Production of Goods and Services

HomeNotesBusiness Studies – 04504.1 – Production of Goods and Services

Production is the effective management of resources in producing goods and services.

Capture

The operations department in a firm overlooks the production process. They must:

Use the resources in a cost-effective and efficient manner

Manage inventory effectively

Produce the required output to meet customer demands

Meet the quality standards expected by customers

Productivity

Productivity is a measure of the efficiency of inputs used in the production process over a period
of time. It is the output measured against the inputs used to produce it. The formula is:

Capture 1

Businesses often measure the labour productivity to see how efficient their employees are in
producing output. The formula for it is:

Capture 2

Advertisements

Report this ad

Businesses look to increase productivity, as the output will increase per employee and so the
average costs of production will fall. This way, they will be able to sell more while also being able
to lower prices.

Ways to increase productivity:

introducing automation (using machinery and IT equipment to control production) so that

improve employee motivation so that they will be willing to produce more and efficiently so.

improved quality control and assurance systems to ensure that there are no wastage of resources

Inventory Management

Firms can hold inventory (stock) of raw materials, goods that are not completed yet (a.k.a work-in-
progress) and finished unsold goods. Finished good stocks are kept so that any unexpected rise in
demand is fulfilled.

When inventory gets to a certain point (reorder level), they will be reordered by the firm to bring
the level of inventory back up to the maximum level again. The business has to reorder inventory
before they go too low since the reorder supply will take time to arrive at the firm

The time it takes for the reorder supply to arrive is known as lead time.

If too high inventory is held, the costs of holding and maintaining it will be very high.

The buffer inventory level is the level of inventory the business should hold at the very minimum
to satisfy customer demand at all times. During the lead time the inventory will have hit the buffer
level and as reorder arrives, it will shoot back up to the maximum level.

Advertisements

Report this ad

Capture

Lean Production

Lean production refers to the various techniques a firm can adopt to reduce wastage and increase
efficiency/productivity.

The seven types of wastage that can occur in a firm:

Overproduction– producing goods before they have been ordered by customers. This results in
too much output and so high inventory costs
Waiting– when goods are not being moved or processed in any way, then waste is occurring

Transportation-moving goods around unnecessarily is simply wasting time. They also risk damage
during movement

Unnecessary inventory-too much inventory takes up valuable space and incurs cost

Motion-unnecessary moving about of employees and operation of machinery is a waste of time

Over-processing-using complex machinery and equipment to perform simple tasks may be

Defects– any fault in equipment can halt production and waste valuable time. Goods can also turn
out to be faulty and need to be fixed- taking up more money and time

By avoiding such wastage, a firm can benefit in many ways

less storage of raw materials, components and finished goods- less money and time tied up in
inventory

quicker production of goods and services

no need to repair faulty goods- leads to good customer satisfaction

ultimately, costs will lower, which helps reduce prices, making the business more competitive and
earn higher profits as well

Advertisements

Report this ad

Now, how to implement lean production? The different methods are:

Kaizen: it’s a Japanese term meaning ‘continuous improvement’. It aims to increase efficiency and
reduce wastage by getting workers to get together in small groups and discuss problems and
suggest solutions. Since they’re the ones directly involved in production they will know best to
identify issues. When kaizen is implemented, the factory floor, for example, is rearranged by re-
positioning machinery and equipment so that production can flow smoothly through the factory in
the least possible time.

Capture 1

Benefits:

increased productivity
reduced amount of space needed for production

improved factory layout may allow some jobs to be combined, so freeing up employees to do
other jobs in the factory

Just-in-Time inventory control: this techniques eliminates the need to hold any kind of inventory
by ensuring that supplies arrive just in time they are needed for production. The making of any
parts is done just in time to be used in the next stage of production and finished goods are made
just in time they are needed for delivery to the customer/shop. The firm will need very reliable
suppliers and an efficient system for reordering supplies.

Benefits:Reduces cost of holding inventory

Warehouse space is not needed any more, so more space is available for other uses

Finished goods are immediately sold off, so cash flows in quickly

Cell Production: the production line is divided into separate, self-contained units each making a
part of the finished good. This works because it improves worker morale when they are put into
teams and concentrate on one part alone.

Methods of Production

Job Production: products are made specifically to order, customized for each customer. Eg:
wedding cakes, made-to-measure suits, films etc.

Advantages:Most suitable for one-off products and personal services

The product meets the exact requirement of the customer

Workers will have more varied jobs as each order is different, improving morale

very flexible method of production

Disadvantages:Skilled labour will often be required which is expensive

Costs are higher for job production firms because they are usually labour-intensive

Production often takes a long time

Since they are made to order, any errors may be expensive to fix

Materials may have to be specially purchased for different orders, which is expensive

Batch Production: similar products are made in batches or blocks. A small quantity of one product
is made, then a small quantity of another. Eg: cookies, building houses of the same design etc.

Advantages:Flexible way of working- production can be easily switched between products

Gives some variety to workers

More variety means more consumer choice

Disadvantages:Can be expensive since finished and semi-finished goods will need moving about

Machines have to be reset between production batches which delays production

Lots of raw materials will be needed for different product batches, which can be expensive.

Flow Production: large quantities of products are produced in a continuous process on the
production line. Eg: a soft drinks factory.

