Production, Productivity and Efficiency

Factors of Production

• Capital: Machinery and equipment used in production.

• Entrepreneurship: The initiative and risk-taking to start and manage a business.

• Land: Natural resources used in production.

• Labour: Human effort used in production.

Sectors of Industry

• Primary Sector: Harvesting raw materials (e.g., farming, mining).

• Secondary Sector: Adding value to raw materials to create products/services (e.g., manufacturing).

• Tertiary Sector: Providing services to customers (e.g., retail, healthcare).

• Quaternary Sector: Research and development (R&D) and information-based services.

Capital Intensive vs. Labour Intensive Production

• Capital Intensive: Relies heavily on automation, machines, and robots.

  • Advantages:

    • Lower unit costs at high scale production.

    • Machinery can operate 24/7.

    • Potentially easier to manage than humans.

    • Faster and more efficient.

    • More precise leading to higher quality.

  • Disadvantages:

    • Significant set-up costs; expensive initial investment.

    • Can be inflexible (machines perform specific tasks).

    • May cause job insecurity and resistance from existing workers.

• Labour Intensive: Relies heavily on human labour.

  • Advantages:

    • More flexible (workers can be retrained).

    • Lower costs for small-scale production.

    • Potential for creativity and innovation from workers.

    • Suitable for countries with low labour costs.

  • Disadvantages:

    • Difficult to manage and motivate workers.

    • Workers require breaks and holidays.

    • Higher likelihood of absences and sick leaves.

Determining the Best Mix of Labour and Capital

• Nature of Product:

  • Services are usually labour intensive.

  • Mass-produced products are usually capital intensive.

• Relative Price of Capital/Labour:

  • Low labour costs in some countries make labour-intensive production cheaper.

• Size of Business:

  • Larger businesses can finance large capital equipment.

Level of Production and Productivity

• Level of Production: Total output in units of a business over a specified time period.

• Productivity: Output measured against input over a period of time.

  • Productivity = \frac{Output}{Input}

• Capital Productivity: Output (over a period of time) / Number of machines.

  • Capital\ Productivity = \frac{Output}{Number\ of\ Machines}

• Labour Productivity: Output (over a period of time) / Number of employees.

  • Labour\ Productivity = \frac{Output}{Number\ of\ Employees}

Factors Influencing Labour Productivity

• Specialization:

  • Workers specialize in specific tasks, increasing skill and efficiency.

  • More specialization leads to faster, better quality output and increased sales revenue.

• Education/Training:

  • Government-provided education and business-sponsored training enhance skills.

  • More education results in fewer mistakes, greater efficiency, and better quality.

• Motivation of Workers:

  • Financial and non-financial incentives motivate staff.

  • Higher motivation leads to greater job enjoyment, fewer errors, better quality, and increased labour productivity.

• Labour Flexibility:

  • Staff's ability to perform different tasks and work at different times.

  • More flexibility ensures continuous operations during absences or high demand, leading to more output and sales revenue.

Factors Influencing Capital Productivity

• Service & Maintenance:

  • Regular equipment maintenance ensures longer, uninterrupted operation.

  • Proper maintenance leads to faster operation and fewer malfunctions.

• Update & Replace Old Technology:

  • Updating to newer machines results in faster operation and fewer stoppages.

• Ensure Machine Operatives Are Well Trained:

  • Proper training results in proper machine usage, fewer accidents/stops, and higher output.

Efficiency

• Efficiency: Using all resources to minimize average unit cost from the level of output.

• Economies of Scale (EoS): Reducing average cost per unit by increasing production scale.

Internal Economies of Scale

• Purchasing: Bulk buying to reduce per-unit costs.

• Managerial: Effective management to motivate staff and reduce waste.

• Marketing: Advertising to attract customers and employees.

• Financial: Access to loans and credit at more favourable interest rates for larger businesses.

• Risk-Bearing: Diversifying products to spread risk.

• Technical: Utilizing advanced production methods.

Lean Production

• Lean Production: Techniques used to cut waste and increase efficiency.

• Cell Production: Staff split into groups (cells) to complete a part of the process.

• Kaizen: Continuous improvement, inviting workers to suggest improvements.

• Just-in-Time (JIT): Minimizing inventory by supplying when needed.

Job Production

• Job Production: Single product made at a time to meet specific customer requirements.

  • Advantages:

    • Meets customer needs exactly.

    • Varied jobs for staff, increasing motivation.

    • High prices charged due to skilled labour and quality.

  • Disadvantages:

    • Skilled labour needed, leading to high costs.

    • Takes longer to make each product.

Batch Production

• Batch Production: A quantity of one product type made at a time, then another quantity of a slightly different product.

  • Advantages:

    • More use of machinery, quicker production.

    • More product choices for customers.

    • Job variety for staff.

  • Disadvantages:

    • Machines have to be reset between batches, causing delays and higher costs.

    • Requires more storage space.

    • If a defect is found, the whole batch may need to be discarded.

Flow Production

• Flow Production: Large quantities of a product produced in a continuous process.

  • Advantages:

    • High/fast output.

    • Lower unit cost of production (EoS).

    • Capital intensive leading to lower labour costs.

  • Disadvantages:

    • Low-skilled/repetitive tasks lead to boredom and demotivation.

    • High capital costs of setting up.

    • Products are too standardized, not meeting customer expectations.

Factors Affecting Selection of Production Method

• Nature of Product: Standardized or unique product demands.

• Size of Market: High or small demand.

• Nature of Demand: Steady or fluctuating demand.

• Size of Business: Small businesses may lack capital for capital-intensive production.

Lead-In Time

• Lead-in Time: Time taken to develop and launch a new product.

  • First Mover Advantage:

    • Premium prices.

    • Customer loyalty.

    • High influence on suppliers.

  • Disadvantages:

    • Risk of product not succeeding.

    • Copycats can offer lower prices and learn from mistakes.