IB Business Management Unit 5.1 pg. 614 Production Methods

Production Referred to as operations management Concerned with producing the right goods/services in the right quantities in a timely & cost-effective manner

Production Productivity is the rate at which inputs are transformed to outputs (how efficient is the business?) The form of production that a manager chooses will help determine a firm’s productivity

Production Sectors Primary sector: extracting raw materials, harvesting crops, rearing animals (mining, agriculture, fishing)

Production Sectors Secondary sector: turning natural resources into finished goods (steel production, car manufacturing)

Production Sectors Tertiary sector: providing services (finance, insurance, health care, education)

4 Factors of Production Land, labor, capital, enterprise Known to production managers as Five M’s: materials, manpower, machines, money, mgmt These factors are combined in cost-effective way to ensure value-added is performed during ‘production’ The value of outputs (products) is greater than the inputs (PROFIT)

Production What is the best production method for businesses? What is best for one business may not be best for another The same kind of product can be produced using different methods 3 types of production: job, batch, mass

Methods of Production Job production: business creates individual product from start to finish to meet customer’s standards Items are “tailor-made” Usually used by small firms No economies of scale Examples: Custom computers, haircut, custom home, office building, Disneyland

Advantages of Job Production Quality: highly-skilled labor is used Motivation: workers feel proud of finished product Uniqueness: adds value to the production process Flexibility: each product can be altered to the customer’s request

Disadvantages of Job Production Expensive: labor-intensive. Higher cost for consumer Time consuming Few economies of scale b/c each product is unique

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Methods of Production Batch production: producing a limited number of identical products One batch completed before production switches to next batch Good for businesses that make a range of products Example: Nike produces batches of different sizes/colors, Krispy Kreme makes batches of different doughnut types

Advantages of Batch Production Economies of scale: machines can produce larger quantities Specialization in production process Variety EX: b-day cakes made in batch but can be customized

Disadvantages of Batch Production Inflexible: once a batch is started, it’s difficult to stop Storage costs of larger quantities Worker boredom

Methods of Production Flow production: form of mass production where different operations are progressively carried out in sequence When one task is complete, the next stage must start immediately Ex: bottled water

Methods of Production Line production: form of mass production where the product is assembled along a conveyer belt Also known as an assembly line Ex: vehicle manufacturers

Methods of Production Mass production: producing mass amounts of standardized products Identical products are produced in large quantities Ex: New York Times prints one million newspapers

Advantages of mass production High volume produced at low cost (economies of scale) Reduces average fixed costs (bc so many products are produced) Machines can work 24 hours a day Product quality is standardized; low defect rate Low labor costs for unskilled workers

Disadvantages of mass production Work is boring & monotonous Machine breakdowns cause major problems Little flexibility in production methods Once a process has begun, cannot make changes Cannot tailor make to customer’s wishes Huge set-up costs. (Must buy machines, maintenance, replacement) Effective storage system needed

Labor and Capital Intensity Some methods of production are labor intensive while others are capital intensive Labor intensive: Job production, services Used in highly skilled professions, ie lawyers More personalization Capital intensive: Batch, mass production Disadvantage: product are highly homogenous, high fixed costs

Review Assignment Choose the most appropriate method of production (job, batch or mass) for each of the following and justify your answer: iPods Navy battleships Coca-Cola 42” plasma TVs Cookies Custom suits iPod – mass/line Coca-cola – batch Cookies – batch Navy ships – job TV – mass/line Custom suits - job