Production of Goods and Services

Production of Goods and
Services
What is production?
• Production is the effective management of resources in producing
goods and services to satisfy consumer wants and needs.
• The process of production adds value to the raw materials and bought
in components.
• To add value the business combine the inputs of a business (factors of
production) to produce more valuable outputs to satisfy consumer
wants or needs.
• For a business to be successful it should combine inputs of resources
efficiently so that it makes the best use of resources at its disposal to
keep costs low and increase profits.
The production process
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 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:
• Businesses often measure the labour productivity to see
how efficient their employees are in producing output.
The formula for it is:
Labour If the employees become more efficient, the amount of

output produced per employee will rise and therefore the
Productivity cost of producing each product will fall. This will make the
business more competitive and is the reason why businesses
are usually very focused on increasing productivity.
Ways to increase productivity
• improving labour skills by training them so they work more
productively and waste lesser resources
• introducing automation (using machinery and IT equipment to control
production) so that production is faster and error-free
• 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
Benefits of increasing efficiency.
• Reduced inputs needed for the same output level.
• Lower costs per unit (average cost)
• Fewer workers may be needed, possible leading to lower wage costs.
• Higher wages might now be paid to workers, which increases
motivation.
Why businesses hold stock
• Firms can hold inventory (stock) of raw materials, goods that are not completed yet 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.
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 and cost respectively.
• Over-processing-using complex machinery and equipment to perform simple tasks may be
unnecessary and is a waste of time, effort and money
• 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
Benefits of Lean Production
• 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
Reduced costs can lead to lower prices for customers, businesses being
more competitive and possibly increased profits.
Lean production can be achieved by the
following methods:
• Kaizen
• Just–In-Time
• Cell Production
Kaizen
• 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
Kaizen method before and after effect
Advantages of Kaizen
• 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.
Advantages of Just In Time (JIT)
• 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.
The firm will need very reliable suppliers and an efficient system for
reordering supplies.
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.
Advantages:
The employees feel more valued and are less likely to go on strike or
cause distractions.

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Production of Goods and

 Use the resources in a cost-effective and efficient manner

Labour If the employees become more efficient, the amount of

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