The Meaning of Production (Cambridge International IGCSE Business)

Introduction to Production

Spec point — "• Managing resources effectively to produce goods and services • Difference between production and productivity • Benefits of increasing efficiency and how to increase it, e.g. increasing productivity by automation and technology, improved labour skills • Why businesses hold inventories"

An introduction to production

• 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

The purpose of production

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

• The 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 Difference Between Production & Productivity

The difference between production and productivity

• 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

$\mathrm{Labour} \mathrm{productivity}=\frac{\mathrm{Output}}{\mathrm{Number} \mathrm{of}w\mathrm{orkers}}$

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

• 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

Worked Example The table shows the number of pairs of luxury wool socks produced by Sokkemani in 2021 and 2022

Year	Units Produced
2021	46,000
2022	69,000

In 2021 Sokkemani employed 50 staff. In 2022 the number of staff employed by the business increased by 20%

Calculate Sokkemani's* *productivity in 2021 and 2022. [3 marks]

Step 1: Calculate the labour productivity for 2021

$=\frac{46,000\mathrm{units}}{50\mathrm{workers}}\,\,=920\mathrm{units} \mathrm{per} \mathrm{worker}$ (1)

Step 2: Calculate the number of workers in 2022

$=50\mathrm{workers}\times1.20\,\,=60\mathrm{workers}$ (1)

Step 3: Calculate the labour productivity for 2022

$=\frac{69,000\mathrm{units}}{60\mathrm{workers}}\,\,=1,150\mathrm{units} \mathrm{per} \mathrm{worker}$ (1)

The Benefits of Increased Efficiency

• 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

$\mathrm{Average} \mathrm{cost} \mathrm{per} \mathrm{unit}=\frac{\mathrm{Total} \mathrm{costs}}{\mathrm{Number} \mathrm{of} \mathrm{units}}$

• **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**

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

Why Businesses Hold Inventories

• Businesses hold inventories (also called stock) to support smooth operations and avoid disruptions

• Types of inventories include:

  • Raw materials—to keep production running without delays
  • Work-in-progress—partially completed goods between stages of production
  • Finished goods—ready to be sold to meet customer demand promptly

• Reasons for holding inventories include:

  • To **prevent stockouts and lost sales
  • To take advantage of bulk purchasing discounts
  • To buffer against supply chain delays
  • To ensure continuous production even when delivery of materials is uncertain

• However, holding too much inventory can increase storage costs and** risk of damage or obsolescence*, which is why inventory levels must be carefully managed