Section: 4

Topic:1
Production of goods
and
services

Production:
Production is the process of transforming inputs into outputs to
satisfy consumer needs and wants. Inputs include the
economic resources such as land, labour, capital, enterprise
which are transformed into goods and services.
when deciding the factors of production to use a firm can either
choose to be:
• Labour intensive where the production process involves
employing a large proportion of labour compared to capital.
• Capital intensive where the production process involves
employing a large proportion of capital compared to
employees.
Note:
• The production process is done by the operations department.
• In developed countries labour costs are high therefore
production is often capital intensive.

Difference between production and

productivity:
Production is regarded as the level of output. Product
productivity is the output measured against inputs used to
create it. productivity is how business can measure its
efficiency. In essence productivity can be raised by either
using fewer inputs to produce the same output or using the
same inputs to produce a higher level of output. If employees
become more efficient, the amount of output produced per
employee will rise and therefore the costs of producing each
product will fall.
• Labour productivity = output/number of workers

• Capital productivity= output/capital employed

12 worker
How to increase efficiency and productivity:
• Improve worker motivation through financial and non-
financial rewards.
• Replace employees with machines-automation
• Improve training to increase employee efficiency/
productivity.
• Improving quality control in the company would result in
less wastage of resources and time. Less wastage would

result in more goods produced from the same input.

Advantages of increasing productivity:

• Reduced inputs needed for the same output level.
• Lower cost per unit due to economies of scale.
• Fewer workers may be needed Due to automation, possibly
leading to lower wage costs.
• Higher wages might now be paid to workers, which increases

motivation.

25 chocolates
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Why businesses hold inventory?
Inventory is regarded as stock of raw materials, semi
finished, finished goods and spare parts for capital goods with
a basic objective of maintaining continuity of operations. It is
important for a business to manage their inventory due to the
following reasons:
• Inventory help the business to meet unexpected increase in
demand. This helps the business stay competitive in case of
shortages of the products or delays from suppliers.
Companies do this by holding buffer inventory. Buffer
inventory is the backup inventory held by the business in
case of emergency.
• The company can benefit from capitalising on low cost
offers like discounts by purchasing in bulk. This increases
the potential for profits.
• The market price of goods is victim to many variables, some
predictable, others not. Holding inventory reduces the degree
of uncertainty in the market value of inventory which
reduces the risk of the business against uncertain price
changes.
Note:
Holding too much inventory can prove to be costly for the
firm. The firm would have to pay storage costs and money
spent on the goods could have been used in other business
activities such as marketing.

Lean production:
It is a combination of various Japanese techniques that aim to
improve quality and minimise wastage. These methods aim to
cut out activities that do not add value for customers and try to
reduce time it takes for a product to be developed. Wastage can
include the following:

• Overproduction:
It Is producing goods before they have been ordered by
customers. This results in high storage costs and possible
damage to goods while in storage.
• Waiting:
It Is when goods are not moving or being processed in any way,
Wastage of time is happening.

• Defects:
Any faults required the goods to be fixed and time can be
wastage inspecting the product and its fault.

• Transportation:
It is moving goods around unnecessarily which causes waste
and does not add value to the product. Goods may also be
damaged when they are being moved around.

• Unnecessary inventory:
If there is too much inventory then this takes up space, it
might also get in the way of production and cost money.
• Over processing:
It is when complex machinery is being used to perform simple
tasks. Some activities in producing the goods may not be
necessary and maybe wasteful for example polishing parts
that will never be visible in the final product Or running
quality checks or inspections more frequently than
necessary.

Advantages Disadvantages
• Less Storage of raw materials or • Lean production takes time and
components. capital to Be integrated in an
• Quicker production of goods or organisation.
services. • The workforce might need to be
• Cutting out some processes speeds up trained and the structure and
the production process. policies of the organisation may

• Less money tied up in inventory. need to be changed for lean to

function.
Methods of Lean production:
Lean production can be achieved by using the following
methods:
• Kaizen
• Just-in-time inventory control
• Cell production

Kaizen:
It is Continuous improvement in Japanese. This technique aims
to eliminate waste. Kaizen believes that improvement does not
come from inventing new technology but through the ideas of
the workers themselves. Small group of workers meet regularly
to discuss problems and possible solutions. This is 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.
It also aims to eliminate waste on the workflow by re-
organising it. This includes getting rid of stockpiles and
reducing time to walk between jobs.

B D D A D B
The floor Will be open and marked with colour coded lines
which map out the flow of materials through the production
process.

Advantages of Kaizen:
• Increased productivity.
• Better utilisation of space.
• Work-in-progress is reduced.

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Just-in-time (JIT):
This is a production technique that involves reducing or
virtually eliminating the need to hold inventory. The materials
or components are delivered just in time to be used in the
production process.
Advantages Disadvantages
• Storage and maintenance costs go • It is a risky way since there is
down since it is much easier to huge dependence on suppliers. If
manage low level of inventory. the suppliers fail it would be
• JIT is more flexible to the changing impossible to complete The
business environment. The production process.
company can shift supply based on • No economies of bulk buying.
the changing demand of the Since goods would be bought in
customers. small amounts, the supplier won’t
• JIT results in better cash flow. Since give discount leading to higher per
working capital in inventory is unit cost.

reduced and funds are not tied up. • Transportation costs might
increase due to repeated orders.

