SECTION 4: OPERATIONS MANAGEMENT
CHAPTER 15: PRODUCTION OF GOODS AND SERVICES
What is production?
It is a process of converting inputs such as land, labour and capital into saleable goods for
example shoes and cell phones.
Managing resources to produce goods and services
The production process
Operations management involves managing business resources – known as input – throughout
the production process so as to produce finished goods, services and components – known as
output – that can be sold to other businesses or customers.
For example, a baker (labour) will take ingredients such as flour and water to his kitchen (land)
and use mixes and ovens (capital) to make bread (the output), which he sells in his shops to
customers.
Operations management must:
Use resources in the most cost-effective way
Produce the required output to meet consumer demand
Meet the quality standard expected by consumers.
Differences between production and productivity:
Production – involves changing inputs into outputs. It can be measured by the number of
units produced in a given period of time.
Productivity – is a measure of how efficiently the inputs are changed into output, which is the
number of units of output produced for every unit of product.
The labour productivity is measured as follows:
𝑻𝒐𝒕𝒂𝒍 𝒐𝒖𝒕𝒑𝒖𝒕
𝑳𝒂𝒃𝒐𝒖𝒓 𝒑𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒗𝒊𝒕𝒚 =
𝑵𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝒆𝒎𝒑𝒍𝒐𝒚𝒆𝒆𝒔
How to improve labour productivity:
Increasing output with the same number of employees.
Keeping output at the same level but with fewer employees.
Improving the skill level of employees
Improving the motivation of employees
Introducing more automation and more or better technology
Improving the quality of management decisions.
However, all of the ways of improving productivity will add to a business’s costs, such as:
The cost of training programmes
Introducing schemes to motivate employees
Purchasing new machinery
Why businesses hold inventories
Businesses hold inventories of:
Raw materials and components
Work-in-progress, that is, semi-finished goods for which production have not yet
completed.
Finished goods
Inventories holding costs:
Warehousing costs – businesses will need to rent or purchase a warehouse to store the
inventories.
Handling costs – inventories need to be moved in and out of the warehouse.
Shrinkage costs – damaged, lost or stolen inventories
Insurance costs – to cover the cost of the losses from shrinkage.
Obsolescence – the business may not be able to sell out-of-date goods.
Opportunity cost – working capital is tied-up in inventories which could be used more
profitably by the business.
Why is it important to hold inventories?
Materials or components will be need to be available at all times to complete the
production. Otherwise, employees and machinery will stand idle and there will be loss
of output.
If businesses do not have finished goods to meet customers’ demand, they might lose
potential customers and future sales, thus affecting the profitability of the business.
To benefit from economies of scale when buying in bulk.
Therefore, businesses have to balance the cost of holding inventories with the cost of not
holding inventories in order to minimise inventory costs.
Lean production
It is the production of goods and services with the minimum waste of resources.
Lean production aims to lower the cost of production by reducing waste to a minimum while
maintaining, or even improving the quality of the finished products.
The main sources of waste in a business are caused by:
Production defects
High inventories
Over production
Idle resources
Transporting goods
These waste increases the business’s cost which will reduce its competitiveness and
profitability.
Benefits of lean production techniques such as just-in-time inventory management and Kaizen
(continuous improvement) will bring the following benefits:
New products can be brought to the market more quickly.
Quality is improved.
Waste of time and resources is reduced or eliminated.
The costs of holding inventories are eliminated.
Unit costs are reduced, which will increase the profits made on each unit sold or enable
a business to reduce its prices and be more competitive. This will increase sales,
revenue and profits.
JUST-IN-TIME (JIT) inventory control
• This method of inventory control implies that no inventories are held by the business.
• Raw materials are obtained from suppliers as and when required by the business.
• Finished goods are delivered to customers as soon as they completed.
• JIT remove the costs of holding inventories by the business.
To be able to implement JIT:
o Businesses must have an excellent relationship and good communication with
suppliers.
o Raw materials and components have to be delivered on time and be of the required
quality and quantity.
o Both workers and materials must be flexible, that is, they must be able to switch from
one product to another.
Kaizen
Kaizen is a Japanese term meaning ‘continuous improvement’.
This approach gives all workers the opportunity to make suggestions on how to improve the
quality and productivity.
Because workers are doing the tasks every day, they know the job better than managers and
thus they may suggest better ways on how to be more efficient.
The main methods of production
The production of goods and services are usually produced by the following methods:
Job production
Batch production
Flow production
1. Job production
It refers to the production of items one at a time.
This method is usually used for the production of single or unique items, such as, ship or
designer dress. wedding dress, wedding rings, wedding cakes, architech
It usually needs highly skilled workers and specialised equipment.
Benefits of job production
o Unique, high quality products are made.
o Workers are often more motivated and take pride in their work.
Limitations of job production
o Uses skilled labour rather than machinery, so selling prices are usually higher.
o Production can take a long time and can be expensive, for example if special materials
or tools are required. leading to higher average cost
o Economies of scale are not possible, often resulting in a more expensive product.
2. Batch production
It refers to the production of goods in batches.
Each batch passes through one stage of production before moving onto the next stage.
A good example of batch production is the making of bread in a bakery.
batch
Benefits of job production
o Since larger numbers are made, unit costs are lower. as there is E.O.S
o Offers the customer some variety and choice.
o Materials can be bought in bulk, so they are cheaper.
batch
Limitations of job production
o Workers are often less motivated because the work becomes repetitive.
o Goods have to stored until they are sold, which is expensive.
3. Flow production/mass production
It refers to the production of very large quantities of identical goods using a continuously
moving process.
At each stage of production additional features are added until the product its finished state.
This type of production is used where a large output of identical, standardised products is
required, to meet high consumer demand, for example, bars of chocolate.
Main features of flow production:
o Large quantities are produced
o Standardised products
o Workers are relatively unskilled
o High degree of automation
o Large inventories of raw materials and work in progress
Factors in choosing the method of production
• The amounts they are likely to sell
• The product they are making
• The costs of production
• The variety of goods expected by customers
• The size of the market
• The type of good being made
How technology has changed production methods
• The use of computers in design has enabled businesses to develop products much more
quickly than in the past.
• The developments in technology are:
o Computer-aided design (CAD)
o Computer-aided manufacturing (CAM)
o Computer-integrated manufacturing (CIM)
• Products can be designed and displayed in three dimensions (3D).
• Special computer software can be used to test different features of the product’s design, for
example, checking the safety of products.
• Computer technology has enabled businesses to design and test products without spending
a lot of money. They do not have to build and rebuild the prototypes until they attain their
ideal products.
• The development of 3D printers is the latest technology to aid the production process.
These printers have been used to produce prototypes, but are now used to produce finished
products in materials such as materials, plastic and rubber.
• When using CAM, computers control the machinery and equipment used in the production
process. Manufacturing is more capital intensive, reducing the need for labour and thus
reducing production costs.
• Technology has changed the way goods are manufactured and also influenced the provision
of services.
o Many large electrical items, such as washing machine and televisions, have built-
in technologies that diagnose faults.
o Banking services such as cash deposits, withdrawals and moving money can be
done with the aid of computers.
o Many retailers use electronic funds transfer at the point of sale (EFTOS) to enable
customers to buy goods using debit or credit cards instead of paying by cash.
o Electronic Point of Sale (EPOS) system are used in supermarkets to calculate the
amount purchased by consumers as well as to manage inventory levels of each item.
Advantages and Disadvantages to business, employees and consumers