Chapter – 37

Production, productivity and efficiency

Definitions
1. batch production a method that involves completing one operation at a time
on all units before performing the next.
2. capital-intensive production methods that make more use of machinery
relative to labour.
3. capital productivity the amount of output each unit of capital (e.g. one
machine) produces.
4. cell production involves producing a family of products in a small self-
contained unit (a cell) within a factory.
5. division of labour specialisation in specific tasks or skills by an individual.
6. downsizing the process of reducing capacity, usually by laying off staff.
7. efficiency producing a level of output where average cost is minimised.
8. first-mover a company that is the first to sell a new product or provide a new
service, when there are no other competing companies.
9. flow production large-scale production of a standard product, where each
operation on a unit is performed continuously one after the other, usually on
a production line.
[Link] production a method of production that involves employing all factors to
complete one unit of output at a time.
[Link] a Japanese term that means continuous improvement.
[Link]-intensive production methods that make more use of labour relative
to machinery.
[Link] productivity the amount of output each unit of labour (e.g. one
worker) produces.
[Link] production an approach to operations that focuses on the reduction of
resource use.
[Link] getting other people or businesses (subcontractors) to undertake
work that was originally done in-house, often to reduce costs.
[Link] the transformation of resources into goods or services.
[Link] the output per unit of input per time period.
[Link] in business, the production of a limited range of goods.
 [Link] using uniform resources and activities or producing a
uniform product.
WHAT IS PRODUCTION?
Production takes place when resources, such as raw materials or components, are
changed into 'products'. Land, labour, capital and enterprise, the factors of
production, are used in the production process.
JOB PRODUCTION
Job production involves the production of a single product at a time. It is used
when orders for products are small, such as 'one-offs'. Production is organised so
that one 'job' is completed at a time. There are a wide variety of goods and services
which are produced or provided using this method of production.
The workforce is usually made up of skilled workers or specialists and the
possibility of using labour-saving machinery is limited. Many businesses adopt this
method of production when they are 'starting up'.
Advantages
 Quality is high because workers are skilled
 Workers are well motivated because work is varied Products can be custom
made
 Production is easy to organise
Disadvantages
 High labour costs due to skilled workers
 Production may be slow- long lead times
 A wide range of specialist tools may be needed
 Generally an expensive method of production
BATCH PRODUCTION
Batch production may be used when demand for a firm's product or service is
regular rather than a 'one-off'. A particular operation is carried out on all products
in a batch. The batch then moves to the next operation.
A great number of products are produced using this method, particularly in
manufacturing, such as the production of components and food processing.
Advantages
 Workers are likely to specialise in one process
 Unit costs are lower because output is higher
 Production is flexible since different orders can be met
 More use of machinery is made
Disadvantages
 More complex machinery may be needed
 Careful planning and co-ordination is needed
 Less motivation because workers specialize
 If batches are small, costs will still be high
 Money may be tied up in work-in-progress
FLOW PRODUCTION
Production is organised so that different operations can be carried out, one after the
other, in a continuous sequence. It is sometimes called mass production, as it tends
to be used for the production of large numbers of standard products. Certain types
of flow production are known as continual flow production, because products such
as clothing material pass continually through a series of processes.
The main features of flow production are:
 the production of large quantities
 a simplified or standardised product
 a semi-skilled workforce, specialising in one operation only
 large amounts of machinery and equipment
 large stocks of raw materials and components.
Advantages
 Very low unit costs due to economies of scale
 Output can be produced very quickly
 Modern plant and machines can allow some flexibility
 Production speed can vary according to demand
Disadvantages
 Products may be too standardized
 Huge set-up costs before production can begin
 Worker motivation can be very low repetitive tasks
 Breaks in production can be very expensive
CELL PRODUCTION
Flow production involves mass producing a standard product on a production line.
The product undergoes a series of operations in sequence on a continuous basis
until a finished product rolls off the 'end of the line'. Cellular manufacturing or cell
production adopts a different approach and involves dividing the workplace into
'cells'. Each cell occupies an area on the factory floor and focuses on the
production of a 'product family'. A 'product family' is a group of products that
requires a sequence of similar operations.
