output of standardised (i.e. identical) products

 Lower costs – Lower prices – Higher Sales
 It (i.e. Capital-intensive) is easy to be used – reducing labour costs and increasing efficiency
 Capital-intensive methods allow workers to specialise in specific tasks and therefore less relative workers and training may be required
 Production might benefit from economies of scale in purchasing (i.e. Bulk)
 Quick/Faster production
 Automated production lines can operate 24/7
 Time is saved – no need to move goods from one part to another as of Batch production

Disadvantages

 Very Boring system for workers – little job satisfaction and motivation
 Significant Storage requirements – costs of inventories of raw materials, components and finished products can be very high
 Capital costs of Setting-up of production lines can be very high
 If one machine breaks down, the whole production will have to stopped.

Factors effecting which production method to use

Nature of the product If a fairly unique product or an individual service is required, job production shall be used and if product can be mass-produced using
automated production line, then flow production will be used.
The size of the market If demand is higher and more products can be sold but in limited quantity, batch production will be used. The production will be in
limited quantity as per demands. Small or niche market’s businesses will likely use job or batch production while International market’s businesses will use
flow production
The nature of demand If there is large and steady demand for product, it becomes economic to set up production line and make continuous production
(flow production method). If there is less production, the methods could most likely be job or batch productions
The size of the business If the business is small and doesn’t have access to huge capital, then it can’t produce using automated production lines - Only large
businesses can produce on this scale. Small businesses are likely to use job or batch production methods

How Technology has changed production methods

Use of Automation, robotics and CAD/CAM
Automation is where equipment used in the factory is controlled by a computer to carry out mechanical processes e.g. spray painting. It requires only few
people for supervising machines and processes.
Mechanisation is where the production us done by machines but operated by people, for example, a printing press.
CAD (computer aided design) is computer software that draws items being designed more quickly and allow them to be viewed in 3D (all angles) instead of
drawing from all sides. It is used to design new products or re-style existing products.
CAM (computer aided manufacture) is where computers monitor production process and control machines or robots on the factory floor (i.e. modern car
production plants)
CIM (computer integrated manufacturing) is the total integration of computer aided design (CAD) and computer aided manufacturing (CAM).

Use of Electronic Payment methods and scanners

EPOS (electronic point of sale). This is used at checkouts where the operator individually scans the bar code of each product. The price and description of the
item is displayed on the checkout monitor and printed on the till receipt. The inventory level is automatically monitored as per sales of products and can be
reordered automatically
EFTPOS (electronic funds transfer t point of sale) This is where the electronic cash register id connected to retailer’s main computer and to banks over WAN. The
money will be directly debited from customer’s account after they wipe their card at till and entered PIN. A receipt will then be printed as a confirmation.

Advantages of New Technology

 Greater productivity
 Greater job satisfaction in workers – routine work done by machines
 Increased Motivation in workers and output Better work quality – training offered for use of new technology – skill requiring tasks
 Better quality goods – better production methods and better quality controls
 More accurate customer demand results – computers used for inventory monitoring
 Increased Profitability – quicker communication and reduced paper-work due to computers
 Greater available information for managers – better and quick decision making
 New products are introduced – new production methods – as per change in market and consumer’s tastes

Disadvantages of New Technology

 Unemployment rises – automation takes place of labour
 Expensive to invest in – increasing risk as there must be greater sales to cover cost of capital (i.e. machinery)
 Employees are unhappy due to change in their work routines due to technology
 Frequent changes – technology is advancing rapidly; therefore, it sooner gets outdated and needs to be replaced