Advantages:There is a high output of standardized (identical) products

Costs are low in the long run and so prices can be kept low

Can benefit from economies of scale in purchasing

Automated production lines can run 24×7

Goods are produced quickly and cheaply

Capital-intensive production, so reduced labour costs and increases efficiency

Disadvantages:A very boring system for the workers, leads to low job satisfaction and motivation

Lots of raw materials and finished goods need to be held in inventory- this is expensive

Capital cost of setting up the flow line is very high

If one machinery breaks down, entire production will be affected

Factors that affect which production method to use:

The nature of the product: Whether it is a personal, customized-to-order product, in which case
job production will be used. If it is a standard product, then flow production will be used

The size of the market: For a large market, flow production will be required. Small local and niche
markets may make use of batch and flow production. Goods that are highly demanded but not in
very large quantities, batch production is most suitable.

The nature of demand: If there is a fair and steady demand for the product, it would be more
suitable to run a production line for the product. For less frequent demand, batch and job will be
appropriate.
The size of the business: Small firms with little capital access will not produce using large
automated production lines, but will use batch and job production.

Technology and Production

Automation: equipment used in the factory is controlled by computers to carry out mechanical
processes, such as spray painting a car body.

Mechanization: production is done by machines but is operated by people

CAD (computer aided designing): a computer software that draws items being designed more
quickly and allows them to be rotated, zoomed in and viewed from all angles.

CAM (computer aided manufacturing): computers monitor the production process and controls
machines and robots-similar to automation

CIM (computer integrated manufacturing): the integration of CAD and CAM. The computers that
design the product using CAD is connected to the CAM software to directly produce the physical
design.

EPOS (electronic point-of-sale): used at checkouts/tills where operator scans the bar-code of each
item bought by the customer individually. The item details and price appear on screen and are
printed in the receipt. They can also automatically update and reorder stock as items are bought.

EFTPOS (electronic funds transfer at point-of-sale): the electronic cash register at the till will be
connected to the retailer’s main computer and different banks. When the customer swipes the
debit card at the till, information is read by the scanner and an amount is withdrawn from the
customer’s bank account (after the PIN is entered).

Advantages of technology in production

Greater productivity

Greater job satisfaction among workers as boring, routine jobs are done by machines

Better quality products

Quicker communication and less paperwork

More accurate demand levels are forecast since computer monitor inventory levels

New products can be introduced as new production methods are introduced

Disadvantages of technology in production

Unemployment rises as machines and computers replace human labour

Expensive to set up

New technology quickly becomes outdated and frequent updating of systems will be needed- this
is expensive and time-consuming.
Employees may take time to adjust to new technology or even resist it as their work practices
change.

Notes submitted by Lintha

Click here to go to the next topic

Click here to go back to the previous topic

Click here to go back to the Business Studies menu

Share this:

Click to share on Twitter (Opens in new window)Click to share on Facebook (Opens in new
window)Click to share on Pinterest (Opens in new window)Click to share on WhatsApp (Opens in
new window)Click to email a link to a friend (Opens in new window)

Loading...

9 thoughts on “4.1 – Production of Goods and Services”

Tetrahedron says:

October 21, 2023 at 12:49 pm

A clear and concise breakdown of the intricate process behind producing quality goods and
services!

Like

Reply

abdullah says:

May 17, 2022 at 12:43 pm

Liked by 1 person

Reply

Joannah says:

November 15, 2021 at 4:47 pm

I have a business exam

tomorrow and this has really helped me. Thank you so much.

Liked by 2 people

Reply

loshne says:

October 24, 2021 at 9:22 am

thanks this was helpful for revision- cool blog

Liked by 1 person

Reply

aaron woong says:

February 22, 2021 at 9:24 am

I believe there is a typo under Lean Production:

Motion-unnecessary moving about my employees and operation of machinery is a waste of time

the “my” seems to be an error

Anyway, thanks for the notes, they are very helpful.

Reply

Lintha says:

February 23, 2021 at 2:41 pm

thank you! fixed!

Like

Reply

Honest Tandanai says:

June 13, 2020 at 12:36 pm

Thank you so much ….this is the most helpful notes

Liked by 1 person

Reply

MEMORY says:

May 27, 2018 at 8:38 pm

THANKS THIS IS HELPFUL

Like

Reply

Sarah says:

May 30, 2018 at 1:51 pm

THAT’S GREAT!

GOOD LUCK FOR YOUR EXAMS! XD

Liked by 1 person
Reply

What Do You Think?

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Search for:

Search …

CONTACT US

If you have any queries, complaints or suggestions, feel free to comment, or write to us at:

[email protected]

[email protected]

Advertisements

AS Level English Language (9093) Support Guide

Check out our friend Iman's site where she'll help you with AS Level English language (9093).
Bookmark this site to your browser so you can use it for your AS Levels!

Advertisements

THE TEAM

The IGCSE AID Team is based in the little state of Kerala in South India. During our four-year
journey with CIE, we’ve managed to grab several Cambridge Learner Awards, including one Top in
World and five Top in Country (India) awards.

ananyaraj16

Azmina

gayatri2000

Lintha

Sarah

Iman Hashim

Home About Notes Mind-Maps Resources

Privacy & Cookies: This site uses cookies. By continuing to use this website, you agree to their use.

To find out more, including how to control cookies, see here: Cookie Policy