Production and Productivity: A Simple Guide
Production and Productivity
Production involves converting inputs into saleable goods, such as shoes. This process requires resources to be used efficiently, meeting consumer demand and quality standards.
Productivity
Productivity is a measure of how efficiently inputs are transformed into outputs.
Improving Productivity
- Improve skill level and motivation of workers
- Introduce more automation and better technology
Labour productivity = total output / number of workers
Inventories (Stock)
Inventories (stock) refer to raw materials, work in progress, and finished goods.
Why hold inventories:
- To have components ready for production
- Not having enough stock might result in loss of sales
Lean Production
Lean production involves producing goods and services with minimal waste of resources.
- Benefits: Quality is improved, waste is reduced, and new products are brought to market quicker.
Waste includes defects, overproduction, and high inventories.
Just-in-Time (JIT)
Just-in-time (JIT) is a lean production method where raw materials arrive from suppliers as needed, reducing business costs by eliminating inventory holding costs.
Kaizen
Kaizen is a lean production approach where workers can suggest improvements to quality or productivity.
Production Methods
- Job Production: Production of items one at a time (expensive due to highly skilled workers, but high prices can be charged).
- Batch Production: Production of goods in batches (less motivated workers, but unit costs are lower).
- Flow Production: Production of large quantities (huge investment, but cost per unit is reduced).
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Types of Costs
- Fixed Costs: Costs that don’t change with the level of production (rent/salaries).
- Variable Costs: Costs that change according to the level of output; the more goods and services produced, the higher the variable costs (wages).
Economies of Scale
Economies of scale involve a reduction in average costs as a result of increasing the scale of operations.
Diseconomies of Scale
Diseconomies of scale are factors that cause average costs to rise as the scale of operations increases.
Economies of Scale Examples
- Financial (lower interest)
- Managerial (specialist managers)
- Marketing (average costs per unit decreases)
- Purchasing (buying in bulk)
- Technical (flow production, new technologies)
Diseconomies of Scale Examples
- Poor communication
- Demotivation of workers
- Poor control
External Economies of Scale
External economies of scale are cost advantages a business enjoys as a result of the whole industry growing.
Formulas
- Revenue = output x price per unit
- Variable costs = output x variable cost
- Total costs = fixed costs + variable costs
- Average costs = total costs / total output
- Profit = total revenue – total costs
Break-Even Point
The break-even point is the level of output where revenue equals total costs (no profit or loss).
- Fixed costs / (sales price – variable costs)
Margin of Safety
The margin of safety is the amount by which actual sales exceed the break-even level of output.
- MOS = actual sales – BEP or MOS / BEP x 100 (percentage)
Break-Even Charts
- Benefits: Easy to construct and interpret, providing useful information for decision-making.
- Limitations: It’s not always easy to separate costs into fixed and variable, and it assumes all output is sold.