Production of goods and services

Welcome to Operations Management: Production of Goods and Services!

Hey there! This chapter is all about how businesses actually make the things they sell. Whether it’s a physical good like a smartphone or a service like a haircut, production is the heart of any operation.

Understanding production methods, efficiency, and quality is essential because it directly impacts a business’s costs, its reputation, and its ability to satisfy customers. Let’s dive in and learn how to manage the 'making' process efficiently!

1. What is Production? The Input-Output Process

Production, or Operations, is the process of taking resources (inputs) and converting them into finished goods and services (outputs).

Inputs (Resources) needed for Production:

Remember the Factors of Production? They are the inputs!

• Land: Raw materials (wood, oil, steel) and the site where production happens.
• Labour: The human effort (workers, managers).
• Capital: Machinery, equipment, and money used to produce.
• Enterprise: The skill and risk-taking needed to organize the first three.

The Goal of Production: Adding Value

The most important concept here is Added Value.

Added Value is the difference between the selling price of the product or service and the cost of the raw materials and components used to make it.

Example: A bakery buys flour, sugar, and butter for \$2. They use these inputs (and labour/equipment) to bake a cake and sell it for \$15. The added value is \$13 (\$15 - \$2). Businesses want to maximise this added value to cover other costs (like rent and wages) and make a profit.

2. Methods of Production

Businesses choose a production method based on the volume (how many they need to make) and the nature of the product (how unique it is). There are three main methods you need to know.

Job Production

Job production involves producing a single, unique item tailored specifically to a customer's order.

Analogy: Think of a custom-built house, a wedding dress, or specialized legal advice. No two are exactly alike.

Advantages of Job Production:

• Products are high quality and often unique.
• Workers are highly skilled and often motivated by variety.
• High prices can be charged (high profit margins).

Disadvantages of Job Production:

• Very high cost per unit.
• Takes a long time to complete.
• Requires skilled labour, which can be expensive.

Batch Production

Batch production involves making a limited number of identical products (a ‘batch’) before switching to make a different batch.

Example: A bakery making 100 chocolate chip cookies, then stopping, cleaning the equipment, and starting a batch of 50 oatmeal cookies.

Advantages of Batch Production:

• Allows the business to meet different customer tastes by producing variety (e.g., different shirt sizes or colours).
• Costs per unit are lower than job production because machines are used more consistently.
• Flexible, as workers and machines can be changed over quickly.

Disadvantages of Batch Production:

• Storage costs can be high if large batches are waiting to be sold.
• Down-time occurs when switching between batches (e.g., cleaning machines or changing settings).

Flow (Mass) Production

Flow production involves continuously producing large quantities of identical products using an assembly line.

Analogy: Imagine a conveyor belt that never stops, making millions of identical items, like soft drinks, canned food, or entry-level cars.

Advantages of Flow Production:

• Very low cost per unit (due to economies of scale).
• High levels of automation reduce wage costs and speed up production.
• Output is consistent and predictable.

Disadvantages of Flow Production:

• The process is very inflexible (difficult to change the product design).
• If one part of the assembly line breaks down, the whole production process stops.
• Work can be boring for employees, leading to low motivation.

3. Efficiency, Productivity, and Lean Production

Once a business chooses a production method, it needs to be as efficient as possible. This means making the most goods and services using the fewest resources.

Increasing Efficiency: The Role of Productivity

Productivity measures the efficiency of production. Specifically, it is the output per unit of input over a period of time (e.g., output per worker, or output per machine).

\( \text{Productivity} = \frac{\text{Total Output}}{\text{Number of Employees (or other input)}} \)

Why is high productivity important?

• It reduces the cost per unit (unit cost).
• The business can produce more goods with the same resources, increasing profits.
• The business becomes more competitive (can potentially lower prices).

How to Increase Productivity

To improve output per worker, businesses can use:

1. Training: Better-trained workers make fewer mistakes and work faster.
2. New Technology/Automation: Using machinery means production is faster, more accurate, and can run continuously.
3. Better Organisation and Motivation: Motivated workers and improved workplace layout streamline operations.
4. Lean Production: Eliminating waste in all operational processes.

Lean Production and Waste Reduction

Lean production refers to techniques designed to cut out waste and raise efficiency throughout the production process.

