Business section 4
Operations management
Business week 17
Production of goods and services
Production is the making of inputs such as land, labour and capital into physical goods. The
term now includes business in the primary, secondary and tertiary sector.
Managing resources to produce goods and services
Also known as the production process.
- Operation management involves Managing business resources (inputs)
- Through the production process these becomes finished goods (outputs)
- Meet the quality standard expected by consumer
Difference between production and productivity
Production is changing inputs to outputs
Productivity is the measure of the efficiency of inputs used in the production process,
especially labour and capital.
Labour productivity = Total Output ÷ Number Of Production Employees
Benefits of increasing efficiency and how to increase
- Increasing productivity = reduced costs
How to improve labour productivity
- Increase output with the same number of employees
- Keeping output the same with fewer employees
To create more output with fewer employees means each employee is being more productive -
increasing employee productivity. To achieve this:
- Improving skill level of employees
- Improving employee motivation
- Improving quality of management decisions
- Introducing more automation and more or better technology
All these methods of improving productivity adds to the businesses costs. Main reason for
improving productivity is to decrease unit costs.
Increase in Output must be greater than the increase in Costs
,Why businesses hold inventories
Inventories - the stock of raw materials, work in progress and finished goods held by a
business.
Almost all businesses hold inventories of:
- Raw materials and components
- Work-in-progress- part-finished goods that have not completed the
production process
- Finished goods ready to be sold
Holding inventories add to costs such as
- Warehouse costs
- Handling costs ( moving goods in and out warehouse)
- Shrinkage costs (damage or lost inventory)
- Insurance
- Obsolescence of goods
- Opportunity costs
Why do businesses hold inventory?
- If the production process needs raw materials they have them at the ready so as to
prevent the production process from coming to a stop and keep producing output
- If business does not have finished goods in stock they can not supply customers with
their orders
- Businesses that buy produce in bulk can benefit from economies of scale when they buy
inventories in large quantities.
Lean production is the production of goods and services with minimum waste of resources.
By lowering waste of resources a business can reduce the final price causing it to be more
competitive. This is important for businesses on global markets.
Lower costs and prices must not lead to reduction in quality of a businesses products.
Many businesses use Lean production ( the production of goods and services with minimum
waste of resources) to increase their competitiveness.
Reasons for waste:
- Production defects
- High inventories
- Overproduction
- Idle resources
- Transporting goods
,Using lean production methods results in
- New products can be brought to the market faster
- Quality is improved
- Wastage of time and other resources is eliminated
- Cost of holding inventories is eliminated
- Unit costs are reduced.
Just-in-time inventory control.
This method means that no inventories are held by the business. Raw materials arrive as they
are needed by the production process. As soon as they are done in the production process they
deliver to the customer.
- This reduces costs as business does not need to hold the inventory.
For this to work effectively the cost of not holding inventory needs to be reduced. To achieve this
a business must have excellent relationships and communication with their suppliers.
Both employees and machinery need to be flexible
(able to switch from one product to another short notice)
Kaizen is a japanese term meaning ‘continuous improvement’.
This allows employees to make suggestions about how to improve quality and productivity.
Employees are the ones that would know how to increase productivity - all the small changes
may lead to one large change in the businesses efficiency.
Main methods of production
Job production
Producing items one at a time - used for single and unique times.
Uses highly skilled employees and specialised machinery.
Batch production
The production of goods in batches. Each batch passes through one stage of production before
moving onto the next stage.
Flow production
The production of large quantities of goods using a continuously moving process. As the
product moves along the line new features are added until the product is done.
Used for large amounts of standardised products to meet high consumer demand. Also known
as mass production.
Main features of flow production are:
- Large quantities are produced
, - Standardised products
- Employees are relatively unskilled
- High degree of automation
- Large inventories of raw materials and work in progress.
Method of benefits limitations
production
job - Unique high quality products - Uses skilled labour instead
- Employees are often more motivated of machinery.
and take pride in their work - Production takes longer and
expensive
- Economies of scale not
possible
batch - Since larger numbers are made, unit - Employees are less
costs are lower motivated due to repetition
- Offers customer variety of choice - Goods have to be stored
- Materials can be bought in bulk until they are sold which is
expensive
flow - More Capital intensive - Requires very large capital
- Materials bought in bulk investment in production line
- Large number of goods produced technology
- Employees are not very
motivated
- It is not a very flexible
method as production lines
are difficult to change
- If one part of the production
line breaks down, the whole
production process will have
to stop until it is repaired
- High levels of raw materials,
work-in-progress and
finished goods inventories
are held. This increases
stocks
Choosing the method of production
Firms decide based on factors such as;
- Amounts they likely to sell
- Product they are making
- Costs of production
- Variety of goods expected by consumers
Operations management
Business week 17
Production of goods and services
Production is the making of inputs such as land, labour and capital into physical goods. The
term now includes business in the primary, secondary and tertiary sector.
