Production is the provision of a product or a service to satisfy customer wants and needs.
The process involves firms adding value to a product.
Remember that added value is the difference between the cost of inputs (raw materials, components) and the final selling price of the product or service.
The production process applies to manufacturing as well as service industries.
In adding value, businesses combine the inputs of a business (factors of production, such as land, labour, capital and enterprise) to produce more valuable outputs(the final good/service) to satisfy customer wants and needs.
These economic resources(another term for factors of production) can be combined in different proportions, as inputs, to the production process.
In order 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 there are low wages, it may be more efficient to use many workers and few machines to produce goods.
This is called labour intensive.
In a developed country where labour costs are high, then production is often capital intensive. Therefore, they would need to use machines/robots and employ few workers.
The role of the operations department 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 ensuring that raw materials are provided and made into finished goods or services. Within this, 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.
Productivity is the output measured against the inputs used to create it.
This is essentially how a business can measure and calculate its efficiency.
The formula:Productivity=Quantity of inputsOutput
Businesses often want to measure the productivity of one of the factors of production or inputs, usually labour. This is measured by dividing the output over a given period of time by the number of employees:
Labour productivity=Number of employeesOutput (over a given period of time)
Productivity can either mean:
using fewer inputs to produce the same output
using the same inputs to produce a much greater 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.
This makes the business more competitive and is the main reason why businesses are usually very focused on increasing productivity.
To ensure that there is always enough inventory to satisfy demand, inventory levels must be carefully controlled.
Inventories can take various forms, including:
raw materials
components
partly finished goods
finished products ready for delivery
spare parts for machinery (in case of breakdowns).
Holding inventories allows a business to maintain production and satisfy customer demand quickly.
When inventories get to a certain point, called the reorder point, they will be reordered so that when a delivery is made, it will bring inventories back up to the maximum level again.
The business must reorder before inventories get too low to allow time for the goods to be delivered.
If inventory levels get too low, they might run out if there is an unexpectedly high demand for the goods.
If inventory levels get too high, this would cost a lot of money; the business has bought the goods but they are not being used and the money could be put to better use.
The buffer inventory level is the inventory held to deal with uncertainty in customer demand and deliveries of supplies.
Kaizen is a Japanese term meaning “continuous improvement” through 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 is proved effective because no one knows the problems that exist better than the workers who work with them all the time.
The benefits are:
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 (JIT) is a production method that involves reducing or virtually eliminating the need to hold inventories of raw materials or unsold 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 started just in time to be used in the next stage of production.
The finished product is made just in time to be delivered to the customer.
In order 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 will need very reliable suppliers and an efficient system of ordering raw materials or components.
The benefits are:
reduced costs of holding inventory because no raw materials and components are ordered to keep in the warehouse just in case they are needed
warehouse space is not needed, reducing costs
finished product is sold quickly and so money will come back to the business more quickly, helping its cash flow.
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 improves employee morale and makes them work harder so they become more efficient. They would feel more valued and are less likely to strike or cause disruption.