0264 · 4.1.1Production processes

Output, efficiency and labour productivity

0:00Two bread producers can make the same number of loaves using very different amounts of time, materials and effort. One wastes flour and leaves trays waiting beside the oven. The other organises its resources carefully and completes orders with fewer delays. Understanding that difference helps explain productivity, efficiency and how much a business should keep in reserve. Production is using resources to make goods or provide services. Goods are physical products, while services are activities carried out for customers.

0:28Resources entering the process are called inputs, and the goods or services produced are outputs. Ingredients and cooks’ time become meals in a café, while equipment and trained employees provide treatments in a clinic. The quantity produced over a period is called output. A business can increase this by adding employees, equipment or materials. Managers also need to understand how effectively those resources are used. Producing more with the same resources, or maintaining production with fewer inputs, helps a business operate more efficiently.

1:00Efficiency is producing output with the fewest resources and the lowest cost. Consider a café that reorganises its preparation area so employees spend less time walking between equipment. The same team can complete more orders during a shift. Fewer paid minutes are needed for each order, so the labour cost per meal falls.

Calculating labour productivity

1:17Labour productivity is the output per employee in a period of time. It measures how much each employee produces on average across the whole team. Labour productivity equals output per period divided by number of employees. Division shares the total production across the workforce, so the answer must include units per employee and the relevant period. Kestrel Bikes makes bicycles. Its monthly output is twelve thousand units, and it has forty employees.

1:43To find the average output per employee, we divide the monthly production by the team size. Keeping the time period in the answer allows a meaningful comparison with later months. Twelve thousand divided by forty gives three hundred. Labour productivity is therefore three hundred units per employee per month. This figure describes the average across the team, whose members may perform different tasks. Comparing similar products over equal periods makes the measurement useful for judging changes in performance.

2:11After installing new equipment, monthly output reaches eighteen thousand units and the business has forty-eight employees. Eighteen thousand divided by forty-eight gives three hundred and seventy-five units per employee per month. Monthly output has therefore risen by six thousand units, because eighteen thousand minus twelve thousand gives six thousand. Labour productivity has grown by seventy-five units per employee per month, since three hundred and seventy-five minus three hundred gives seventy-five.

2:39Total output rose by half, while output per employee rose by a smaller share, because eight more employees joined the team. The two figures therefore change by different amounts and describe different aspects of performance. The equipment still lets each employee produce more every month. Managers should also check material waste, equipment costs and product faults when judging overall efficiency.

Improving efficiency in production

3:03Revenue is the income a business receives from selling goods or services, while profit is total revenue minus total costs. Greater efficiency can lower the average cost of production because fewer resources are used for each unit. If sales revenue remains unchanged and total costs fall, profit increases. Lower costs also give a business more freedom over its prices. It can reduce prices to compete for customers while protecting the amount earned on each sale.

3:30Customers benefit when those savings lead to cheaper products. Reducing wasted materials helps the business obtain more useful output from the resources it buys. Businesses can improve efficiency through automation and technology, stronger labour skills, better motivation, an improved layout and a set of waste-cutting methods called lean production. Automation is using equipment to carry out tasks with limited human involvement. A machine that fills containers consistently can reduce spillage and complete repetitive tasks quickly.

4:00The business benefits when the savings outweigh the equipment and maintenance costs. Technology can also help employees organise their work. Willow Inn provides rooms for guests. Its booking software updates room availability immediately. Employees spend less time checking separate records, and fewer booking mistakes require correction. Choosing suitable technology matters because the improvement must solve a problem in that particular operation. Training develops employees’ knowledge and skills for their work.

4:27A machine operator who learns the correct settings can reduce faulty products and avoid unnecessary stoppages. Better labour skills therefore reduce wasted materials and time. The business gains more usable output from its existing equipment and workforce. Motivation is the reason why employees want to work hard and work effectively for the business. Employees who feel recognised and understand their targets work more carefully and suggest useful improvements. Fewer mistakes and less idle time mean more output from the same team.

4:57Finally, an improved layout reduces unnecessary movement between stages of production. Placing packing materials beside the dispatch area, for example, saves time whenever an order is prepared. Employees then complete more orders each hour, so the labour cost of every order falls.

Inventory types, purposes and costs

5:13Inventory is the goods and materials a business holds, for use in production or for sale. Lean production uses techniques that reduce waste of time, materials, space and inventory to increase efficiency. Two methods achieve lean production: just-in-time inventory control and Kaizen. It also examines the whole process for activities that consume resources without helping satisfy customers. Waiting for components, correcting mistakes and storing unnecessary supplies all create opportunities for improvement.

5:43Raw materials are basic inputs a business turns into products. Work in progress consists of products that are partly completed. Finished goods are completed products ready for sale. Sunrise Bakery makes bread for local shops. Its flour, partly prepared dough and packaged loaves illustrate these three forms of inventory. Holding inventory can protect the business from interruptions. Extra flour allows preparation to continue when a supplier’s delivery is delayed. Packaged loaves provide products that customers can buy immediately.

6:13These benefits explain why reducing inventory requires careful planning about deliveries, production and customer demand. Businesses hold inventory to keep production going, meet unexpected demand, obtain bulk discounts and prepare for seasonal demand. Materials held in reserve support continued operations during delivery delays. Finished goods allow customers to receive purchases immediately after an unexpected increase in orders. The business protects sales because products are already available. A bulk discount is a lower price per unit for purchasing a large quantity.

6:45Buying packaging in larger orders can therefore reduce the amount a business pays for each wrapper. Seasonal demand rises and falls at the same times each year. A gift producer can build finished inventory before a busy period, when orders may exceed its normal production capacity. Inventory also creates costs because it needs storage space, protection and management. Cash is the money a business holds as notes and coins and in its bank account.

