Production of goods and services
Contents: 9 sections
Productivity, and the calculation attached to it
Production is the making of a good or the providing of a service. Productivity is how much output comes from each unit of input. A business can raise production simply by hiring more people while its productivity stays flat, or even falls, so the two words are not interchangeable and every efficiency question turns on the difference.
Labour productivity is the measure 0264 publishes as a formula and examines as a calculation.
Labour productivity = output per period (units) / number of employees = units per employee
Worked example. A bakery produces 24000 loaves a week and employs 15 bakers.
Labour productivity = 24000 / 15 = 1600 units per employee
A rival bakery employs 25 bakers and produces 25000 loaves a week.
Labour productivity = 25000 / 25 = 1000 units per employee
The rival produces more loaves in total and is still the less productive business, because each employee makes fewer.
The consequence is a cost. If a baker is paid $800 a week, the first bakery's labour cost per loaf is 15 x 800 / 24000 = 12000 / 24000 = $0.50, and the rival's is 25 x 800 / 25000 = 20000 / 25000 = $0.80. The same wage spread over more output is a lower cost per unit, which is why productivity turns up in answers about price, profit and competitiveness.
Three habits protect the marks on this calculation. Show the substitution as well as the answer, because a correct method with an arithmetic slip still earns the method mark. Use actual output, not maximum possible output, when a data table gives you both. And give the unit as units per employee, never as a sum of money.
Why efficiency matters, and how to raise it
Efficiency means producing with as little waste of resources as possible, which shows up as a lower average cost per unit. It matters because a lower cost per unit gives a business a choice it did not have before: cut the price and compete harder, or hold the price and widen the profit margin.
Ways to increase efficiency:
- Automation and better technology, so machines do more of the work, faster and more consistently. Technology has a subtopic of its own at 4.2.
- Improving labour skills through training, so employees work faster, make fewer mistakes and can move between tasks.
- Better motivation, because a motivated workforce produces more per hour and is absent less often.
- Better organisation of the process, such as laying out the workshop so materials travel a shorter distance.
Lean production, just-in-time and Kaizen
Lean production means cutting every kind of waste out of the process while keeping output the same. The waste attacked is not only scrap material. It is also time spent waiting, space filled with inventory nobody needs yet, and products made twice because the first attempt was faulty.
Just-in-time (JIT) is an inventory method. Materials and components arrive from suppliers at the moment production needs them, and finished goods leave as they are completed, so the business holds almost no inventory at all.
Kaizen means continuous improvement. Instead of one large change every few years, small improvements are made constantly, usually suggested by the employees who do the job, because they are the people who can see the wasted step.
| Lean production | Advantages | Disadvantages |
|---|---|---|
| Just-in-time | Little cash tied up in inventory. Less storage space, so lower rent and insurance. Less stock spoils or goes out of date | Any late delivery stops production. No inventory to meet a sudden rise in demand. Frequent small deliveries lose the bulk discount |
| Kaizen | Costs fall a little at a time and keep falling. Employees are involved, which motivates them. Cheap, because the ideas come from inside | Improvements are small, so a business in trouble may need something faster. Meetings take employees off the job |
JIT depends entirely on suppliers being reliable and close, so answers about it should reach supplier choice.
Why a business holds inventory
Inventory is the raw materials, part-finished goods and finished goods a business is holding at any moment. Holding it costs money, so a business needs a reason.
- To meet unexpected rises in demand without losing the sale to a competitor.
- To keep production running if a delivery is late or a supplier lets the business down.
- To buy in bulk and take the purchasing discount, which lowers the cost per unit.
- To cover a seasonal peak the factory could not produce fast enough in the season itself.
- To let each stage of production run at its own pace instead of stopping every time the stage before it pauses.
Against that, inventory ties up cash that could be paying wages or a loan, costs money to store and insure, and can perish, be damaged or go out of fashion before it sells.
What decides how much inventory to hold
| Factor | How it changes the amount held |
|---|---|
| How predictable demand is | Steady, forecastable demand allows low inventory. Demand that jumps around needs a buffer |
| How perishable the product is | Fresh food and anything fashion-led is held in small amounts, because unsold inventory becomes worthless |
| Lead time and supplier reliability | A supplier who delivers in a day allows less inventory than one who takes six weeks or delivers late |
| Storage space and its cost | Expensive or limited warehouse space pushes a business towards holding less |
| Cash available | Inventory is paid for before it is sold, so a business short of working capital cannot afford to hold much |
| Purchasing discounts | A large discount for bulk buying can be worth more than the cost of storing the extra |
| The production method used | A business running just-in-time holds almost none by design |
Job, batch and flow production
| Method | What it is | Suits | Advantages | Disadvantages |
|---|---|---|---|---|
| Job | One item at a time, to the customer's own requirements, finished before the next is started | Wedding cakes, tailored suits, a bridge, a hairdresser | Matches exactly what the customer asked for, so a high price can be charged. Motivating for skilled employees | High cost per unit. Slow. Needs skilled, expensive labour. No bulk discount on materials |
| Batch | A quantity of identical items goes through each stage together, then the equipment is reset for the next batch | Bakery loaves, clothing in several sizes, paint in different colours | Some variety still offered. Lower cost per unit than job. Machinery and workers used flexibly | Time and money lost resetting between batches. Part-finished goods build up as inventory |
| Flow | Identical items move continuously along a line, each stage adding something | Bottled drinks, cars, newspapers | Lowest cost per unit at high volume. Output large and steady. Quality consistent | Very high set-up cost. A breakdown anywhere stops everything. Repetitive and demotivating |
Choosing a method, and justifying the choice
A recommendation earns its marks from the reason, not the choice, and the reason has to come from the business in front of you.
- How standard is the product? Customers who want something individual rule out flow production whatever it would save.
- How large and how steady is demand? Flow production only repays its set-up cost if the output can actually be sold.
- What finance is available? A start-up that cannot raise the capital for a production line has no real choice to make.
- How price-sensitive is the market? Where businesses compete on price, the cost per unit decides everything. In a luxury market it may barely matter.
Write it as one chain: the point, then the reference to this business that makes the point fit, then what it does to the business. "Flow production lowers the cost per unit [k], and with 400000 identical bottles a week [app] that saving is repeated on every unit, so the average cost falls far enough to fund a price cut [an]." The justification then has to say something new, such as which factor decides it here and what the answer would depend on.
Common mistakes
- Using production and productivity as if they were the same word.
- Using maximum possible output instead of actual output when the data table shows both.
- Writing the labour productivity answer as a sum of money instead of units per employee.
- Saying just-in-time reduces costs without saying which cost, or forgetting it leaves nothing to cover a late delivery.
- Describing Kaizen as one big improvement, or confusing it with quality control.
- Saying batch production makes one product at a time. That is job production.
- Claiming flow production is always cheapest. It is only cheapest at high volume, because the set-up cost has to be spread.
- Listing advantages of a production method with no reference to the business in the stem, which loses every application mark.
- Recommending a method and then justifying it by repeating an advantage already given.
What the syllabus asks for on this topicSyllabus points
Syllabus points
- Calculate labour productivity as output per period divided by the number of employees.
- Explain why efficiency is important to a business and how it can be increased, including automation, technology and improved labour skills.
- Explain lean production and how it is achieved through just-in-time inventory control and Kaizen.
- Give the advantages and disadvantages of lean production methods.
- Explain why businesses hold inventory and the factors affecting how much they hold.
- Describe job, batch and flow production and give the advantages and disadvantages of each.
- Recommend and justify a production method for a given business.
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