Module 3

PRODUCTION OF GOODS AND SERVICES

Learning Outcome
1. Discuss the definition of Production
2. Discuss the definition of Productivity
3. Discuss the ways to improve productivity
4. Discuss the benefits of increasing efficiency/productivity
5. Discuss the why do businesses hold stock?
6. Discuss the lean Production
7. Discuss the types of wastage that can occur in a firm
8. Discuss the factors that affect which production method to use
9. Discuss the technology and Production
10. Discuss the advantages and disadvantages of technology in production
11. Discuss the types of Production
Learning Content
1. Definition of Production
2. Definition of Productivity
3. Ways to improve productivity
4. Benefits of increasing efficiency/productivity
5. Why do businesses hold stock?
6. Lean Production
7. Types of wastage that can occur in a firm
8. Factors that affect which production method to use
9. Technology and Production
10. Advantages and Disadvantages of technology in production
11. Types of Production

Production is the effective management of resources in producing goods and services. Production is the provision of
a product or service to satisfy consumer’s wants and needs. The process involves adding value to a product or raw
material.

The operations department in a firm overlooks the production process. They must:
1. Use the resources in a cost-effective and efficient manner.
2. Manage inventory effectively.
3. Produce the required output to meet customer demands.
4. Meet the quality standards expected by customers.
Productivity measures how efficient a business has produced in relation to its resources.

The formula is: Productivity = Output / Input.

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.

Businesses seeks to measure to the productivity of one of the factors of production or inputs which is usually Labour,
this enable a business to compare its level of production with that of competitors who have different resources
available to them. It is measured by:

Output (the amount of production) / Number of employees

Ways to improve productivity

 Effective management: A good manager motivates his workers and ensures that resources are used
effectively.
 Improving Skills: With proper and improved skills, wastage will be reduced.
 Improving Employee motivation: A motivated worker will definitely improve output produced which
will increase business productivity.
 Using Automation: getting technology to automate process improves efficiency as newer technology
makes the process faster.

Benefits of increasing efficiency/productivity

 Lower cost per unit
 Less employees needed (reduce labor 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
 Risk of wastage
 Shelf life (items may reach best before date before being sold)
 Opportunity cost

Not enough stock

 Lost Sales
 Idle production process
 Special orders could be expensive

Depletion of stocks as a result of usage or sales is represented by the sloping lines. The rate of depletion can be
identified from the gradient of the lines. The steeper the gradient, the faster the depletion. When stocks fall to the
reorder level, a new batch is ordered. But there is a gap between the order being made and the delivery of supplies,
this time gap is known as the lead time. The gap between the minimum stock level and the zero stock level is known
as buffer stock.

The following decision need to be taken when managing the stock levels through a stock control chart:

 The size of the buffer stock

 The maximum level of stock to be held
 The reorder quantity
 The reorder level
Lean Production
Lean production refers to the various techniques a firm can adopt to reduce wastage and increase
efficiency/productivity.
The seven types of wastage that can occur in a firm:
1. Overproduction– producing goods before they have been ordered by customers. This results in too much
output and so high inventory costs.
2. Waiting– when goods are not being moved or processed in any way, then waste is occurring.
3. Transportation-moving goods around unnecessarily is simply wasting time. They also risk damage during
movement.
4. Unnecessary inventory-too much inventory takes up valuable space and incurs cost.
5. Motion-unnecessary moving about of employees and operation of machinery is a waste of time and cost
respectively.
6. Over-processing-using complex machinery and equipment to perform simple tasks may be unnecessary and
is a waste of time, effort and money.
7. Defects– any fault in equipment can halt production and waste valuable time. Goods can also turn out to be
faulty and need to be fixed- taking up more money and time.
By avoiding such wastage, a firm can benefit in many ways:
1. Less storage of raw materials, components and finished goods- less money and time tied up in inventory.
2. Quicker production of goods and services.
3. No need to repair faulty goods- leads to good customer satisfaction.
4. Ultimately, costs will lower, which helps reduce prices, making the business more competitive and earn
higher profits as well.
3 Common lean production techniques

A-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.

Benefits:
1. Increased productivity
2. Reduced amount of space needed for production
3. Improved factory layout may allow some jobs to be combined, so freeing up employees to do other jobs in the
factory
B-Just-in-Time inventory control: this techniques eliminates the need to hold any kind of inventory by ensuring that
supplies arrive just in time they are needed for production. The making of any parts is done just in time to be used in
the next stage of production and finished goods are made just in time they are needed for delivery to the
customer/shop. The firm will need very reliable suppliers and an efficient system for reordering supplies.
Benefits:
1. Reduces cost of holding inventory.
2. Warehouse space is not needed any more, so more space is available for other uses.
3. Finished goods are immediately sold off, so cash flows in quickly.
C-Cell Production: the production line is divided into separate, self-contained units each making a part of the
finished good. This works because it improves worker morale when they are put into teams and concentrate on one
part alone.
Methods of Production
1. Job Production: products are made specifically to order, customized for each customer. Eg: wedding cakes,
made-to-measure suits, films etc.