Managing resources to produce goods and services
Also known as the production process.
- Operation management involves Managing business resources (inputs)
- Through the production process these becomes finished goods (outputs)
- Meet the quality standard expected by consumer
Difference between production and productivity
Production is changing inputs to outputs
Productivity is the measure of the efficiency of inputs used in the production process,
especially labour and capital.
Labour productivity = Total Output ÷ Number Of Production Employees
Benefits of increasing efficiency and how to increase
- Increasing productivity = reduced costs
How to improve labour productivity
- Increase output with the same number of employees
- Keeping output the same with fewer employees
To create more output with fewer employees means each employee is being more productive -
increasing employee productivity. To achieve this:
- Improving skill level of employees
- Improving employee motivation
- Improving quality of management decisions
- Introducing more automation and more or better technology
All these methods of improving productivity adds to the businesses costs. Main reason for
improving productivity is to decrease unit costs.
Increase in Output must be greater than the increase in Costs
,Why businesses hold inventories
Inventories - the stock of raw materials, work in progress and finished goods held by a
business.
Almost all businesses hold inventories of:
- Raw materials and components
- Work-in-progress- part-finished goods that have not completed the
production process
- Finished goods ready to be sold
Holding inventories add to costs such as
- Warehouse costs
- Handling costs ( moving goods in and out warehouse)
- Shrinkage costs (damage or lost inventory)
- Insurance
- Obsolescence of goods
- Opportunity costs
Why do businesses hold inventory?
- If the production process needs raw materials they have them at the ready so as to
prevent the production process from coming to a stop and keep producing output
- If business does not have finished goods in stock they can not supply customers with
their orders
- Businesses that buy produce in bulk can benefit from economies of scale when they buy
inventories in large quantities.
Lean production is the production of goods and services with minimum waste of resources.
By lowering waste of resources a business can reduce the final price causing it to be more
competitive. This is important for businesses on global markets.
Lower costs and prices must not lead to reduction in quality of a businesses products.
Many businesses use Lean production ( the production of goods and services with minimum
waste of resources) to increase their competitiveness.
Reasons for waste:
- Production defects
- High inventories
- Overproduction
- Idle resources
- Transporting goods
,Using lean production methods results in
- New products can be brought to the market faster
- Quality is improved
- Wastage of time and other resources is eliminated
- Cost of holding inventories is eliminated
- Unit costs are reduced.
Just-in-time inventory control.
This method means that no inventories are held by the business. Raw materials arrive as they
are needed by the production process. As soon as they are done in the production process they
deliver to the customer.
- This reduces costs as business does not need to hold the inventory.
For this to work effectively the cost of not holding inventory needs to be reduced. To achieve this
a business must have excellent relationships and communication with their suppliers.
Both employees and machinery need to be flexible
(able to switch from one product to another short notice)
Kaizen is a japanese term meaning ‘continuous improvement’.
This allows employees to make suggestions about how to improve quality and productivity.
Employees are the ones that would know how to increase productivity - all the small changes
may lead to one large change in the businesses efficiency.
Main methods of production
Job production
Producing items one at a time - used for single and unique times.
Uses highly skilled employees and specialised machinery.
Batch production
The production of goods in batches. Each batch passes through one stage of production before
moving onto the next stage.
Flow production
The production of large quantities of goods using a continuously moving process. As the
product moves along the line new features are added until the product is done.
Used for large amounts of standardised products to meet high consumer demand. Also known
as mass production.
Main features of flow production are:
- Large quantities are produced
, - Standardised products
- Employees are relatively unskilled
- High degree of automation
- Large inventories of raw materials and work in progress.
Method of benefits limitations
production
job - Unique high quality products - Uses skilled labour instead
- Employees are often more motivated of machinery.
and take pride in their work - Production takes longer and
expensive
- Economies of scale not
possible
batch - Since larger numbers are made, unit - Employees are less
costs are lower motivated due to repetition
- Offers customer variety of choice - Goods have to be stored
- Materials can be bought in bulk until they are sold which is
expensive
flow - More Capital intensive - Requires very large capital
- Materials bought in bulk investment in production line
- Large number of goods produced technology
- Employees are not very
motivated
- It is not a very flexible
method as production lines
are difficult to change
- If one part of the production
line breaks down, the whole
production process will have
to stop until it is repaired
- High levels of raw materials,
work-in-progress and
finished goods inventories
are held. This increases
stocks
Choosing the method of production
Firms decide based on factors such as;
- Amounts they likely to sell
- Product they are making
- Costs of production
- Variety of goods expected by consumers
