Production, Productivity & Efficiency (Edexcel A Level Business)

Methods of Production

• Production is the transformation of resources (e.g. raw materials components and processes) into finished goods or services

  • Goods are physical products, such as bicycles and T-shirts

  • Services are non-physical items such as hairdressing, tourism and manicures

• Businesses can organise their production processes in a variety of ways

The main methods of production
 

• The method of production used by a business will depend upon a number of factors

  • The level of output required to be produced

  • The nature of the product

  • Whether the product is standardised or customised

  • The level of automation used in production

Methods of production

Job production

• Producing one item at a time, as ordered by the customer

  • Advantages

    • High quality product

    • Motivated and highly skilled workers

    • Customised products can be produced

  • Disadvantages

    • Production is slow

    • Labour costs are high

Batch production

• Groups of the same product are produced, before moving on to a group of different products

  • Advantages

    • Workers can specialise

    • Production can take place as the previous 'batch' starts running out

  • Disadvantages

    • Requires careful coordination to avoid shortages

    • Money is tied up in stock as completed products need to be stored

Flow production

• Continuous manufacturing of standardised products, usually on a production line

  • Advantages

    • Low unit costs due to economies of scale

    • Rapid production

    • Usually highly automated (capital intensive)

  • Disadvantages

    • Customisation is difficult

    • Capital equipment can be expensive to purchase

Cell production

• This involves workers being organised into multi-skilled teams, with each team responsible for a particular part of the production process

  • Advantages

    • Cell production is often more efficient than other methods as workers share their skills and expertise

    • Motivation is usually high as employees work as a team

  • Disadvantages

    • Requires extensive reorganisation of production processes

    • Teams efficiency may be reduced by weaker workers

Calculating Productivity

• Productivity is the output per input (person or machine) per hour e.g. an Ikea worker is able to produce 2 Poāng chairs per hour

  • This is not production, which is the total amount of output produced in a time period, e.g. IKEA produced 300 Poāng chairs in February

• The labour productivity of a business is measure of the output per worker during a specified period of time

• Labour productivity is calculated using the formula

• Capital productivity is a measure of the output of capital employed (e.g. machinery) during a specified period of time

• Capital productivity is calculated using the formula

Factors that Influence Productivity

•  The productivity within a business can often be improved

• When productivity increases, business costs decrease

• When business costs decrease, the firm can either pass on this decrease to consumers in the form of lower prices - or maintain the selling prices and enjoy higher profit margins

Factors that Influence Productivity

The Link Between Productivity & Competitiveness

• Competitiveness refers to the ability of a business to maintain or grow its sales and market share given the presence and actions of rivals

• Businesses that increase their level of productivity (e.g. of workers or capital equipment) are likely to be more competitive

The link between productivity & competitiveness  

• Businesses that are competitive are likely to have the financial resources required to continue investing in improvements to their productivity

Understanding Efficiency

• Efficiency refers to the ability of a business to use its production resources as cost-effectively as possible

  • Efficiency is often measured in terms of the average cost per unit

  • The average cost per unit is calculated using the formula

• Maximum efficiency is achieved when the cost per unit is at its lowest

Maximum efficiency occurs at the point where the costs are at their lowest

• The average cost curve shows that the most efficient level of production is achieved where

  • Economies of scale are maximised

  • Total costs are spread across an optimum level of output

  • Diseconomies of scale are minimised

Factors that Influence Efficiency

The Range of Factors that can Influence Business Efficiency

Capital Intensive & Labour Intensive Production

• Labour-intensive production predominantly uses physical labour in the production of goods/services

  • The delivery of services is usually more labour-intensive than manufacturing

  • In countries where labour costs are low (e.g. Bangladesh) labour-intensive production is common

  • Small-scale production is likely to be labour-intensive

  • E.g. UK schools are labour-intensive operations as teachers plan and deliver lessons and provide pastoral support

• Capital-intensive production predominately uses machinery and technology in the production of goods and services

  • Large-scale production of standardised products is likely to be capital-intensive

  • Manufacturing in developed countries where labour costs are relatively high is likely to be capital intensive

  • E.g. Automative manufacturers such as Ford use robots and other production technology to manufacture vehicles with supervisors overseeing the quality of output

The Advantages & Disadvantages of Labour Intensive and Capital Intensive Production