PRODUCTIVITY
Output can be increased if productivity is raised. Productivity is the amount of
output that can be produced with a given input of resources. It is common to
measure the productivity of specific resources in a period of time. A business may
measure labour productivity - this is output per worker per period of time.
A business may be interested in the productivity of its capital. This is becoming
increasingly the case as more firms become capital intensive. A capital productivity
ratio can be calculated by dividing output by the amount of capital employed in a
given period.
FACTORS INFLUENCING PRODUCTIVITY
Over time a business wants to improve productivity if possible. This is because
costs will be lower and profit will be higher. Some of the key factors that can be
used to influence productivity are outlined below.
Specialisation and the division of labour: One feature of modern business is
specialisation. This is the production of a limited range of goods by an individual,
business, region or nation. Departments specialise in different activities, such as
marketing, production, finance, personnel and purchasing. Workers will also
specialise in certain tasks and skills. This is called the division of labour. It allows
people to concentrate on a limited range of tasks.
Education and training: The government can help improve the quality of labour by
investing in education. This might involve providing more equipment for schools
or improving the quality of teaching. Firms can also improve the productivity of
their workers by providing their own training.
Motivation of workers: If people are motivated at work they will be more
productive. Firms might use financial incentives, such as piece rates. Workers who
are not motivated by money may respond to other incentives. For example, job
rotation might be introduced. This involves an employee changing jobs from time
to time. If people are trained to do different jobs, their time at work may be more
interesting because there is more variety.
Working practices: The way labour is organised and managed can affect
productivity. Working practices are the methods and systems that employees adopt
when working.
Labour flexibility: Labour can be more flexible if workers are trained to do
different jobs and can switch from one to the other at short notice.
Capital productivity: Productivity usually increases when new technology is
introduced. This is because new technology is more efficient. Productivity is also
likely to increase if production becomes more capital intensive.
PRODUCTIVITY AND COMPETITIVENESS
If businesses can raise productivity they will be able to produce more output with
the same level of resources. This will mean that costs will be lower and they can
charge lower prices than rivals. This makes businesses more competitive in the
marketplace. As a result they are likely to win more customers, increase market
share and possibly threaten the survival of their rivals.
If businesses in a particular country can be more productive then they may become
more competitive in overseas markets. This will help to boost the nation's exports
and improve the performance of the nation's economy. This could help increase the
standard of living in the country. However, improving productivity may not be
enough to compete with overseas rivals. Other factors have to be taken into
account.
WAYS TO IMPROVE PRODUCTIVITY
A business might use a number of approaches to improving labour productivity.
 Increase specialisation. If workers become more specialised their
performance is likely to improve and their output per day, for example, will
increase. A business might reorganise working practices so that people can
specialise more effectively.
 Improve motivation. Some financial methods include the introduction of
piece rates, performance-related pay, profit-related pay and bonuses. Non-
financial methods of worker motivation, such as job enrichment, improving
the working environment, empowerment, delegation and team working,
might be introduced by a business.
 Improve training. Although training employees can be very expensive,
investment in the right sort of training can help to improve productivity and
also increase staff motivation. One area where more training might improve
productivity in some countries is training in customer service. Customer
service training is an area that might be overlooked by businesses. However,
retaining current customers is a far cheaper that trying to attract new ones.
Therefore, some specialist cu`stomer service training might generate a
number of benefits including customer retention, fewer complaints and
happier customer-facing employees.
 Increase labour flexibility. One way of making workers more flexible is by
introducing job rotation.
 Improve service and maintenance. Machinery and other expensive
equipment will be more productive if it is serviced regularly and maintained
effectively. It is easy for businesses to overlook the importance of regular
servicing and thorough maintenance. This might be because machines seem
to work well until they breakdown. However, with regular servicing and
maintenance machinery is much less likely to breakdown and more likely to
operate efficiently - using less fuel, for example. Machinery breakdowns can
be very expensive since production might be completely stopped for a period
of time.
EFFICIENCY
Efficiency is about making the best possible use of all a business's resources. A
business will want to use its materials, labour and capital as effectively as possible.
Businesses often use costs as a measure of efficiency. Production is said to be
efficient if average costs are minimised.
