Business Production Methods

• The notes below summarize business production methods.

Adding Value

• Added value is the difference between the cost of raw materials and the selling price of the finished goods.
• Added value formula: Selling price - (Bought-in goods and services).
• Added value increases through purchasing cheaper raw materials, but quality must be maintained.
• Improving production process efficiency - purchasing up-to-date machinery or training the workforce.
• Business growth can lead to purchasing economies of scale, achieving greater added value.
• Increased efficiency through up-to-date machinery purchases.
• Raising the product price affects the price elasticity of demand; price increases, where demand is price-sensitive, can reduce overall revenue.
• Brand status creates added value, like Chanel perfume, despite identical production processes to competitors.
• Additional services, such as technical helplines or ethical disposal, can add value to a product.
• Improving customer access and convenience, such as drive-through outlets and home delivery, adds value.

Job Production

• Job production is a unique product made by a skilled craftsman to a specific requirement.
• Wedding dresses, tailor-made suits, buildings, bridges, and ships are examples of job production.
• Job production advantages include its uniqueness, high quality due to handmade detail, specialisation, ability to charge higher prices and employee enjoyment of their skills.
• Disadvantages of job production include high cost to purchase, time-consuming production, higher wage bill as skilled employees are required and a smaller target market.

Batch Production

• Batch production: Manufacturing a limited number of identical products, with work completed at each stage for the whole batch before moving to the next stage.
• Examples of batch production include clothes, paint, and bread production.
• Batch production advantages: reduced unit costs from economies of scale, variable production quantities based on demand and suitability for processes divided into operations.
• Product variations, quicker production and specialist machinery and less need for skilled employees are also batch production advantages.
• Disadvantages of batch production include; faulty products result in writing off whole batch, time lost between switching batches, employee boredom due to machinery, initial machinery costs.
• Production time may be lost due to machinery breakdown and cross contamination.

Flow Production

• Flow Production: Different operations are carried out one after the other, in a continuous sequence.
• Examples of products include Crème Eggs, golf balls, and cars.
• Flow production advantages: Large quantities of standardized products, reduced unit costs via economies of scale and computer-controlled machinery ensures consistency and uniformity.
• Production continues non-stop for long, with reduced labor needs and therefore lower costs.
• Flow production is faster than job or batch production.
• Disadvantages of flow production are high set-up costs that must be justified by high sales volume and products are standardised.
• Breakdowns are costly because the interdependence means one section breaking down stops the whole line.
• Flow line job environments tend to be repetitive/boring, leading to motivation issues.

Types of Production Methods

• Types of production methods depend on the product, cost of labor/capital, money available for investment, technology, labor skills, market size, and customer requirements.

Productivity

• Productivity: Measurement of business efficiency in turning production inputs into output.
• Productivity can be measured by labour and capital.
• Labour productivity = Output (per period) / No. of employees (per period)
• Capital productivity = Output / Capital employed
• High productivity advantages: increased economies of scale/competitiveness, fixed costs spread over higher output, therefore lower unit costs and performance bonuses to employees, which increases motivation.

Improving productivity

• Improving productivity: Making technological improvements (replacing labor with machinery/robots).
• Developing multi-skilled workforce through training, using quality circles and improving workforce motivation through financial and non-financial rewards.
• Methods also include reducing absenteeism redesigning production processes, job enrichment/rotation, adapting management styles, adopting a 'Kaizen' approach and TQM/lean production.
• Employing management consultants, as well as delayering and empowerment, and benchmarking enhance productivity.

Capacity utilization

• Capacity utilization: Extent to which a business uses its resources, comparing actual output with potential output at full capacity.
• Capacity utilization formula: (Actual level of output / Maximum possible output) x 100
• Advantages of operating at full capacity: minimized average costs, helps raise profits, employees may feel more secure, improves company image.
• Operating at full capacity disadvantages: Strain on overworked resources can cause quality reduction, staff pressure can cause stress/accidents and machinery may breakdown due to insufficient maintenance time.
• Lack of flexibility to accommodate new customers.

Spare capacity

• Spare capacity measured by output as a percentage of total capacity.
• Significant spare capacity (underutilization) can have major effects on businesses.
• Spare capacity problems: staff demotivation, reduced overtime, limited bonuses, and potential redundancy threats.
• It can also increase costs and management time spent on reorganisation and limits capital for investment, causing a reduction in competitiveness.
• A lack of return on investment capital and producer goods depreciate, even when not fully used.

Resolving spare capacity problems

• Methods include subcontracting, rationalisation, and increasing asset use.
• Businesses will often ride out this situation in the hope that the market they operate in will recover and that demand will increase.

Subcontracting

• Getting someone else to produce the goods for you, reducing risk.
• Subcontracting advantages: reduces the need for capital investment.
• Subcontracting disadvantages: lack of control, high prices if few subcontractors exist, delivery delays, leading to customer dissatisfaction.

Rationalisation

• Concentrating on core products/services, disposing of those not profitable or necessary for long-term success.
• Rationalisation advantages: allows management to focus on business strengths.
• Rationalisation disadvantages: lost customers, potential write down (reducing) of assets, implies redundancy costs.