7:10Paying for materials before using them leaves less cash available for other immediate needs. Unsold products may also deteriorate or become unwanted, so part of the purchase cost is wasted.

Just-in-time and Kaizen

7:20Just-in-time inventory control arranges for materials and components to arrive when needed and finished goods to be made to order. It is often shortened to J I T. Little or no inventory is held because deliveries and production are coordinated closely. Customer requirements guide the timing, and suppliers must deliver the correct items when operations need them. A furniture producer using J I T receives the timber needed for confirmed customer orders shortly before making the products.

7:47Employees complete those orders and arrange dispatch. The business avoids buying large quantities far ahead of use. This reduces the amount of money tied up in materials awaiting production. The business also benefits from lower storage costs because fewer materials and finished products need space. Less inventory reduces the risk of deterioration or products becoming unwanted before sale. These savings can make production more efficient. Customers may benefit through lower prices if the business passes on some of the cost reduction.

8:17Successful J I T depends on very reliable suppliers because reserve materials are limited. A late delivery can stop production, which delays customers’ orders and reduces the business’s sales. More frequent deliveries can increase transport charges because each journey has a cost. Managers must compare those charges with the savings from holding less inventory. A sudden rise in demand creates another difficulty when few finished goods are available. Customers must wait while the business obtains materials and completes production.

8:47Some may choose another supplier with products ready for immediate purchase. J I T therefore works best when demand is reasonably predictable and deliveries can be coordinated reliably. Kaizen is continuous improvement in small steps, and every employee is encouraged to suggest changes. Employees understand the practical difficulties in their daily tasks and can identify sources of waste. A manager considers a suggestion, the team tries a small change, and its results are checked.

9:14Successful changes become part of the usual working method. Harbour Care supplies medical equipment to clinics. Its employees suggest placing commonly ordered items nearer the packing area. The business tests the arrangement and checks whether order preparation becomes quicker. If the change saves time without causing mistakes, the team keeps it. Further suggestions can gradually improve the process. Kaizen benefits the business when small improvements reduce waste and lower costs.

9:41Employees gain a greater sense of involvement because their ideas influence how tasks are organised. Many changes need little spending, so businesses with limited funds can participate. Moving equipment or improving instructions can solve practical problems without buying expensive machinery. Meetings and testing take employees away from their usual tasks, so the business loses some production time during the process. Small improvements also take time to produce substantial results. A serious capacity problem may require major investment beyond what minor changes can achieve.

10:15Kaizen is most useful when managers listen carefully and sustain employees’ involvement.

Inventory decisions and exam technique

10:19The amount of inventory held depends on the type of product, storage space and cost, money tied up, supplier reliability and predictability of demand. Perishable products deteriorate quickly, so a café usually holds limited quantities of fresh ingredients. Durable items can remain usable for longer. Managers match quantities to the time available for using or selling them. Limited storage space restricts how much inventory a business can hold safely. Renting additional premises raises costs, so a small online shop may order goods more frequently.

10:52Inventory also ties up money, because purchases must be paid for before the goods are sold. A business with little spare cash may need smaller orders to preserve funds for wages and other payments. Unreliable suppliers encourage businesses to hold reserve materials because delivery delays threaten production. Dependable deliveries allow smaller reserves and release storage space. Finally, predictable demand lets a business match purchases closely to expected sales, as a school uniform shop can before each term.

11:20Where orders fluctuate unexpectedly, additional finished goods help the business serve customers promptly. These factors interact, so managers must balance protection against cost. A business facing uncertain demand may want extra inventory, but perishable products limit how much it can safely keep. Seasonal demand may justify advance production when completed goods remain usable until the busy period. The appropriate amount depends on the business’s circumstances and the consequences of running out.

11:49Keep total output, labour productivity and efficiency clearly separated when answering questions. Output measures the quantity produced, while labour productivity measures the average per employee over a stated period. Efficiency also considers the resources and costs needed to obtain that result. Higher labour productivity is most valuable when products meet customers’ requirements and the overall resource savings justify the change. Every question in Paper One Short Answer and Data Response, and in Paper Two Case Study, is built on business information.

12:21Calculate means work out from given facts, figures or information. For labour productivity, select the output and employee figures from the same period, apply the formula and include the units. Written responses should connect the business’s circumstances to a clear consequence. Cedar Works makes metal components for cars. Its supplier deliveries are sometimes late, and orders rise before a busy travel season. An exam-style question asks you to explain two reasons why this business holds inventory.

12:49Explain means set out purposes or reasons, say why and how, supported with relevant evidence. Cedar Works holds raw materials because its supplier deliveries are sometimes late. These reserves allow production to continue during delays, so customer orders can still be completed on time. It also holds finished goods because orders rise before the busy travel season. Producing these items in advance allows the business to meet demand when orders exceed its usual production capacity.

13:16Each reason uses evidence from the case and follows the effect through to the business outcome. The delivery problem connects to continued production, while seasonal orders connect to products being available when needed. A named benefit is only the starting point, and showing how the case creates it makes the answer convincing. Labour productivity is the output per employee in a period of time. Dividing production by workforce size makes it possible to compare average employee output across suitable periods.

13:45Efficiency is producing output with the fewest resources and the lowest cost. Technology, skills, motivation and a better layout help businesses reduce the resources needed for useful production. Lean production reduces waste across the process, and its methods must suit the business. J I T reduces the amount held through closely timed deliveries and production, while Kaizen develops improvements through employee suggestions. Inventory protects operations and customer service, but storage and purchases create costs.

14:14Understanding those connections allows you to explain why different businesses choose different arrangements.