FACTORS INFLUENCING EFFICIENCY AND HOW IT MIGHT BE
IMPROVED
The efficiency of businesses can be influenced by a very wide range of factors. If a
business can reduce average costs, efficiency will improve. Some of the measures
that a business might use to reduce costs are outlined below.
Introducing standardisation: Standardisation involves using uniform resources and
activities or producing a uniform product. It can be applied to tools, components,
equipment, procedures and documents.
Outsourcing: It may be possible to improve efficiency by outsourcing specific
business activities. This means that work currently done by a business is given to
specialists outside the business that can do the same work at a lower cost or more
flexibly.
Relocating: Moving the entire business to a new site is a drastic measure, but can
result in much lower costs. By relocating, businesses might enjoy lower rents,
lower wages and better transport links.
Downsizing: Downsizing involves reducing capacity, i.e. laying off workers and
closing unprofitable divisions.
The advantages of this for businesses can include:
 cost savings and increased profit
 a more focused and competitive operation
 removal of unprofitable or inefficient parts of a business
 profitable businesses no longer subsidising unprofitable ones.
Delayering: Delayering also involves reducing staff. Cuts are directed at particular
levels of a business, such as managerial posts. Many traditional organisational
charts are hierarchical, with several layers of management. Delayering involves
removing some of these layers to give a flatter structure.
Investing in new technology: New technology can often improve efficiency. New
machinery may be quicker, more accurate, be capable of more tasks, and carry out
work in more extreme conditions than older equipment or labour. Many machines
are controlled by computers and can undertake very complex tasks. The use of
information. and communications technology has helped most businesses improve
efficiency.
Lean production: Lean production is an approach developed by Toyota, the
Japanese car manufacturer. Its aim is to use fewer resources in production. Lean
producers use less of everything. This includes factory space, materials, stocks,
suppliers, labour, capital and time. As a result, lean production:
 raises productivity
 reduces costs and cuts lead times
 reduces the number of faulty products
 improves reliability and speeds up product design.
Lean production involves using a range of practices designed to reduce waste and
improve productivity and quality.
Kaizen: There is a strong link between kaizen and lean production. Kaizen is a
Japanese word that means continuous improvement. There is a belief in Japan that
everything can be improved. This means that workers are always coming up with
ideas to improve quality, reduce waste or increase efficiency. The individual
improvements may be very small, but over a long period of time they can have a
huge impact.
Just-in-time production (JIT): This involves minimising or eliminating the amount
of stock held by a business. It reduces all of the costs associated with stock
holding.
DISTINCTION BETWEEN LABOUR AND CAPITAL INTENSIVE
PRODUCTION
One of the most important production decisions that operations managers have to
make is what combination of capital and labour to use. Labour-intensive
production techniques involve using a larger proportion of labour than capital.
Capital-intensive production techniques involve employing more machinery
relative to labour.
Capital-intensive strategies
Benefits
 Generally more cost effective if large quantities are produced
 Machinery is often more precise and reliable
 Machinery can operate 24/7
 Machinery is easier to manage than people
Drawbacks
 Huge set-up costs
 Huge delays and costs if machinery breaks down
 Can be inflexible much machinery is highly specialised
 Often poses a threat to the workforce and could reduce motivation
Labour-intensive strategies
Benefits
 Generally more flexible than capital - can be retrained for example
 Cheaper for small-scale production
 Cheaper for large-scale production in countries like China and India
 People are creative and can therefore solve problems and make
improvements
Drawbacks
 People are more difficult to manage than machines. They have feelings and
react
 People can be unreliable. They may be sick or leave suddenly
 People cannot work without breaks and holidays
 People sometimes need to be motivated to improve performance

COMPETITIVE ADVANTAGE FROM SHORT PRODUCT LEAD-IN TIMES

Businesses can gain a competitive advantage if they can reduce the amount of time
it takes to develop and launch new products. Being the first into the market means
they can exploit what may be called 'first-mover' advantages. First-movers:
 can make a lasting impression on customers, which can result in improved
brand recognition and lasting brand loyalty
 may charge premium prices by exploiting early- adopters in the market
 have more time to develop their production processes to help perfect their
products or services
 may be able to control resources in the industry, for example, they may win
exclusive contracts with key suppliers or important human resources
 may enjoy a strategic advantage if it is expensive for customers to switch
products at a later date