What is labour intensive production?
High levels of human input in the production process
- highly specialist, personal, service industry, high level of skill required
What is capital intensive production?
High level of capital investment e.g. use of machinery
- mass production, standardisation, efficient production
The balance of labour intensive and capital intensive production depends on the nature of the product and the target market.
Productivity?
Amount of output that can be produced with a given input of resources in a specified time period.
Maximising productivity means getting the most out of the resources available to the business.
Labour productivity equation?
Total output (in a time period) / Number of employees
Factors affecting productivity?
Specialisation - if an employee becomes a specialist in a specific role
Capital intensity - introducing automation to increase output
Working practices - may include the layout of production, team working, quality management
Motivating workers - happy workers work harder and faster
Education and training - to improve the skills of the workforce
Difficulties when increasing labour productivity?
Sometimes a trade-off
✔️Increasing productivity can lead to increased competitiveness as cost per unit is reduced, allowing a business to increase it’s profit margin or offer customers a more competitive price.
❌ Although increasing output may improve productivity and unit costs in the short term, high levels of output can lead to stress and burnout. This leads to a compromise on quality, customer service and creativity as well as costly mistakes being more likely to occur leading to product returns and complaints.
Benefits of improved efficiency?
- labour productivity rises
- unit costs fall
- resources such as labour,expertise and time can be reallocated
- resources such as labour,expertise and time can be reallocated
- profit margins increase
- improved flexibility across the business
- opportunity to explore new ventures - e.g. a new product line
- ability to charge lower prices and therefore improve competitiveness
Ways that waste may happen in a business?
Motion - unnecessary movement of people
Overproduction- making products that cannot be sold easily
Overprocessing - adding features that do not add value
Waiting - for processes to finish before others can begin
Transport - unnecessary movement of the product or materials
Inventory - too much stock
Defects - faulty products
Cost of poor stock management?
- Opportunity cost → over-stocking means tying up cash that can’t be used elsewhere
- Shrinkage → stock being stolen, damaged or lost
- Financial costs → storing stock and managing it can be time consuming and costly
- Too little stock → having too little stock means that orders cannot be met, which leads to unhappy customers and loss of sales
How can wastage of stock be minimised?
- Store inventory appropriately e.g perishable goods in refrigeration
- Rotate stock - so old stock gets used/sold first
- Pricing strategies - adjust prices to clear stock through sales promotions
- Computerised stock management systems - to track all inventory
- Organising production so that workers work more effectively reduces waste in terms of time
Can lead to greater productivity and efficiency and reduce the average/unit costs of production
Main focus of lean production?
reducing….
- defects
- time wasted
- inventory levels
What is lean management?
Should remove anything that is not necessary
The following aspects of a business could be redesigned to be more efficient:
- meetings
- processes
- organisational structure
What can effective lean production lead to?
Competitive advantage
This is because:
- waste is minimised along with average costs
- improve flexibility and reduce lead times
- leading to greater customer satisfaction
- in times of difficulty, e.g. economic instability, lean organisations are more able to survive and continue to make a profit
Ways to improve capacity utilisation?
- Increase workforce hours - offer overtime pay
- Employ workers on temporary contracts
- Outsource some of production
- Rationalisation: redundancies or sale of assets
- Sub-contract in work from another business
Why may a business want to hold stock?
- enable production to take place
- satisfy customer demand
- precaution against supplier delay
- allow efficient production
- allow for seasonal changes
- provide buffer between production processes and can be useful if machinery breaks
Advantages of buffer stock?
- allows a business to meet sudden increases in demand/unexpected orders
- allows production to continue in the event of supplier delay
- holding buffer stock could result in placing fewer orders which can reduce delivery and supply costs
Disadvantages of buffer stock?
- cost of storing and securing buffer stock
- stock could deteriorate, especially if perishable
- cash flow implications of having money tied up in stock
Advantages of just in time?
- Less storage space required which saves rent and insurance costs and allows more production/selling space
- Reduces chances of stock going out of date/obsolete and can therefore help with waste minimisation
- Better cash flow as less money is tied up in unused stock
It’s success depends on the reliability of a business’s suppliers
Disadvantages of just in time?
- Increased delivery and supply costs as orders are placed more often
- May result in reduced cost savings from bulk buying as orders may be smaller, but more frequent
- Little room for mistakes due to minimal stock holding
- Supplier delay could result in production slowing down or stopping
Methods of lean production? (And advantages of lean production)
Just in time management of stock
Quality assurance and total quality management
Continuous improvement (kaizen)
:)
- improved productivity
- greater efficiency
- lower average/unit costs
- better quality and reliability
- helps to gain competitive advantage (e.g. better reputation)
Key aspects of quality for the consumer?
- good design
- good functionality
- reliability and consistency
- durability
- good after sales service
- value for money
Benefits to a business of having quality products? (How competitive advantage can be gained?)
- customer loyalty
- added value
- differentiation (especially products which are deemed to be of “high quality”)
- reduced price elasticity of demand + the ability to charge a higher price
- reduced defects and returns
Methods of achieving quality
- have clear understanding of customer needs
- achieve a quality award/mark from external organisation
- involve all employees in managing quality
- work with high quality suppliers
- invest in technology
- train employees in quality procedures
Why is quality difficult to improve?
- customers’ perception of quality is constantly changing
- a successful business could let quality slip if there is no incentive to outperform rival businesses
- improving quality can add more work so might be naturally opposed by the workforce
- measuring quality can be difficult and expensive
