Production of goods and services

Chapter - 18
This chapter will explain:
• the meaning of production – managing resources effectively to produce goods and services
• the difference between production and productivity
• the benefits of increasing efficiency and how to increase it, for example, increasing productivity
by automation and technology, improved labour skills
• why businesses hold inventories
• the concept of lean production; how to achieve it, for example, justin-time inventory control and
Kaizen; benefits of lean production
• the main methods of production: the features, benefits and limitations of job, batch and flow
production
• how to recommend and justify an appropriate production method for a given situation
• how technology is changing production methods, e.g. using computers in design and
manufacturing
Meaning of Production

Production refers to the process of transforming inputs (resources such as raw

materials, labour, and capital) into finished goods or services that can satisfy
consumer needs. It's not limited to manufacturing – it also includes service
delivery.

Key focus: Managing resources efficiently to create value.

For a business to be competitive it should combine these inputs of resources
efficiently so that it makes the best use of resources at its disposal to keep costs
low and increase profits.

In a developing country, where wages are low, it may be more efficient to use many
workers and few machines to produce goods – this production process is called
‘labour-intensive’.

However, in developed countries where labour costs are high, production is often
‘capital-intensive’, where businesses use machines/robots and employ few
workers.
Operations department
The role of the Operations department in a business is to take inputs and change
them into outputs for customer use. Inputs can be physical goods or services. The
Operations Manager is responsible for making sure that raw materials are
provided and made into finished goods or services.
A typical manufacturing business will have:
• a Factory Manager who will be responsible for the quantity and quality of
products coming off a production line; this will include the maintenance of the
production line and other necessary repairs
• a Purchasing Manager who will be responsible for providing the materials,
components and equipment required for the production
• a Research and Development Manager who will be responsible for the design
and testing of new production processes and products.
Difference Between Production and Productivity

Production - Total quantity of output produced by a business (e.g., 1000 units of

shoes per week).

Productivity - A measure of efficiency – it shows how much output is produced

per unit of input (e.g., output per worker or per machine). It is usually expressed
as:

Productivity = Output / Input

Ways to increase productivity and efficiency

There are a number of ways to increase productivity and efficiency. These include:

• Improve quality of the product and inventory control to reduce waste.

• Replace employees with machines – automation.

• Improve training to increase employee efficiency.

• Motivate employees more effectively.

• Introduce new technology.

• Use more automation.

Benefits of Increasing Efficiency

Efficiency means using fewer resources to produce the same output, or more
output with the same resources. Benefits include:

Lower unit costs

Higher profits

Competitive pricing

Less waste

Greater capacity without increasing resources

How to Increase Efficiency

a) Automation and Technology

Using robots, automated machinery, and AI systems reduces the need for manual
labour.
Technologies like CAD (Computer-Aided Design) and CAM (Computer-Aided
Manufacturing) increase accuracy and reduce time.
b) Improved Labour Skills
Training workers helps them become more competent and faster.
Skilled workers make fewer mistakes and can handle multiple tasks.
Why Businesses Hold Inventories

Inventories (or stocks) refer to:

Raw materials – needed for production

Work-in-progress (WIP) – semi-finished goods

Finished goods – ready for sale

Reasons for holding inventory:

To meet unexpected demand

To allow production to continue if suppliers delay

To take advantage of bulk buying discounts

To maintain a buffer in case of disruptions

However, too much inventory ties up cash and increases storage costs.
Formula to calculate the Reorder Time (also called Reorder Point) for inventory:

Reorder Point=(Average Daily Usage×Lead Time)+Buffer Stock

✅ Where:

Average Daily Usage = Units used per day

Lead Time = Days between placing and receiving the order

Buffer Stock = Extra stock kept for emergencies or delays

📘 Example Problem:
Problem:
A company that sells smartphones uses 50 units per day. It takes 7 days to restock
inventory after placing an order. They want to keep a buffer stock of 200 units to
avoid stockouts.

Question: When should the company reorder?

🧮 Solution:
Using the formula:

Reorder Point=(50×7)+200=350+200=550 units

✅ So, the company should place a new order when inventory reaches 550 units.
Practice Question:

A bookstore sells 30 books per day. The lead time to receive new stock is 5 days.
The manager keeps a buffer stock of 100 books to avoid running out.

Question:

🔹 Calculate the reorder point.

🔹 At what inventory level should the bookstore place a new order?

Lean Production
Lean production is a strategy that focuses on minimising waste while maximising
productivity and efficiency.

Key features of lean production:

Just-in-Time (JIT): Inventory is ordered and received just before it is needed in

production.

✔ Reduces storage costs

❌ Risk if suppliers are unreliable

Kaizen: Continuous improvement through small, regular changes made by all
employees.

✔ Increases worker involvement and innovation

❌ Requires commitment from all levels

Cell production, TQM (Total Quality Management), and time-based management

are also part of lean approaches.
Lean production

Lean production covers a variety of techniques used by businesses to cut down on

waste of resources, including time, and therefore increase efficiency.