• Main Types of Waste: Overproduction, waiting time, unnecessary transport, overprocessing, excess inventory, wasted motion, and defects.
• Kaizen (Continuous Improvement): A Japanese philosophy where employees continuously look for small improvements in production methods.
• Just-in-Time (JIT) Inventory Control: Raw materials arrive only when needed for production, and goods are completed just in time to be delivered to customers, minimizing warehouse and holding costs.

Managing Inventories

A business holds three main types of inventory: raw materials, work-in-progress, and finished goods.

• Why businesses hold buffer inventory: To avoid stopping production if deliveries are delayed and to meet unexpected surges in customer demand.
• Costs of holding inventory: Storage and warehousing costs, risk of damage or obsolescence, and working capital tied up in stock.

Technology in Production

Technology dramatically impacts productivity, especially in flow and batch methods.

• Automation: Using machinery (robots, computers) instead of human labour. Advantage: Reduces wages and improves accuracy. Disadvantage: High initial cost; potential redundancy costs.
• Computer-Aided Design (CAD): Software used to design 2D and 3D products quickly and accurately.
• Computer-Aided Manufacturing (CAM): Using computers to control production machinery and equipment.

4. Quality Management

It doesn’t matter how fast you produce goods if they are faulty. Quality is crucial for customer retention and brand reputation.

What is Quality?

Quality means that a product or service is fit for its purpose and meets or exceeds customer expectations.

Key Methods of Managing Quality

1. Quality Control (QC)

Quality Control involves checking the quality of goods at the end of the production process.

• How it works: Inspectors examine finished items, often sampling only a few, to identify defects.
• The Problem: If a fault is found, the item often has to be scrapped or reworked, which is wasteful and costly.
• Example: A furniture company inspecting a completed chair before it is packaged.

2. Quality Assurance (QA)

Quality Assurance involves checking quality standards throughout the production process, aiming to prevent errors before they occur.

• How it works: Every employee is responsible for quality at their stage of production. The whole system is managed to prevent faults from occurring.
• The Benefit: Fewer products are scrapped, reducing waste and rework costs.
• Example: During chair assembly, the worker attaching the legs double-checks the screws before passing it to the next workstation.

3. Total Quality Management (TQM)

Total Quality Management is a company-wide approach where all employees are committed to maintaining high standards of work in every aspect of business operations, aiming for 'zero defects'.

Why is High Quality Important?

A reputation for poor quality can damage a business. High quality leads to:

• Customer Loyalty: Customers return, making sales predictable.
• Strong Brand Image: Businesses can charge premium prices (e.g., Apple).
• Fewer Complaints: Less time and money spent resolving customer issues and replacements.
• Reduced Waste: Especially with Quality Assurance and TQM, fewer faulty products mean lower production costs.

5. Location Decisions

Where a business decides to produce its goods or services is a major strategic decision. A bad location choice can lead to high costs or lost customers.

Factors Influencing Location Choice

The importance of each factor depends on the type of business (goods vs. service, manufacturing vs. retail).

Access and Market Factors:

• Proximity to the Market (Customers): Essential for service providers (like hairdressers, restaurants) and businesses selling heavy, expensive-to-transport goods (like cement).
• Proximity to Raw Materials: Important for businesses that use bulky or perishable raw materials (e.g., a sugar factory needs to be near the sugar cane fields).
• Transport Links: Good roads, ports, or airports are needed for receiving materials and distributing finished goods.

Cost and Resource Factors:

• Availability and Cost of Labour: Does the business need highly skilled workers (e.g., software developers) or cheap, unskilled workers (e.g., assembly line operatives)? The wage rate in different regions matters.
• Cost of Land/Rent and Utilities: Land in city centres is very expensive. Manufacturing often locates outside of urban areas where land is cheaper.
• Power and Water: Industries that require vast amounts of electricity or water must locate where these are cheap and reliable.

External Factors:

• Government Incentives (Grants/Subsidies): Governments often encourage businesses to locate in economically depressed areas by offering money or tax breaks.
• Legislation/Rules: Planning restrictions or environmental protection laws might prevent a polluting factory from locating in certain areas.
• Competition: Sometimes businesses choose to locate away from competitors; other times (like a food court), locating near competitors can attract more customers overall.

Location Example

Did you know? A high-tech company that designs microchips will focus heavily on finding a location near skilled labour and good transport links (for fast air freight of small, expensive chips). They worry less about proximity to raw materials, as those are cheap to transport.