The Meaning of Production (Cambridge (CIE) IGCSE Business)

Introduction to Production

• Production is the transformation of resources (e.g. raw materials, components and labour) 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

Diagram: the purpose of production

• This process of transforming inputs into outputs (goods and services) adds value to the raw materials

• Competitive businesses combine these inputs of resources efficiently, making the most of the resources so as to minimise costs and generate a profit

• Operations management focuses on designing, controlling and improving the processes used in the production of goods and services

  • It involves overseeing the entire production process, from acquiring raw materials to delivering the final product/service to customers

  • Its goal is to ensure that the production process is efficient, cost-effective and meets quality standards

The Difference Between Production & Productivity

• The terms production and productivity are fundamentally different

• Production is the act of adding value to the factors of production to create goods/services e.g. using tomatoes & basil to create a soup

  • It is the process of converting the factors of production into goods/services

  • It is a measure of output e.g. 3 cans of soup

• Productivity is a measure of efficiency that calculates the amount of outputs produced per unit of input

  • It calculates how efficiently resources are being used in the creation of goods/services and aids comparison of performance e.g. after training, workers proved to be 27% more efficient in their productivity

• Labour productivity is calculated using the formula

Improving productivity 

• Productivity can often be improved so as to reduce costs. This can be achieved by

  • Increasing output using the same level of inputs

  • Maintain the level of output but using fewer inputs

Diagram: ways businesses can improve productivity

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

• Businesses that increase their level of productivity are likely to be more competitive and are more likely to be successful in the long term 

The Benefits of Increased 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

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

Diagram: the benefits of improved efficiency

• Businesses that are competitive usually generate more profit. This provides the financial resources to continue investing in improvements to their productivity

Why Businesses Hold Inventories

• Inventories are raw materials, work-in-progress and finished goods held as stock

  • They enable production to take place to meet customer demand

• To ensure that there is always enough inventory to satisfy demand, inventory levels must be carefully controlled

Stock control diagrams

• A stock control diagram illustrates the flow of stock (inventory) into and out of a business over time

Diagram of a stock control chart

Diagram analysis

• The maximum stock level is the maximum amount of stock a business is able to hold in normal circumstances (1600)

• The reorder level is the level at which a business places a new order with its supplier (800)

• The minimum stock level is also known as the buffer stock level and is the lowest level to which a business is willing to allow stock levels to fall (400)

• The lead time is the length of time from the point of stock being ordered from the supplier to it being delivered (1 week)

• The stock level line shows how stock levels change over the given time period

  • As stock is used up, a downward slope is plotted

  • When an order is delivered by a supplier, the stock level line shoots upwards