CHAPTER 15: PRODUCTION OF GOODS AND

SERVICES

Grade 9 IGCSE
BUSINESS STUDIES
Objective:
By the end of this session you will be able to understand:

1.The production process

2.How to explain, measure and increase productivity
3.Why businesses need to hold and control inventories
4.What is lean production
5.Different methods of production
6.How technology has changed production methods
 The Production process
Production is the process of converting inputs such as land, labor, and capital into
finished goods and services.

Businesses combine these inputs in different proportion to produce valuable outputs

( the final good or service) to satisfy consumer wants and needs.

The process involves adding value to a product. Value added is the difference between
the cost and the final selling price.
When the production process is called
“Labor – Intensive”?
For a business to be competitive it should combine these inputs of
resources efficiently to keep costs low and increase profits.

In developing countries, where wages are low, it may be more efficient
to use many workers and few machines to produce goods ,this is called
labour- intensive.

This is where the proportion of labour used in producing the product is

relatively high. Labour will usually be used instead of capital.
 When the production process is
called “capital – Intensive”?

Capital intensive - this is where

machines are used to produce goods.
In developed countries where labour
costs are high businesses use relatively
more capital than labour.
How to improve labour productivity?

 In general, improving productivity can either mean using fewer

inputs to produce the same output or using the same input to
produce a larger amount of output.
 As employees become more efficient , the amount of output
produced per employee will rise and therefore the costs of
producing the product will fall.
 Ways to improve productivity
 Training => improving the skills of employees => they become
more efficient=>increased output per worker => higher sales
 Automation and technology => use more/better machines => Can
produce more outputs at better quality => better company image
 Improving the motivation of employees => they will produce more
output => higher output per employee => higher sales => higher
potential profit
 Improving the layout of machines to reduce wasted time moving
from one workspace to another => so better use of the time =>
can produce more output per day/hour
Types of inventories
Costs of holding inventories
If holding inventories is costly,
then why do we hold
inventories?
 LEAN PRODUCTION
 Earlier in this chapter we looked at the benefits of a business of improving
productivity and how this can reduce the cost of producing each unit of output.
 Now we will learn the concept of “Lean production”.

 Lean production covers a variety of techniques used by businesses to cut down

on waste and therefore increase efficiency.

 Our goal is to improve productivity, lower the costs of production by reducing

waste to a minimum while maintaining, or improving, the quality of the finished
product.

 What are the types of waste that can occur in production?

 High inventories:
Defects: any faults storage costs,
require the goods to be warehouse costs,
repeated, time and raw risk of obsolescence
materials can be wasted

Types of waste that can

Over production: high
occur in production
storage costs, possible
damage whilst in
storage, risk of
obsolescence
Transportation:
goods might be
Over- processing: If damaged when
complex machinery is they are being
being used to perform moved around
simple tasks then this is
wasteful
 Faster production: new
products can be brought Less storage of raw
to the market more materials or
quickly components

Costs that might be saved from

eliminating of waste
Costs per unit are
reduced: I can reduce
the final price and
enable the business to
be more competitive
Wastage of time
and raw materials
Less money tied up in is reduced or
inventories : I can use this eliminated ( no
money to invest in defects)
machines or improve my
business
 What is Kaizen?
 It means “ continuous improvement” in Japanese.

 The kaizen approach gives all employees the opportunity to make suggestions
about how to improve quality or productivity.

 The improvement does not come from investing in a new technology but
through the ideas of workers themselves, no one knows the problems that
exist better than the workers who work with them all the time so they are the
best ones to think of ways to overcome them.

 The changes suggested by individual employees may be very small, but all of
these small improvements can lead to big improvements in efficiency.
 Just In time
 It is a production method whose focus is on reducing or eliminating the
need to hold inventories of raw materials and finished products.
 The raw materials are delivered by suppliers just in time to be used in the
production process, and the finished product is made just in time to be
delivered to the customer.
 JIT reduces business costs by removing the costs of holding inventories
 Just In time
Advantages: reducing the costs of holding inventories
1.warehouse space is not needed => reducing rental costs
2.The finished product is sold quickly (reducing obsolescence)
3.Money will come back to the business more quickly helping its cash flow =>
money is not tied up in inventories => no opportunity cost
 Methods of production

Job Production Batch Production Flow Production

 Methods of production -Job
Production
The main features of Job Production are as follows:

•Each product is made one at a time specifically to a customer.

