Factors of Production

• Production occurs when an individual, business, or organization creates a product, offers a service, or develops an idea.
• Factors of Production is an economic term that refers to the general inputs utilized to produce goods and services for profit.
• The six factors of production are natural resources, raw materials, labor, capital, information, and management.

Natural Resources

• These are supplied by primary industries
• The six types of natural resources:
  • Agriculture
  • Fishing and trapping
  • Mining
  • Water
  • Fuel and energy
  • Logging and forestry
• Extractive industries are primary industries that extract resources from the Earth or sea.

Raw Materials

• These are goods used in the manufacturing of other goods.
• The two main types:
  • Ingredients: Raw materials combined or converted to become part of the finished product.
  • Supplies: Raw materials that do not become a part of the finished product but are used in the creation process.

Labour

• Labour includes physical and mental/cognitive work for goods/services production
• Businesses automate and consolidate to save costs.
• Automation: many tasks are performed by machines instead of people.
• Consolidation: small manufacturing sites close and operations centralize into one large site.
• Outsourcing occurs when another company is hired to perform tasks for a company as a cost-saving measure.

Capital

• Capital is money invested in a business, also known as monetary capital.
• Liquid capital can be transformed into other items to run the business.
• Non-liquid capital, like buildings/equipment, is part of operations and cannot easily convert to liquid capital; these are considered capital goods.
• Intellectual property, such as ideas or talent, is a non-tangible form of capital.

Information

• In a competitive global market, businesses need information about:
• New technology
• Customers
• Competition
• Political conditions
• Sources of supply.
• Accurate, usable information reduces business risk and enhances profitability.

Management

• Management consists of people who run the business, controlling/directing factors of production like natural resources, raw materials, labour, capital, and information.
• Management allocates company resources and makes decisions affecting day-to-day and long-term operations.
• In larger companies, high-level managers and/or boards of directors decide on profit distribution.
• In smaller businesses, a single manager or owner makes all business decisions.

The Production Process

• The four stages: purchasing, processing, grading, and quality control.

Purchasing

• A business assigns someone to purchase raw materials to produce the product/service
• This can be a purchasing department, purchasing agent, buyer, or owner.
• Considerations when making purchasing decisions:
  • Raw material quality
  • Raw material price
  • Additional costs (shipping, taxes, duties, storage, expiration, etc.)

Processing

• Non-service businesses convert one item into another through "conversion processing."
• Examples of refined raw materials:
  • Bauxite becomes aluminum
  • Sugar cane becomes sugar
  • Wheat becomes flour
  • Timber or logs become paper

Quality Control

• Quality control encompasses standards ensuring products conform to excellence levels.
• Standards are set by the company, government, or organizations like the International Organization for Standards (ISO).
• ISO sets worldwide standards for industries across 157 countries.

Grading

• This is related to quality control
• Grading involves checking products for size/quality against fixed standards for the product/category.
• Grading lets consumers make informed purchasing decisions.
• Products not formally graded may not meet manufacturer standards; thus, sold as "seconds" with defects or at reduced prices with surface damage as "scratch and dent" sales.

Improving Productivity

• Profitability and productivity are related
• Increased Profitability results in increased profit
• Increased productivity involves:
  • Maintaining quality, increasing speed
  • Increasing quality, maintaining speed
  • Increasing both quality and speed simultaneously
• Maintaining productivity depends on:
• Training
• Capital investment
• Investment in technology
• New inventory systems

Training

• Training programs are essential to developing a productive employee.
• Four Major Types of Training:
  • Initial
  • Ongoing
  • Retraining
  • Specialized

Capital Investment

• Capital investments, such as new facilities, computers, and machinery, contribute to increased productivity.

Investment in Technology

• Current technology helps companies improve and maintain their competitive edge.
• Robotics/automation uses computer-controlled machinery for repetitive tasks to improve productivity.

New Inventory Systems

• Just-in-time (JIT) systems help businesses coordinate suppliers, monitor warehouse storage, and track factory production to deliver goods on time.
• This system saves time, money, and space, reduces waste, and requires up-to-date statistical information.
• Benefits: having materials in the right amount, place, and time

Methods of Production

• Job production normally produces single, one-off products that can be big, small, and/or unique.
• Each individual product must be completed before the next is started; At any moment, there is only one product being made
• Small firms use labor-intensive job production before having the chance to expand and buy advanced equipment.
• Motivation increases because workers produce the whole product, enabling specialized products to be produced
• Often the labour is highly skilled, however, this results in high unit costs and takes longer to complete due to its labour intensive demands.

Batch Production

• Batch Production is products in separate groups that go through the process together.
• The process involves distinct stages where each unit goes through an individual production stage, and batch moves on afterward
• With large batches, Firms are allowed to have a "division" of labour; therefore, the batch production enables economies of scale
• This is usually employed in industries for batches of identical products
• Additionally, batches are matched to demand, allowing design and composition of batches to be altered

Drawbacks

• Include high levels of work-in-progress stocks at each stage
• Work may be demotivating and boring
• High unit costs if small batches are made
• Machinery needs to be cleaned and adjusted after each batch

Flow/Mass Production

• The process is used when products move individually from stage to stage as soon as they are ready
• Flow production systems can produce large quantities quickly, which suits industries where the product is high and consistent
• This suits the production of standardized items needing minor alterations and often referred to as "mass production"
• This production usually takes place on a production line
• It tends to be demotivating and boring

Labour Costs

• Tend to be relatively low because much of the process is mechanized, with little physical handling
• The constant output makes planning inputs simple, minimizing input stocks
• Products end to be consistent and high quality
• Easy to check product quality throughout the process

The main disadvantage

• The high initial set-up cost
• Additionally, the work is repetitive and demotivating

Formulas

• Total Cost/Unit = Price/Unit + Hidden Costs/Unit
• Total Cost = Total Cost/Unit x Number of Units