It aims to reduce the time it takes for a product to be developed and become
available in the shops for sale.

Lean production cuts out any activities which do not add value for the customer
and this can apply to services as well.
There are seven types of waste that can occur in production:

• Overproduction

• Waiting

• Transportation

• Unnecessary inventory

• Motion

• Over-processing

• Defects
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 for 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
Lean production can be achieved by using the
following methods:
• Kaizen
• just-in-time inventory control
• cell production.
Kaizen
Kaizen means ‘continuous improvement’ in Japanese and its focus is on the
elimination of waste.
The improvement does not come from investing in new technology or equipment
but through the ideas of the workers themselves.
Small groups of workers meet regularly to discuss problems and possible
solutions.
This has proved effective because no one knows the problems that exist better
than the workers who work with them all the time, so they are often the best ones
to think of ways to overcome them
The advantages of Kaizen

• increased productivity

• reduced amount of space needed for the production process

• work-in-progress is reduced

• improved layout of the factory floor may allow some jobs to be

combined, thereby freeing up employees to carry out some other

job in the factory.

Just-in-time inventory control

Just-in-time or JIT is a production method which focuses on reducing or virtually

eliminating the need to hold inventories of raw materials or components and on
reducing work-in-progress and inventories of the finished product.

The raw materials or components are delivered just in time to be used in the
production process, the making of any parts is undertaken just in time to be used
in the next stage of production and the finished product is made just in time to be
delivered to the customer.
• All this reduces the costs of holding inventory, as no raw materials and
components are ordered to keep in the warehouse just in case they are needed.

• Warehouse space is not needed, again reducing costs.

• The finished product is sold quickly and so money will come back to the
business more quickly, helping its cash flow.

To operate just-in-time, inventories of raw materials, work-in-progress and finished

products are run down and no extra inventory is kept.

The business therefore needs very reliable suppliers and an efficient system of
ordering raw materials or components.
Cell production

Cell production is where the production line is divided into separate,

self-contained units (cells), each making an identifiable part of the
finished product, instead of having a flow or mass production line.
This method of production improves the morale of the employees and
makes them work harder so they become more efficient.
The employees feel more valued and are less likely to strike or cause
disruption.
Methods of production

• job production
• batch production
• flow production.
 Method Features Benefits Limitations

Job One-off, unique items (e.g., custom drones) High quality, Time-consuming,
Production
customisation high costs

Batch Groups of products made together (e.g., 500 Economies of scale, Downtime when
Production
blue drones, then 500 red) more variety switching batches

Flow Continuous production line (e.g., cars) Low unit costs, high High initial costs, low
Production
efficiency flexibility
Job production

This is where products are made specifically to order, for example, a customer
would order a particular dish and Tara would make it. Each order is different, and
may or may not be repeated.

Other examples include: specialist machinery manufacturers that will produce a

machine for another business to meet a particular specification,

bridges, ships, made-to-measure suits, cinema films, or individual computer

programs that perform specialised tasks.
Advantages of job production

• It is most suitable for personal services or ‘one-off’ products.

• The product meets the exact requirements of the customer.
• The workers often have more varied jobs (they don’t carry out just
one task).
• More varied work increases employee motivation – giving them
greater job satisfaction.
• It is flexible and often used for high-quality goods and services,
meaning that a higher price can be charged.
Disadvantages of job production

• Skilled labour is often used and this raises costs.

• The costs are higher because it is often labour intensive.

• Production often takes a long time.

• Products are specially made to order and so any errors can be expensive to
correct.

• Materials may have to be specially purchased, leading to higher costs.

Batch production
This is where similar products are made in blocks or batches. A certain number of
one product is made, then a certain number of another product is made, and so
on.

Tara made a batch of one type of dish and then made a batch of another type of
dish, and so on.

Other examples include: a small bakery making batches of bread, several houses
built together using the same design, furniture production (a certain number of
tables are made, then a certain number of chairs), or clothing (a batch of a
particular size of jeans is produced and then a batch of another size).
Advantages of batch production

• It is a flexible way of working and production can easily be changed

from one product to another.
• It still gives some variety to workers’ jobs.
• It allows more variety to products which would otherwise be
identical. This gives more consumer choice (for example, different
flavours of ready-meals).
• Production may not be affected to any great extent if machinery
breaks down.
Disadvantages of batch production

• It can be expensive as semi-finished products will need moving

about to the next production stage.

• Machines have to be reset between production batches which

means there is a delay in production and output is lost.

• Warehouse space will be needed for inventories of raw materials,

components and finished batches of goods. This is costly.

Flow production
This is when large quantities of a product are produced in a continuous process. It
is sometimes referred to as mass production because of the large quantity of a
standardised product that is produced.

It is called flow production because products look as if they are flowing down the
production line (they move continuously along a production line).

The basic ingredients are put together at one end of the production line and then
the product moves down and more parts are added, and so on, until the product is
finished and packaged ready for sale.

