Production of Goods and Services

Production of Goods and Services

• Production involves providing a product or service to meet consumer needs.
• The production process is applicable in both manufacturing and service sectors.
• Firms add value to a product during the production process.

Operations Management

• Operations management is a modern term for production management
• Focuses on managing the process of converting inputs into outputs.
• The primary goal is to increase profit on output by adding value.

Production Process Efficiency

• Businesses should efficiently combine resources to stay competitive, reduce costs, and increase profit.
• Developing countries may find it more efficient to use more workers and fewer machines; known as labor intensive production.
• Developed countries with expensive labor often use machines/robots (capital intensive production).

Operations Department Roles

• Factory manager: Responsible for the quantity and qualities of products.
• Purchasing manager: Handles raw materials and equipment procurement.
• Research and development manager: Responsible for design and testing.

Productivity

• Productivity is the measure of output against inputs. Productivity = output/quantity of input
• Labor productivity is output over a period divided by the number of employees. Labor productivity = output (over given period of time) / number of employees

Ways to Increase Productivity

• Training staff to be more efficient
• Improving inventory control
• Using machines instead of people
• Introducing new technology
• Improving employee motivation
• Improving quality control/assurance to reduce waste

Outcomes of Increased Productivity

• Reduced inputs for the same output.
• Lower costs per unit.
• Fewer workers needed, potentially leading to lower wages.
• Higher wages for workers to increase motivation

Stock Management

• Stock includes materials and goods needed for production and supply.

Nature of Stock

• Raw materials and components are stocks bought from outside the business.
• Work in progress includes partly finished goods in production.
• Finished goods are complete products held in stock for sale, especially for seasonal changes.

Effective Stock Management

• Necessary to meet unforeseen demand changes.
• Accommodate stock rotation.
• Prevent stock wastage.
• Minimize high storage costs and opportunity costs.
• Avoid late deliveries and loss of supplier discounts due to poor management.

Stock Holding Costs (Too Much Stock)

• Opportunity cost
• Storage cost
• Risk of wastage

Stock Holding Costs (Too Little Stock)

• Lost sales
• Late production
• Small order quantities (loss of discounts, higher transport costs)

Stock Control Charts

• Tools to analyze stock levels over time to identify patterns and ensure stock levels are appropriate.

Buffer Inventory

• Buffer inventory helps manage uncertainty in customer demand and supply deliveries.
• Inventory levels should not fall so low that shortages in raw materials reduce output.

Maximum Stock Level

• The level of stock appropriate to hold for origination to minimize costs

Re-Order Level

• The point at which new stocks are ordered.
• Calculated by considering average daily usage and lead time for new supplies.

Business Considerations for Stocks

• Storage space available
• Cost of storage
• Ordering times
• Delivery times

Lean Production

• Lean production uses techniques to reduce waste and increase efficiency

Seven Types of Waste

• Overproduction: Producing too many goods before being ordered, leading to high storage costs and potential damage.
• Waiting: Waste that occurs when goods are not moving or being processed.
• Transportation: Unnecessary movement of goods, which doesn't add value and may cause damage.
• Unnecessary Inventory: Holding too much inventory, taking up space and hindering production.
• Motion: Employee movements like bending or stretching, which waste time and may cause safety risks.
• Over Processing: Using complex machinery for simple tasks, leading to waste

Defects

• Any faults requiring fixing; time spent inspecting products is wasted.

Benefits of Lean Production

• Less storage needed.
• Quicker production output.
• No need to repair defects..
• Better equipment utilization.
• Cutting unnecessary processes.
• Less money tied up in inventories.
• Improved health and safety.

Kaizen

• A Japanese term meaning ‘continuous improvement' through eliminating waste.
• Improvements come from workers' ideas, not new technology or equipment investments.

Advantages of Kaizen

• Increased productivity.
• Reduced space needed.
• Less work- in- progress

Just-In-Time (JIT) Production

• Just-in-time production involves nearly eliminating the need to hold raw material inventories or unsold finished goods.

Benefits of JIT

• Reduced operating costs.
• Higher quality products.
• Improved deliveries.

Cell Production

• The production line divides into separate, self-contained units, each making an identifiable part of the finished product.
• This team-working approach ensures worker commitment, as each cell is responsible for completing a unit of work.

Benefits of Cell Production

• Improves morale of employees.
• Employees become more efficient and hardworking.
• Employees feel valued and are less likely to strike or cause disruption.

Job Production

• Job production involves making a single product at a time, requiring highly skilled workers.
• Advantages: Ability to undertake specialized projects with higher value added.
• Disadvantages: High production costs, time-consuming processes, and expensive error correction.

Batch Production

• Batch production makes a quantity of one product before producing another item, requiring adaptable labour and machines.
• Advantages: Benefits from economies of scale and faster, lower unit costs than job production.
• Disadvantages: High levels of stocks in the form of unfinished goods and can be expensive

Flow Production

• Flow production involves producing large quantities of a product in a continuous process, often called mass production, requiring specialized and expensive equipment.
• Advantages: Low unit costs due to economies of scale and high productivity.
• Disadvantages: Inflexible as it is hard to switch to producing other products, and delays are caused by machinery breakdown.

Factors Influencing Production Method

• Market size: Smaller businesses tend towards job production, while larger businesses use flow production.
• Nature of business: Unique products/services or automated production lines lead to flow production.
• Nature of demand: Low demand favors job/batch production, while high demand favors flow production.
• Size of business: Small businesses typically use job/batch production.

Technology’s Impact on Production

• Automation
• Mechanization
• CAD (computer-aided design)
• CAM (computer-aided manufacture)
• CIM (computer integrated manufacture)
• EPOS (electronic point of sale)
• EFTPOS (electronic funds transfer at point of sale)
• Contactless payment

Advantages of Technology in Production

• Increased efficiency and productivity.
• Greater job satisfaction and worker stimulation.
• Requirement for more skilled workers to operate machinery.
• Quicker and more up-to-date information availability.

Disadvantages of Technology in Production

• Increased unemployment due to machinery replacing workers.
• High investment costs in technology and machines.
• Employee unhappiness due to changes.
• Rapid obsolescence of technology requiring frequent replacement.

Chapter 19: Costs, Scale of Production, and Break-Even Analysis

• Break-even point: The point where total revenue equals total costs (total revenue - total costs=0), indicating no profit or loss.
• Break-even level of output can be calculated using charts or calculation methods.
• Break-even analysis helps businesses make decisions about prices, costs, and sales levels. Break- even = fixed costs/ contribution
• Contribution = selling price – variable costs
• Turnover/sales revenue: Money a business receives from selling its goods.
• Total revenue = price per product x quantity sold
• Fixed costs: Costs that do not change as the output changes
• Variable costs: Costs that vary directly with the number of items sold/produced (output)
• Total costs = fixed costs + variable costs Average costs per unit = total costs
• Margin of safety: The point where sales exceed the break-even point. Margin of safety = total output - breakeven output