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Copyright 2002 by Harcourt, Inc. All rights reserved.

Production

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Definition of production

Production takes place whenresources such as raw materials orcomponents, are changed intoproducts.

It refers to those activities that bringa product into being.

PhotoDisc

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Production Function States the relationship between inputs and outputs Inputsthe factors of production classified as:

Landall natural resources of the earthnot just solid earth! Price paid to acquire land = Rent

Labourall physical and mental human effort involved inproduction

Price paid to labour = Wages

Capitalbuildings, machinery and equipmentnot used for its own sake but for the contributioit makes to

production

Price paid for capital = Interest

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Production Function

Inputs Process Output

Land

Labour

Capital

Product orservice

generated

value added Final Product /Service

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Production Function

There is a production function for every good that

shows the maximum output you can get from any

quantities of inputs. The production function is the

description of the current best technology for

making a good.

Production functions apply to firms.

E.g., Maruti Suzuki has a production function forproducing Swift. GM has a production function for

producing Chevrolets.

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Production Function

Mathematical representationof the relationship:

Q = f (K, L, La) Output (Q) is dependent upon the amount

of capital (K), Land (L) and Labour (La)

used

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7/31Copyright 2002 by Harcourt, Inc. All rights reserved.

Analysis of Production Function:

Short Run

In the short run at least one factor fixed in supply but all otherfactors capable of being changed

Reflects ways in which firms respond to changesin output (demand)

Can increase or decrease output using more or less of somefactors but some likely to be easierto change than others

Increase in total capacity only possiblein the long run

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Analysis of Production Function:

Short Run

In times of risingsales (demand)firms can increaselabour and capitalbut only up to acertain level theywill be limited bythe amount ofspace. In thisexample, land is

the fixed factorwhich cannot bealtered in the shortrun.

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Analysis of Production Function:Short Run

If demand

slows down,the firm canreduce itsvariablefactors inthis example itreduces itslabour andcapital butagain, land isthe factor

which staysfixed.

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Analysis of Production Function:Short Run

If demand slows

down, the firm canreduce its variablefactors in thisexample, itreduces its labourand capital butagain, land is thefactor which stays

fixed.

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Analysing the ProductionFunction: Long Run

The long run is defined as the period of time taken to vary allfactors of production

By doing this, the firm is able to increase its total capacitynot just short term capacity

Associated with a change in the scale of production The period of time varies according to the firm

and the industry

In electricity supply, the time taken to build new capacitycould be many years; for a market stall holder, the long runcould be as little as a few weeks or months!

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Analysis of Production Function:Long Run

In the long run, the firm can change all its factors of production thusincreasing its total capacity. In this example it has doubled its capacity.

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Scales of production

One-off/Job One productnot a prototype.

Batch

From two up to a few hundred thousand. Mass (continuous flow)

Hundreds & hundreds of thousands of products.

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Characteristics of the different

scales of production

One-off/Job Batch Mass (continuous flow)

Labour costs

Efficiency

Tools

Unit costs

Capital investment

Labour intensity

High

Low

General

High

Low

High

Medium

Medium/High

Specialised

Medium

Medium/High

Medium

Low

High

Specialised

Low

High

Low

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Three methods of production

Figure:

PhotoDisc

Methods of production

Job production Batch production Flow production

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It involves the productionof a single product at atime.Job production

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Job production

Advantages:

Able to produceunique orders to meet

customers individualneeds.

More likely tomotivate workers (see

end results) Fairly simple way ofproduction(one a time)

Disadvantages:

Labor intensiveness

and high costs High selling costs Not fit for mass

production and large

demand

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This involves dividing thework into a number ofdifferent operations, or amethod that involves

completing one operationat a time on all units

before performing the next.

Job production

Batch production

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Batch production

Advantages:

Suitable for a wide

range of similarproducts

Reducing the need forskilled workers

More standardizedproducts and lessmachinery needed

Disadvantages:

Higher unit costs forsmall batch

Less motivatedworkers for repetitiveone operation

Careful planning

needed to reduce idlemachines or workerwaiting

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It is a method of large-scaleproduction of standardizedproducts, where eachoperation on a unit is

performed continuously oneafter another, usually on aproduction assemble line

It often includes mass,repetitive and process

production.

Job production

Batch production

Flow production

PhotoDisc


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Flow production

Advantages:

Large scale production

and reduced unit costs Highly automated andhigh efficiency

Able to produce large

quantity of products

Disadvantages:

Very high investment costin machinery and

equipment Limited ability to meet

unique customer needs

Repetitive operation and

less motivation High costs with thebreakdown of machines

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Factors affecting the choice of proper

production methods

The nature of the productDifferent products may require a specific production method.

The size of marketA big or small market may require a different production method. The stage of business development

A start-up firm or large established firm will use different production methods.

The current state of technologyChanges in technology result in firms using new mass productionmethods.

PhotoDisc

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Strategic Importance of the

Production Function

Mass Productionsystem formanufacturing products in large amountsthrough effective combinations of

employees with specialized skills,mechanization, and standardization

Assembly Linemanufacturing technique thatcarries the product on a conveyor system pastseveral workstations where workers performspecialized tasks.

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The Job of Production Managers

Inventory Control Requires balancing the need to keep stocks on

hand to meet demand against the expenses ofcarrying the inventory

Perpetual inventory: system that continuouslymonitors the amounts and location of inventory

Vendor-managed inventory: system that handsover a firms inventory control functions to

suppliers

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Implementing the Production Plan

Just-in-Time Systemmanagementphilosophy aimed at improving profits andreturn on investment by minimizing costs andeliminating waste through cutting inventory on

hand.

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Implementing the Production Plan

Material Requirement Planning (MRP)computer-based production planning system bywhich a firm can ensure that it has needed partsand materials available at the right time and

place in the correct amounts.

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Controlling the Production Process Production planningdetermines the amount

of resources (including raw materials and other

components) a firm needs to produce a certainoutput

Routingdetermines the sequence of workthroughout the facility and specifies who will

perform each aspect of production at whatlocation

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Controlling the Production Process

Schedulingdevelopment of timetables thatspecify how long each operation in the

production process takes and when workersshould perform it.

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Controlling the Production Process Gantt charttracks projected and actual work

progress over time

PERT (Program Evaluation and ReviewTechnique)chart which seeks to minimizedelays by coordinating all aspects of the

production process

Critical Pathsequence of operations that requiresthe longest time for completion

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Sample Gantt Chart

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PERT Diagram for Building a Home

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