Large numbers of identical products are made and the costs of production are low
(the business will gain from economies of scale).
Advantages of flow production

• There is a high output of a standardised product.

• Costs of making each item are kept low and therefore prices are also lower.

• It is easy for capital-intensive production methods to be used – reducing labour

costs and increasing efficiency.

• Capital-intensive methods allow workers to specialise in specific, repeated tasks

and therefore the business may require only relatively unskilled workers – little
training may be needed.
• It may benefit from economies of scale in purchasing.

• Low average costs and therefore low prices usually mean high

sales.

• Automated production lines can operate 24 hours a day.

• There is no need to move goods from one part of the factory to

another as with batch production, so time is saved.

Disadvantages of flow production

• It is a very boring system for the workers, so there is little job satisfaction,
leading to a lack of motivation for employees.

• There are significant storage requirements – costs of inventories of raw

materials/components and finished products can be very high unless just-in-time
systems are used.

• The capital costs of setting up the production line can be very high.

• If one machine breaks down the whole production line will have to be halted.
Factors affecting which method of production to use

• The nature of the product.

• The size of the market.

• The nature of demand.

• The size of the business.

How technology has changed production methods

Technological advances have allowed the mechanisation and automation of

production methods in many industries.

For example,

the car industry is almost entirely automated. The use of automation, robotics and
CAD/CAM keeps businesses ahead of the competition, keeps costs falling,
reduces prices and improves the products manufactured.
• Automation is where the equipment used in the factory is controlled by a
computer to carry out mechanical processes, such as paints praying on a car
assembly line.

The production line will consist mainly of machines and only a few people will be
needed to ensure that everything proceeds smoothly.

• Mechanisation is where the production is done by machines but operated by

people, for example, a printing press.

Robots are machines that are programmed to do tasks, and are particularly useful
for unpleasant, dangerous and difficult jobs. They are quick, very accurate and
work non-stop, 24 hours a day.
• CAD (computer-aided design) is computer software that draws items being
designed more quickly and allows them to be rotated to see the item from all
sides instead of having to draw it several times.

It is used to design new products or to re-style existing products. It is particularly

useful for detailed technical drawings.

• CAM (computer-aided manufacture) is where computers monitor the production

process and control machines or robots on the factory floor.

For example, on the production line of a car plant computers will control the
robots that spot-weld the car body together or the robots that spray paint the car.
• CIM (computer-integrated manufacturing) is the total integration of
computer-aided design (CAD) and computer-aided manufacturing (CAM).

The computers that design the products are linked directly to the computers that
aid the manufacturing process.
Technology has also improved productivity in shops with electronic payment
methods and scanners at the tills.

• EPOS (electronic point of sale). This is used at checkouts where the operator
scans the barcode of each item individually.

The price and description of the item is displayed on the checkout monitor and
printed on the till receipt.

The inventory record is automatically changed to show one item has been sold
and if inventory is low (at the reorder point) then more inventory can be
automatically ordered.
• EFTPOS (electronic funds transfer at point of sale). This is where the electronic
cash register is connected to the retailer’s main computer and also to banks over a
wide area computer network.

The shopper’s card will be swiped at the till and the bank information will
automatically be read from the card. The money will be directly debited from the
customer’s account after they have signed for the debit to be made or have
entered their PIN (personal identification number).

A receipt will be printed as confirmation that the payment has gone out of the
customer’s account.
• Contactless payment is increasingly being used in many countries. It is a fast,
easy and secure way to pay for purchases that are less than a small amount, for
example, in the UK this is £30 or less.

Sometimes larger transactions can be made but then a passcode, fingerprint or

some other way is used to ensure this is a correct transaction. Pre-paid, debit,
charge and credit cards, key fobs, wearable devices such as watches and
wristbands, and mobile devices, such as smartphones and tablets, can be used to
make contactless payments.
The advantages of new technology

• Productivity is greater as new, more efficient production methods are used,

reducing average costs.

• Greater job satisfaction stimulates workers, as routine and boring jobs are now
done by machines.

• More skilled workers may be needed to use and maintain the new technology.
Businesses must offer training to existing workers in the use of new technology.
The workers may become more motivated and therefore improve the quality of
their work.
• Better quality products are produced owing to more accurate production
methods.

• Quicker communication and reduced paperwork, owing to computers, lead to

increased profitability.

• The information that is available to managers through the use of IT is much

greater and this should result in better and quicker decision making.

• New ‘high tech’ products are introduced as new technology makes completely
new products available.
The disadvantages of new technology

• Unemployment could rise as machines/computers replace people on the factory

floor and in offices.
• It is expensive to invest in new technology products and machinery. This
increases the risks as large quantities of products need to be sold to cover the
cost of purchasing the equipment.
• Employees may be unhappy with the changes in their work practices when new
technology is introduced.
• New technology is changing all the time and will often become outdated quite
quickly and need to be replaced if the business is to remain competitive.