Advantages:
 Most suitable for one-off products and personal services.
 The product meets the exact requirement of the customer.
 Workers will have more varied jobs as each order is different, improving morale
very flexible method of production.
Disadvantages:

 Skilled labor will often be required which is expensive.

 Costs are higher for job production firms because they are usually labor-intensive.
 Production often takes a long time.
 Since they are made to order, any errors may be expensive to fix.
 Materials may have to be specially purchased for different orders, which is expensive.

2. Batch Production: similar products are made in batches or blocks. A small quantity of one product is made,
then a small quantity of another. Eg: cookies, building houses of the same design etc.
Advantages:

 Flexible way of working- production can be easily switched between products.

 Gives some variety to workers.
 More variety means more consumer choice.
 Even if one product’s machinery breaks down, other products can still be made.
Disadvantages:

 Can be expensive since finished and semi-finished goods will need moving about.
 Machines have to be reset between production batches which delays production.
 Lots of raw materials will be needed for different product batches, which can be expensive.

3. Flow Production: large quantities of products are produced in a continuous process on the production line.
Eg: a soft drinks factory.
Advantages:
 There is a high output of standardized (identical) products.
 Costs are low in the long run and so prices can be kept low.
 Can benefit from economies of scale in purchasing.
 Automated production lines can run 24×7.
 Goods are produced quickly and cheaply.
 Capital-intensive production, so reduced labor costs and increases efficiency.
Disadvantages:

 A very boring system for the workers, leads to low job satisfaction and motivation.
 Lots of raw materials and finished goods need to be held in inventory- this is expensive.
 Capital cost of setting up the flow line is very high.
 If one machinery breaks down, entire production will be affected.
Factors that affect which production method to use:
1. The nature of the product: Whether it is a personal, customized-to-order product, in which case job
production will be used. If it is a standard product, then flow production will be used.
2. The size of the market: For a large market, flow production will be required. Small local and niche markets
may make use of batch and flow production. Goods that are highly demanded but not in very large quantities,
batch production is most suitable.
 3. The nature of demand: If there is a fair and steady demand for the product, it would be more suitable to run
a production line for the product. For less frequent demand, batch and job will be appropriate.
4. The size of the business: Small firms with little capital access will not produce using large automated
production lines, but will use batch and job production.
Technology and Production
1. Automation: equipment used in the factory is controlled by computers to carry out mechanical processes,
such as spray painting a car body.
2. Mechanization: production is done by machines but is operated by people.
3. CAD (computer aided designing): a computer software that draws items being designed more quickly and
allows them to be rotated, zoomed in and viewed from all angles.
4. CAM (computer aided manufacturing): computers monitor the production process and controls machines and
robots-similar to automation.
5. CIM (computer integrated manufacturing): the integration of CAD and CAM. The computers that design the
product using CAD is connected to the CAM software to directly produce the physical design.
6. EPOS (electronic point-of-sale): used at checkouts/tills where operator scans the bar-code of each item
bought by the customer individually. The item details and price appear on screen and are printed in the
receipt. They can also automatically update and reorder stock as items are bought.
7. EFTPOS (electronic funds transfer at point-of-sale): the electronic cash register at the till will be connected to
the retailer’s main computer and different banks. When the customer swipes the debit card at the till,
information is read by the scanner and an amount is withdrawn from the customer’s bank account (after the
PIN is entered).
Advantages of technology in production
1. Greater productivity.
2. Greater job satisfaction among workers as boring, routine jobs are done by machines.
3. Better quality products.
4. Quicker communication and less paperwork.
5. More accurate demand levels are forecast since computer monitor inventory levels.
6. New products can be introduced as new production methods are introduced.
Disadvantages of technology in production
1. Unemployment rises as machines and computers replace human labor.
2. Expensive to set up.
3. New technology quickly becomes outdated and frequent updating of systems will be needed- this is expensive
and time-consuming.
4. Employees may take time to adjust to new technology or even resist it as their work practices change.

Three Types of Production

1. Primary Production:
Primary production is carried out by ‘extractive’ industries like agriculture, forestry, fishing, mining and oil
extraction. These industries are engaged in such activities as extracting the gifts of Nature from the earth’s surface,
from beneath the earth’s surface and from the oceans.

2. Secondary Production:
This includes production in manufacturing industry, viz., turning out semi-finished and finished goods from raw
materials and intermediate goods— conversion of flour into bread or iron ore into finished steel. They are generally
described as manufacturing and construction industries, such as the manufacture of cars, furnishing, clothing and
chemicals, as also engineering and building.

3. Tertiary Production:
Industries in the tertiary sector produce all those services which enable the finished goods to be put in the hands of
consumers. In fact, these services are supplied to the firms in all types of industry and directly to consumers.
Examples cover distributive traders, banking, insurance, transport and communications. Government services, such as
law, administration, education, health and defence, are also included.