Cell production:
Cell production involves grouping workstations or machines
into small, flexible units called cells. Each cell is responsible
for producing a complete product or a significant part of a
product. for example in automotive industry cells might
assemble specific parts of a car such as doors or engines, before
integrating them into the final product.
Advantages of cell production:
• Due close teamwork And responsibility within the cell it
often leads to higher quality outputs.
• Greater employee satisfaction is gained due to teamwork and
a sense of ownership over the production process.
• Efficient workflows minimise waste and reduce the time
between production steps.

Methods of production:
There are three main methods of production:
• Job production
• Batch production
• Flow production

Job production:
It is where a single product/unique item is made at a time. For
this, we require highly skilled workforce.
It is most suitable for personal services or “one off” products for
example, tailor made suits, specialised jewellery, custom
software’s.
Advantages Disadvantages
• The product meets the exact • Skilled Labour is often used,
requirements of the customer. which is costly.
• Worker motivation is higher due to • The costs are higher because it is
tasks that are being carried out often labour intensive.
required variety of skills and Are • Projects are specially made to
generally not repeated. order so any errors can be
• Organisation of job is simple. expensive to correct.
Since only one job is handled at a • Materials may have to be specially
time it is easier to coordinate and purchased, leading to higher costs.

communicate.

Batch production:
It is where a quantity of one product is made, then a quantity
of another item will be produced. Here similar product are made
in blocks or batches. for this labour and machines must be
flexible to switch to making batches of other designs.
It is most suitable for bakeries like gourmet, a small bakery
making batches of bread, cakes or furniture production where a
certain number of tables are made, then a certain number of
chairs are made.
 Advantages Disadvantages
• It is a flexible way of working and • Machines have to be reset between
production can easily be changed production of different batches
from one product to another. which means there might be
• It still gives some variety to delayed in output.
workers’ job. • Warehouse space will be needed
• It allows more variety of products for inventory of raw material,
which would otherwise be identical. components and finished batches
This gives more customer choice for of goods. This can be costly.
example, different flavours of • For this, we need complex

cakes. machinery, which is very

expensive.

Flow production:
It is where is where large quantities of a product are produced
in a continuous process. It is sometimes referred to as mass
production. It is called flow production because products look
like as if they are flowing down the production line.
It is most suitable for businesses which produce similar
products on a very large scale such as cars, cameras,
television, packaged foods and drinks.
Advantages Disadvantages
• There is a high output of • It is very boring for the workers
standardised Products. leading to lack of motivation.
• Due to purchasing economies of • There are significant storage
scale average cost of producing one requirements meaning cost of
unit is less therefore we can keep raw materials, components and
prices low. finish products can be very high.
• We can easily integrate capital • The initial cost of setting up the
intensive production methods which production lines can be very very
would reduce labour cost and high.
increase efficiency. • If one machine breaks down the
• Automated production lines can whole production line will have to
operate 24 hours a day. be stopped.
• There is no need to move goods from
One part of the factory to another as

with batch production, saving time.

Factors affecting which method of

production to use:
• The nature of the product:
If A fairly unique product or an individual service is required
job production will be used. If the product can be mass produced
using an 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 not in
very large quantities, batch production will be used. Small
local markets or niche markets will be served by businesses
using job or batch production.

• Nature of demand:
If if demand is high and steady flow production would be used.
If demand is less frequent, such as furniture, Job or batch
production might be used.

• The size of the business:

If The business is large and can afford expensive machinery
then then flow production otherwise job or batch production
would be used.
Influence of technology:
The following are the ways in which technology has influenced
the production methods:

• Automation:
It is where the equipment used in the factory is controlled by a
computer to carry out mechanical processes, such as paint
spraying on a car in the assembly line.

• CAD (computer aid design):

It is the use of computer software to design items more quickly
and with precision.

• CAM (computer aided manufacturing):

It is where computers monitor the production process and control
machines or robots on the factory floor. For example, robots
controlling the production of cars in Honda’s factory.
This helps in the process of automation. CAD and CAM
combined are known as CIM (Computer integrated
manufacturing).
• Mechanisation:
It is where the production is done by machines and controlled by
humans. For example, a printing press.

How technology has changed productivity

in shops:

• 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 receipt.
The inventory record is automatically changed to show one item
has been sold and if inventory is low (at the point of re-order)
then more inventory can be automatically ordered.
• EFTPOS (electronic Fund transfer at point of
sale):
This is where the electronic cash registered is connected to the
retailers main computer and also the banks over a wide area of
computer network. The shoppers card will be swiped at the
counter and the bank information will automatically be read
from the card. The money will be directly debited from the
customers account after they have entered their pin

• Tap and pay:

This is done by a contactless device. When it is touched against
a contactless terminal, it securely transmits information about
the purchase.
Advantages Disadvantages
• Greater productivity, better quality • A Business has to pay both
of products leading to more capital costs of installing the
customer loyalty and increasing new machinery and labour
potential for EOS. training cost. Huge investment
• New high-tech products are in machinery can delay firms’
introduced as new technology other objectives.
makes completely new products • Automated plants, if out of order
available. can lead to a whole production
• Quicker communication and line being halted. Leading to loss
reduced paperwork, owing to of production, high costs and
computers which leads to lower profits.
profitability. • High cost to keep machinery
• Greater job satisfaction as routine updated.
jobs would be done by machines • Employees maybe unhappy with
and employees can take on more the change in the workplace
strategic roles. practices.
• Workers will get training since the • Workers might be unemployed
job requires more skill. This will due to mechanisation.
increase the motivation since the job
is more meaningful to the

employees.