•Examples of products made using job production would include designer

jewellery or clothing, buildings and flower arrangements.

•Each product made will be unique because it has been designed to meet
specific standards that the customer has set.

•Uses skilled labour rather than machinery - this means it is known as a

labour intensive method of production.

•High quality products are made.

 Job Production
Features Advantages Disadvantages
product is made one at a time – an Variety of work => greater Low volume of production => can’t
individual item is completed employees’ motivation benefit from economies of scale
before another is started => more expensive products

Unique product / each product is High level of customer satisfaction Errors are expensive to correct
different

Labor intensive – skilled skilled labor => High quality Labor intensive + Skilled labor =>
employees products => high final prices => high wages => high costs
more profit
Low volume production – Can’t Production can take a long time =>
produce large quantities possible cash flow problems

High quality products – tailored to Special materials might be needed

customer’s requirements => expensive
 Batch Production
• Batch production is a method of production that
creates several items in a series of production
steps. The items that are created together are
known as a batch.

• A certain number of one similar product is made ,

then a certain number of another product is made
and so on.

Small groups of products made in stages.

• It is suited to products that are identical to each
other, but are only produced in limited quantities –
or for a limited amount of time.
 Batch production
Features Advantages Disadvantages
Similar products are made in Materials can be bought in bulk => less motivated employees because
batches OR A certain number of some economies of scale the work becomes repetitive.
one similar product is made , then
a certain number of another
product is made and so on.
Bakery example: makes one type
of bread, then
one type cake.

Lower unit costs than job some variety to worker’s job Machines need to be reset
production between batches => delay

Machines need to be reset some variety and choice for Semi- finished products need to be
between batches customers moved around =>. Waste of time
and risk of damage
Flexible work, can change Warehouse space is needed to
products easily stock raw materials => warehouse
cost
 Flow Production
• It is the opposite of Job production.

• ‘It is when a large quantities of identical products produced in a continuous process. It is

called flow because the products look as if they are flowing down the production line.

• Flow production usually involves large scale production where each operation on a unit is
performed continuously, one after the other, often on a production line.

• All products are identical, and the aim is to make as many as possible to reduce the costs by
benefiting from economies of scale.

• To be efficient production is continuous. Many flow productions open 24 hours and staff
work on shifts.

• Flow production is highly capital intensive – it costs a lot to buy the capital but it is cheap
to run it afterwards.
 Flow Production
Features Advantages Disadvantages
Large quantities are produced/Large Large volume of production => benefit Machinery breakdown => Production
volume of production from economies of scale process can be stopped

Continuous movement of goods along Capital intensive => lower labor costs Boring job => lack of motivation
a production line

Standardized products 24 hours production => large number High storage costs
of products can be produced

Employees are relatively unskilled Very fast production High costs to buy machines

High degree of automation (capital Capital intensive => higher efficiency

intensive)

Fast method of production

 Factors affecting which method of production to
use
• The size of the business : small businesses => cant afford buying lots of
machines => can’t operate on a large scale => job or batch production
• The nature of the demand: if large and steady demand => better to produce it
using flow production to benefit from economies of scale.
• The nature of the product: if unique and tailored=> job production ,others =>
batch or flow.
• The size of the market: international market => flow , local markets => job or
batch
Examples of the use of technology
In shops:
•EPOS (electronic point of sale): When products' bar codes are scanned, and
the information is printed out on a receipt, data is also sent to a computer to
keep track of stocks, so they can manage their inventory levels of each item.
•EFTPOS (electronic fund transfer at point of sale): The customer's
credit/debit card is swiped, and the money is debited from the customer's
bank account. A receipt is printed out to confirm the transaction.

In factories:
•Automation: Equipment in the production process is controlled by a
computer.
•CAD (computer aided design): Used for designing 3-D objects.
•CAM (computer aided manufacture): Computers control machines in the
production process.