The Meaning of Production (CIE IGCSE Business)

• Production is the transformation of resources (e.g. raw materials, components and labour) into finished goods or services
  • Goods are physical products, such as bicycles and T-shirts
  • Services are non-physical items such as hairdressing, tourism and manicures

Diagram Showing the Purpose of Production

Raw materials are converted into finished goods/services. This process requires production and the productivity of workers or machines
 

• This process of transforming inputs into outputs (goods and services) adds value to the raw materials
• Competitive businesses combine these inputs of resources efficiently, making the most of the resources so as to minimise costs and generate a profit
• Operations management focuses on designing, controlling and improving the processes used in the production of goods and services
  • It involves overseeing the entire production process, from acquiring raw materials to delivering the final product/service to customers
  • Its goal is to ensure that the production process is efficient, cost-effective and meets quality standards

• The terms production and productivity are fundamentally different
  
  
• Production is the act of adding value to the factors of production to create goods/services e.g. using tomatoes & basil to create a soup
  • It is the process of converting the factors of production into goods/services
  • It is a measure of output e.g. 3 cans of soup
    
    
• Productivity is a measure of efficiency that calculates the amount of outputs produced per unit of input
  • It calculates how efficiently resources are being used in the creation of goods/services and aids comparison of performance e.g. after training workers proved to be 27% more efficient in their productivity
     
• Labour productivity is calculated using the formula

Improving productivity 

• Productivity can often be improved so as to reduce costs. This can be achieved by
  
  • Increasing output using the same level of inputs
  • Maintain the level of output but using fewer inputs

Diagram of ways Businesses can Improve Productivity

Productivity can be improved by improving employee motivation or training workers to improve their skills

• When costs decrease, a business can either pass on savings to consumers in the form of lower prices or maintain the selling prices and enjoy higher profit margins
• Businesses that increase their level of productivity are likely to be more competitive and are more likely to be successful in the long term 

• Efficiency refers to the ability of a business to use its production resources as cost-effectively as possible
  • Efficiency is often measured in terms of the average cost per unit
  • The average cost per unit is calculated using the formula
    
    

• Maximum efficiency is achieved when the cost per unit is at its lowest
• Businesses that increase their level of productivity (e.g of workers or capital equipment) are likely to be more competitive
  

Diagram with the Benefits of Improved Efficiency

The link between productivity and competitiveness
  

• Businesses that are competitive usually generate more profit. This provides the financial resources to continue investing in improvements to their productivity

• Inventories are raw materials, work-in-progress and finished goods held as stock
  • They enable production to take place to meet customer demand
    
    
• To ensure that there is always enough inventory to satisfy demand, inventory levels must be carefully controlled
  

Stock Control Diagrams

• A stock control diagram illustrates the flow of stock (inventory) into and out of a business over time

Diagram of a Stock Control Chart

An example of a stock control diagram 

Diagram Analysis

• The maximum stock level is the maximum amount of stock a business is able to hold in normal circumstances (1600)
  
• The reorder level is the level at which a business places a new order with its supplier (800)
• The minimum stock level is also known as the buffer stock level and is the lowest level to which a business is willing to allow stock levels to fall (400)
  
• The lead time is the length of time from the point of stock being ordered from the supplier to it being delivered (1 week)
• The stock level line shows how stock levels change over the given time period
  • As stock is used up, a downward slope is plotted
  • When an order is delivered by a supplier, the stock level line shoots upwards